Conversion of shares in mergers or acquisitions of a company
Mergers or acquisitions of a company are, in essence, the reorganization of a legal entity through its liquidation and the creation of a merged LLC with a larger market participant.
In the process of doing business, companies often make decisions about pooling available resources and funds. Purpose – The purpose of mergers and acquisitions is to increase the efficiency and profitability of the business. As part of a merger or acquisition, one of the most important stages is the conversion of shares. What it is and how it works will be detailed in this article.
Features of the conversion of shares
The first step is to define the term “share conversion”.
The conversion of shares means actions to convert the securities of the merging company into shares of the LLC to which the merger will be carried out. At the same time, the shares of the merged company will be redeemed.
The main requirements for the conversion procedure are established by the Federal Law “On Joint Stock Companies”. Before proceeding with the reorganization procedure, companies must necessarily conclude an agreement on accession or merger, which also regulates questions on the conversion of shares. The agreement must contain the terms of the conversion, including the ratio of prices between the shares of the old and the new company.
The current legislation does not establish a special procedure for calculating conversion rates. However, as practice shows, the coefficient is determined by agreement of the parties. Most often, this is the market value of a block of shares of companies involved in a merger or acquisition. The market value itself is determined since an independent appraisal.
The order of determining the coefficient looks like this:
- Appraisal activities with the participation of an independent specialist who forms an opinion on the market values of companies and shares.
- Assessment of the totality of existing risks.
- Organization of a meeting of owners.
- Approval of the final terms of a merger or acquisition deal.
- Drawing up the final reporting of the merging company, conducting an inventory and drawing up a deed of transfer.
It is important to note that the assessment is carried out at the very beginning with the aim of its preliminary approval during the general meeting of shareholders and the subsequent consolidation of the agreements received in the document on accession or merger.
One of the main advantages of the share conversion is that this mechanism allows you to keep the share capital and expand it through the addition of a new company. In addition, with a correctly chosen strategy, the conversion of shares allows you to create new opportunities for the growth and development of the company.
However, when converting shares, it is important to pick apart multifarious factors, such as:
- The value of the company’s shares.
- Ownership share of shareholders of both companies.
- The ratio of turnover of companies and the assessment of the market value of shares.
Also, when converting shares, a more favourable price ratio between old and new shares can be established, depending on the conditions of the merger or accession.
Despite the advantages of share conversion, this process has its drawbacks. This may lead to an increase in the company’s tax liabilities, as well as possible changes in the company’s investment strategy.
To carry out a merger or acquisition of commercial organizations, it is necessary to carefully consider each stage. The conversion of shares is an integral part of the process, so it is important to think through and analyze all aspects related to the conversion. It takes quite a long time to complete all the necessary documents for conversion. At the same time, it is necessary to consider the interests of all participants, because the prospects of the company after a merger or accession depend on this. If you have any difficulties with the execution of the procedure for the conversion of shares, including the preparation of documents, please contact VALEN. Our competent consultants will help corporate clients understand all aspects and help with the procedure.