The Application And Regulation Of Equity Swaps In Corporate Takeovers

Equity swaps, as one kind of financial derivatives, serve the general functions ofother derivatives which include hedging and speculation, etc.. Recently, a newapplication of equity swaps emerged in many fully fledged capital markets such asthat of the USA and UK, by which strategic investors can decouple the economicownership and voting right to the shares as the referencing asset of the equity swap tocirculate the applicable reporting obligation and secretly accumulate the shares of thetarget company. The perfectly designed equity swap transaction can effectively assistin corporate takeover and control change of the target company. This new applicationof equity swap impacts not only the ownership disclosure system in the capital market,but also the conventional company law theory and corporate governance, thus posinga challenge to the regulation on equity swaps.This paper will introduce the product structure and transaction mechanisms ofequity swaps, summarize the cases happened in the USA, UK, and France, etc. whereequity swaps are frequently used in corporate takeovers, analyze legal issues such asregulation arbitrage and new voting buying caused by this new application, researchinto the regulation rules on equity swaps in jurisdictions other than mainland China.On the above basis, this paper will offer a reform proposal to Chinese current lawsand regulations regarding the ownership disclosure system, and discuss the feasibility of a Chinese company adopting the method of formulating provisions in its articles ofassociation, in reference of the measures taken by some American companies inresponse to the new application of equity swaps.This paper is divided into five chapters:Chapter I is an overview of equity swaps in combination of finance theories withcommercial practices. It introduces the product structure and transaction mechanismsof equity swaps in details and analyzes all aspects of its functions, from theperspective of each party to the equity swap agreement respectively, one significantfunction of which is to satisfy some strategic demands of both contractual parties.Chapter II is a discussion about the new mode of application of equity swaps incorporate takeovers. It lists the relevant cases happened in the USA, France, the UKand New Zealand, with the emphasis on analyzing the judgment of the CSX case inthe USA and American current legal provisions in this regard.Chapter III is an analysis on the legal issues caused by the new application ofequity swaps in corporate takeovers. It identifies two problems of the new applicationof equity swaps, which are regulation arbitrage and new vote buying, and thensystematically discusses the implications of these two problems on ownershipdisclosure rules and corporate governance.Chapter IV is a comparative research into the regulation rules on equity swaps injurisdictions other than mainland China. It emphasizes and compares the regulationrules in the USA and UK. The USA regulator, SEC, didn’t amend the regulation ruleswhile some American companies took the matter into their own hands by formulatingcorresponding provisions in their articles of association. On the other hand, the UKregulator, FSA, actively revised its ownership disclosure rules by broadening thereporting obligation coverage to include the economic ownership held through equityswap transactions.Chapter V is a reform proposal to the regulation of the equity swap transactionsin China and the prevention of the adverse influences exerted by its new application.Based on the analysis of Chinese current regulation rules of ownership disclosuresystem, it proposes to revise the current laws and regulations. In the meantime, it discusses the feasibility of a Chinese company adopting the method used by Americancompanies to cope with this new application of equity swaps.