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Share for Share Exchange and Substantial Property Transaction


A share for share exchange is a method used by shareholders of a company to sellpart of the business or to undertake a restructure of the company.

Through a share exchange, the shareholders of the company, will be able to swap their shares in the target company for shares in the newly incorporated company. The reasons for a share exchange might be various and might related to a re-organisation of the company with the creation of subsidiaries, settling of disputes between the members of the company or planning a succession.

One issue that could arise in this transaction relates to the need for shareholder approval due to the triggering of section 190 of the Companies Act 2006. The Companies Act 2006 states that when a contract is present between two parties, it is important to check the applicability of section 190.

The first step is to check whether the contract relates to the acquisition of non-cash assets (NCA). NCA are defined in section 1163 of the 2006 Act as “any property or interest in property, other than cash”, including assets as land, machinery, shares and security over a mortgage. During a share exchange the shareholders will swap their shares in a Company A for other shares in a Company B.

The second step is to identify, under section 191 of the Companies Act 2006, whether the transaction is “substantial”. The Act highlights three different thresholds:

1. If the value of the transaction is less than £5,000 the transaction is not “substantial”;

2. If the value of the assets is higher than £5,000 but lower than £100,000, the transaction will be labelled as “substantial”, if the value of the assets is more than 10% of the company’s asset value;

3. If the value is over £100,000 then the transaction will always be “substantial”.

Section 190 states that the member’s approval will be requested for the transaction if:

  • A director of the company acquires or is to acquire from the company a substantial non-cash asset;
  • The company itself acquires or is to acquire from a director, directly or indirectly, a substantial non-cash asset.

During a share exchange the two potential application of section 190 of the Act are the issue of new shares in the holding company and the acquisition of the holding company of the shares in the target.

Regarding the issue of new shares, the shares that are created in the holding company, will not fall under section 190 of the Act due to the shares not been owned by the company before their issue.

Regarding the acquisition of shares of the new company, this transaction can be considered to be a non-cash consideration, as shares are bought in exchange for new shares. This transaction will fulfil the definition of section 190(1) of the Companies Act 2006 and will request a resolution from the members if the value of the transaction will meet the definition of “substantial” as per section 1163 of the Companies Act 2006.

The importance of the abovementioned sections was highlighted in the case of Duckwari plc v Offerventure Ltd (1999) where it was stated the purpose is “to give shareholder specific protection in respect of arrangements and transactions which will or may benefit directors to the detriment of the company”.