Australia: Cash Settled Equity Swaps in Takeovers

Last Updated: 8 July 2005
Article by Neil Pathak and Weyinmi Popo

While the use of cash settled equity swaps is an established part of the Australian securities market, their use in recent high profile takeovers in Australia has attracted much attention. In particular, this attention has focused on the use of swaps by bidders or potential bidders in target companies without disclosure.

Examples of cash settled equity swaps in recent takeovers include:

  • BHP Billiton in its successful takeover of WMC Resources. BHP held cash settled equity swaps over 4.3 per cent of WMC. These were disclosed by BHP in its bidder’s statement at the outset of its bid.
  • The recent takeover bid by Cleveland-Cliffs for Portman Mining, where Seneca (a US hedge fund) was reported to at one stage have held over nine per cent of Portman Mining (for practical purposes enough to block compulsory acquisition).
  • The current takeover bid by Centennial Coal for Austral in relation to which Glencore International AG holds cash settled equity swaps over 6.49 per cent of Austral Coal (in addition to physically holding 7.42 per cent of Austral’s voting shares). Glencore’s holding of the swaps has now become the subject of a Takeovers Panel application.

What are they?

In essence, a cash settled equity swap is a contract referenced to an underlying parcel of shares pursuant to which the investor or ‘taker’ gives or receives cash payments from the swap counterparty or ‘writer’ equal to the decrease or increase in the underlying share price between the date of the agreement and maturity of the swap. In return, the taker agrees to pay a fixed return to the writer by way of a financing charge.

Ordinarily, the writer of the swap will hedge its position by acquiring the underlying shares, so that its economic return is equal to the financing charge. However, this need not be the case and the writer may take an unhedged or partially hedged position.

Why use them in takeovers?

A bidder or potential bidder may seek to use cash settled equity swaps:

  • to lock in the acquisition price over a parcel of the target company’s shares equivalent to the swap shares, thereby hedging against target share price rises
  • as a ‘de facto’ pre-bid stake—although the holder of a cash settled equity swap does not control the voting or disposal of any underlying shares which the writer may acquire to hedge its position, it may have the ability to buy such shares from the writer on maturity of the swap, and
  • as a means of financing a pre-bid acquisition on a cost-effective basis.

Cash settled equity swaps usually do not, on their terms, confer a relevant interest in the target company’s underlying shares on the holder or make the holder an associate of the swap counterparty. If so, the advantage for a potential bidder is a swap in relation to more than five per cent of the company should not require disclosure by it under the substantial shareholding provisions of the Corporations Act. Conversely, if the swap counterparty acquired a physical shareholding in excess of five per cent, it would need to disclose it shareholding.

Can disclosure be avoided?

If disclosure of the cash settled equity swap under the substantial shareholding provisions is to be avoided, the swap must be structured such that:

  • it is cash settled only (no option to settle physically)
  • the holder has no power to control voting or disposal of the underlying shares
  • the counterparty must not be acting in concert with or consistently with the wishes of the holder. The holder should consider using an independent third party (ie non-adviser) as the swap counterparty
  • the counterparty should not be required to acquire shares in order to hedge its position, and
  • there must be no ‘economic warehousing’—there must be no agreement, arrangement or understanding between the holder and the swap counterparty (whether or not enforceable) that the underlying shares would be available for purchase by the holder on maturity or unwind of the swap.

However, even if a swap is structured to avoid disclosure under the substantial shareholding provisions, this is not the end of the story. Failure to disclose the existence of the swap in respect of more than five per cent of the shares in a timely manner may give rise to ‘unacceptable circumstances’. This may be the case if it can be shown that the effect of the swap or the failure to disclose its existence infringes the Eggleston principles which, among other things, require that the acquisition of control over shares takes place in an efficient, competitive and informed market.

Is there a trend toward greater disclosure?

The UK

Recognising the widespread use of derivatives in the London market, the UK Takeover Panel issued a public consultation paper in May proposing amendments to the UK Takeover Code. This would require the disclosure of dealings in a target company’s relevant securities during the offer period where that person holds ‘long’ equity derivatives over one per cent or more of a target company’s relevant securities. The rationale for this extension included that:

  • a significant element of market activity has moved from the cash market to the derivative market
  • derivative holders may exercise a significant degree of de facto control over underlying securities (ie the swap counterparty will wish to obtain repeat business from the holder and therefore is likely to act in accordance with the holder’s likely wishes)
  • swap counterparties will normally hedge by buying underlying shares equivalent to swap shares which they will not sell until swap is closed out. On the unwind, hedged shares then become available to be bought, including by the holder
  • disclosure of dealings would enable target shareholders to better understand forces at work in the market and, in particular, reasons why prices of bidder or target securities may be moving in a particular direction, and
  • market knowledge of swaps could have an impact on an efficient, competitive and informed market and that ‘desirably in a fully informed market, swap agreements should be disclosed’.


While the Australian Takeovers Panel and ASIC have been reported as considering the use of equity swaps in takeovers, there has not yet been any guidance on the matter. However, this is about to change.

The Takeovers Panel is currently considering an application brought by Centennial Coal alleging unacceptable circumstances in relation to the failure by Glencore International AG to make timely disclosure regarding equity swap arrangements entered into in relation to more than five per cent of Austral Coal.

These Takeovers Panel proceedings should provide some useful guidance on the use of cash settled equity swaps in takeovers, particularly with regard to the disclosure requirements. The decision may also be the precursor of a Takeovers Panel guidance note.

It will be interesting to see whether the Australian Takeovers Panel adopts an approach similar to that being proposed by the UK.

Future editions of this newsletter will provide an update on the results of the Panel proceedings and in respect of the issue of any guidance notes on the matter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions