Debt for equity swap is a process for restructuring by exchanging debt for equity. This tool is applicable for situations where a creditor, despite the borrower being unable to pay the debt, believes in the company’s future prospects and is open to a swap.
The required steps for the realisation of the debt for equity swap:
Drafting a debt for equity swap agreement that is a foundational document that outlines the terms of the swap, the amount of debt to be converted into equity and the valuation of the shares to be issued. It forms the legal basis for the transaction.
Amendments to the existing loan agreement may be required or if the loan will be fully converted into equity the termination agreement should be signed or clause in debt for equity swap agreement on that issue should be included.
Amendments to the articles of association or shareholders’ agreement may be required if the swap is prohibited in that documents or new class of shares will be used for the swap. This ensures the legality of the new equity structure.
Obtaining consent from the shareholders is crucial due to the dilution of their ownership percentage and approvement of the issuance and allotment of the new shares. Typically, these require an ordinary resolution, but a special resolution may be necessary by the articles of association.
The debt for equity swap deems as a non-cash consideration for shares so the compliance with section 45 of the AIFC Companies Regulations is required. The board of directors, before the shareholders meeting, must adopt the resolution that:
- determine the reasonable cash value of the consideration for the shares;
- resolve that the consideration for shares is fair and reasonable to the company and all existing shareholders;
- resolve that the present cash value of the consideration to be provided for the shares is not less than the nominal value;
- describe the consideration in sufficient detail and the present cash value of the consideration and the basis of the board’s valuation.
Prepare and sign the relevant AIFC forms, instrument of transfer of shares and notify the registrar about issuance and allotment of new shares.
The debt for equity swap represents a strategic financial restructuring tool, particularly useful in scenarios where companies face financial challenges but have promising future prospects. This process not only provides an opportunity for creditors to convert their monetary claims into potentially valuable equity stakes but also offers companies a chance to realign their capital structure and pave the way for future growth and stability.
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