Issue of shares for non-cash consideration in the local scenario
  • Julija Azzopardi Coppola

In their pursuit of growth, companies often require additional resources, many time long term assets. The most prevalent manner to acquire these assets is to purchase them for cash and/or against a debt. Alternatively, an entity can acquire an asset in exchange for the company’s shares.  Exchangeable assets can consist of tangible fixed assets such as building, land, vehicles and other equipment, intangible assets can include patents, trademarks and other intellectual property, financial assets and even entire companies for group restructuring purposes. Issue of shares for non-cash consideration is a proven method for achieving the intended goals with limited use of cash resources.

Perhaps the biggest advantage of acquiring assets via non-cash consideration is that the company does not have repayment requirements. This makes it more enticing than other forms of financing such as bank loans, which have fixed repayment schedules, interest and principal considerations. Whilst one has to consider dividend distribution, these are at the discretion of the Directors and can be tied to the profits of the company. Therefore, the business is given more flexibility over its finances.

A company’s capital structure consists of debt and equity, which is how a business finances its daily operations and growth plans. Debt/equity ratio is an essential measure of the company’s financial position with a high ratio often associated with higher default risk limiting company’s ability to raise cash in future. Target debt/equity ratio can be demanded by the lending institution in order to meet existing contractual obligations or self-imposed by the owners of the company.

Although debt financing is often considered as a cheaper option on the basis that interests incurred on finance used to generate income are deductible for tax purposes, in recent years, Malta introduced a Notional Interest Deduction Rules (NID). The aim of NID is to reach tax neutrality between debt and equity financing. Resulting in companies able to claim a deduction for notional interest deemed to be incurred on their equity capital.

In addition, companies that have already financed acquisition of non-current/current assets via shareholder’s funding have the option to capitalise such loans. Loan capitalisation is an arrangement in which a shareholder converts debt to equity. In other words, it is a process whereby consideration for shares issued by the company takes the form of the discharge of existing debt. This transaction results in reduced debt and increased equity in the statement of financial position.

When the company issue shares for non-cash consideration, it has full control over how many shares to issue, what to initially charge for them and the timing of the issue. It can also issue further shares in future if it wishes to raise more money. The company can decide on the type of shares it issues and what rights these give to shareholders.

However, it is pertinent to point out, that consideration for the acquisition of shares in a company may only consist of assets capable of economic assessment. This means that the monetary value can be calculated and assigned to the asset. As a result, future personal services and in general any undertakings to perform work or supply services may not be given by way of consideration.

Shareholders should not be giving impaired assets as consideration for the shares, to the detriment of other shareholders and members of the company. They should also act in good faith and avoid malicious capitalisation of liabilities to portray a financial position other than what is deemed true and fair and mislead the users of the financial statements.

To eliminate the likelihood of the above, Article 73(4) of the Maltese Company’s Act, 1995 requires a report to be drawn up by an independent auditor whenever the company issues shares, either for an original subscription or subsequent issue of shares, for non-cash consideration. The said Act requires an auditor to apply various valuation techniques to assess the value of an underlying asset and report whether in their opinion the values arrived at by the application of these methods correspond at least to the number, nominal value and premium of shares being issued.

Our team has the expertise to support the company throughout all stages of non-cash capital increase. We can assist with the transaction structuring and tax planning to achieve the intended aims of the company, valuation of assets and rapid implementation compliant with the Maltese laws and regulations.


July 13, 2021