Equity swap

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An equity swap is a swap based on stocks or stock indices .

Cash-Settled Equity Swap

A cash-settled equity swap is the typical variant of equity swaps in which a buyer acquires the price gains of an underlying share, but not the voting rights of the same. More precisely, mutual payment flows are agreed depending on the development of a share (see also derivative ). This variant is increasingly used in hostile takeovers. The attacking entity buys at most a number of banks cash settled equity swaps with the target company ( Target ) as the underlying ( underlying ). If the target company's share price rises, the attacking company receives the difference to the share price agreed upon at the time of subscription. At the same time, the banks involved buy large blocks of shares in the company to be taken over in order to hedge against the payments due to the attacking company if the share price rises. If the share price of the company to be taken over rises (as it usually does when announcing takeovers), the attacker earns correspondingly well. If the attacker then redeems his cash-settled equity swaps accordingly, he not only receives the money, but at the same time the banks will also try to sell the acquired shares in the company to be taken over. Here, of course, the attacker offers himself as a buyer, who can cover part of the purchase price for the shares with the speculative profits earned with the cash-settled equity swaps . If the bank were not to tender the shares to the swap counterparty, but to a third party, the attacker could buy the shares directly via the stock market, which would drive up the price, but the attacker would not care because the Revenues from swap-parallel transactions increase. In the latter case, however, the resulting increase in income tax liability could be problematic, which is why such swap transactions are often carried out via intermediate companies in tax havens .

Since ultimately the sale of the shares to the attacker is neither contractually agreed in advance nor mandatory (however, this is likely due to the business relationships between the banks and the attacker), the attacker does not have any direct access to the shares beforehand and therefore none according to the Takeover Act binding mandatory notification . This makes it possible for the attacker to “sneak up in secret”.

Through cash settled equity swaps , an attacker

  • fix the share price of the company to be taken over to a certain extent,
  • de facto company shares of the company to be taken over in advance, but he has to purchase them according to § 25 I No. 2 WpHG if the thresholds of § 21 I WpHG are exceeded, as they have a comparable economic effect as the financial instruments in § 25 I No. 1 WpHG,
  • by acquiring these prior to the announcement of a takeover interest, finance part of the takeover costs directly for the price increase of the target and the resulting speculative profits.

While in the previous variant the attacker first maximizes his economic stake and minimizes the number of voting rights, the opposite happens from the banks' point of view: Little or no economic ownership is acquired in the underlying company, but the voting rights are bundled. This property also enables aggressive investors to conclude such an equity swap with third parties in order to gain a particularly strong opportunity to influence the voting rights without having to invest a lot of capital. In this case, however, there is a special challenge for the investor to find a suitable counterparty who takes the economic risk into hand and bets on rising prices of the underlying asset.

Examples of Cash Settled Equity Swaps

Treatment in German law

Holders of cash-settled equity swaps must, in accordance with Section 38 (1) No. 2 WpHG, exceed or fall below the reporting thresholds of 5, 10, 15, 20, 25, 30, 50 or 75% of BaFin and the issuer of the shares report about this. If the purchaser fails to do this, he faces regulatory fines. A loss of rights according to Section 44 (1) WpHG is planned.

See also

Individual evidence

  1. ^ Journal of Corporate Finance (2007): Hedge Funds, Insiders, and the Decoupling of Economic and Voting Ownership: Empty Voting and Hidden (Morphable) Ownership
  2. ↑ Mondaq Business Briefing: Cash Settled Equity Swaps in Takeovers (July 8, 2005)
  3. ↑ Handelsblatt (July 17, 2008): With swap deals through the back door