Nowadays, the term "stock swap" is used quite commonly in today's M&A transactions. In general, "stock swap" is the use of stock to swap between parties without using cash or can be combined with the use of cash depending on the agreement of the parties. Accordingly, the buyer becomes the owner of the target company, and the seller becomes the shareholder of the buyer.

The prevailing legal documents mainly regulate "stock swap" transactions between public companies, including Decree 58/2012/ND-CP, Circular 162/2015/TT-BTC and other relevant guiding documents, amendments and supplements, without regulating the "stock swap" transactions between companies that are not public companies.

In general, the purpose of "stock swap" transactions between public companies is mainly increasing the ownership ratio of the issuer in other public companies as well as merger purpose between the issuer and another public company.

In Vietnam, there have been many cases of public companies performing stock swap, leading to mergers of enterprises. Most recently, Kido Group Corporation (HOSE: KDC) submitted to the General Meeting of Shareholders a plan to issue shares to swap all outstanding shares of KIDO Frozen Foods Joint Stock Company (UPCom: KDF) according to Merger Agreement. Accordingly, KDC currently owns 36,400,000 shares of KDF. To purchase back all of KDF's shares, KDC needs to issue an additional 23,088,000 shares in exchange for 17,760,000 owned by the rest of KDF's shareholders. The swap ratio is 1: 1.3 (1 KDF share will be exchanged for 1.3 KDC shares) [1]

The legal consequences after completing the stock swap between KDC and KDF are as follows:

    - All KDF shareholders will become KDC's shareholders and KDC will own 100% of KDF's charter capital;

    - KDC's charter capital will increase by an amount equal to the value of the actual total number of additional shares that KDC has issued; and

    - KDF will be transformed from a Joint Stock Company to a One Member Limited Liability Company with 100% charter capital owned by KDC.

As such, there is currently no legal framework governing the "stock swap" between companies which are not public companies. Therefore, in the case of companies that are not public companies, if they wish to perform a "stock swap" transaction with each other or with a foreign shareholder, it is necessary to seek official advice from the competent authority on cashless method in stock swap transaction to not violate the regulations of prohibiting cashless method in related transactions. [2]

Here is our advice on Stock swap and its legal issues. As a professional corporate lawyer team in the field of investment, we are always ready to provide our clients with optimal solutions in terms of efficiency, cost, and simplified legal procedures. Please visit our DIMAC website and other News category to get the latest updates on legal advice and market experience sharing.   

[1] Refer to the merger plan to merge KIDO Frozen Foods Joint Stock Company into Kido Group Corporation of the Board of Directors of Kido Group Corporation to submit to the General Meeting of Shareholders in 2020.

[2] Decree 222/2013/ND-CP on cash payment, Circular 09/2015/ TT-BTC guiding financial transactions of enterprises in accordance with Article 6 of Decree No. 222/2013/ND-CP dated 31/12/2013 of the Government on cash payment.