Equity swaps are sometimes used by investors to gain exposure to the economic performance of a particular security, without the need to acquire the underlying physical security. Investment banks offering such products will however often acquire the underlying security as a hedge against their counterparty exposure under the swap.
Concerns have been expressed, not without foundation based on examples in Australia and the USA, that the eventual natural buyer of the physical securities acquired as a hedge may be the counterparty to the equity swap. In this way, equity swaps could be used to effectively warehouse shares in a target company, in advance of a takeover offer or other corporate transaction.
Responding to this concern, New Zealand's new Financial Markets Conduct Act and the Takeovers Code now require public disclosure of certain equity derivative positions.
The ability to use equity swaps to take substantial equity positions without requiring disclosure has been curtailed, although synthetic investment may still have some taxation benefits. Investors contemplating such transactions should seek advice and make sure their disclosure procedures are updated to reflect the new requirements.
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.