When an acquirer buys the shares of a company, many people assume the payment is made immediately in cash. However, this is not always the case. In practice, several mechanisms can be used to finance an acquisition.
Among them, payment in shares of the acquiring company — commonly referred to in many transactions as the roll-over mechanism — has become an increasingly strategic option in mergers and acquisitions.
A roll-over allows the seller to reinvest all or part of the sale price of their company into shares of the acquiring company. In other words, instead of receiving only cash, the seller receives shares in the company acquiring their business and thus becomes a shareholder in the new group.
In this article, we will explain how this mechanism works, its advantages, and the legal and tax considerations it involves.
Payment in Shares: The Principle of the Roll-Over
Traditionally, in a business acquisition, the buyer pays the share price in cash. However, the buyer may also propose payment in shares of their own company.
In this case, the seller exchanges the shares of their company for shares in the acquiring company.
This is known as a roll-over: the seller “rolls over” part of their economic value into the new structure instead of exiting entirely in cash.
In practice, the seller:
• sells their shares in the target company
• receives shares in the acquiring company in exchange
• becomes a shareholder of the group after the transaction
They therefore participate in the future value creation of the combined entity.
This mechanism should not be confused with other payment structures used in M&A:
• Vendor Loan: part of the purchase price is paid later as a loan granted by the seller
• Earn-out: part of the purchase price depends on the company’s future performance
In a roll-over, the logic is different: the seller directly reinvests in the acquirer through shares.
Why Use Payment in Shares?
Payment in shares offers several strategic advantages. It can benefit both the buyer and the seller.
1. Aligning the Interests of the Buyer and the Seller
First, this mechanism aligns the interests of both parties.
In many transactions, the seller remains active in the company after the deal. For example, they may continue in a leadership role or assist during the transition.
By retaining a stake through the roll-over, the seller remains directly interested in the performance of the group. They become a partner in future value creation rather than simply a seller exiting the capital.
2. Offering Additional Upside Potential to the Seller
The roll-over may also allow the seller to optimize the value of their assets.
If the acquiring company grows significantly after the transaction, the value of the shares received may increase.
In that case, when the seller eventually sells these shares, they may realize an additional capital gain. In other words, the initial sale can become a new investment opportunity.
This is particularly attractive when the acquirer is a fast-growing company or a group pursuing an expansion strategy.
3. Preserving the Acquirer’s Cash Position
For the buyer, the advantage is also significant. Payment in shares avoids an immediate cash outflow.
In practical terms, the acquirer retains its cash to:
• finance growth
• invest in new projects
• repay debt
• pursue additional acquisitions
Furthermore, this solution helps preserve the company’s borrowing capacity.
This is why this mechanism is frequently used in external growth strategies, particularly in technology sectors or within expanding corporate groups.
Constraints and Key Considerations of the Roll-Over
Despite its advantages, payment in shares requires careful attention to several aspects. These points must be anticipated during the negotiation of the transaction.
1. La question de la liquidité des actions
The first issue concerns the liquidity of the shares received. The seller generally wants to know how and when they will be able to sell their shares.
Several questions arise:
• Are the shares publicly listed?
• Is there an organized exit mechanism?
• Is a buyback clause provided?
Without visibility on liquidity, shares may be perceived as riskier than cash.
2. Rights Attached to the Shares
Next, the seller must understand the rights associated with the shares received through the roll-over.
These rights may include:
• voting rights
• dividend rights
• tag-along or drag-along exit mechanisms
These elements determine the seller’s actual ability to participate in decisions and protect their interests. A detailed analysis of the shareholders’ agreement is therefore essential.
3. The Tax Treatment of the Transaction
Taxation is also a key consideration. In principle, the sale of shares may generate a taxable capital gain for the seller. However, if the payment is made in shares rather than cash, the seller may face a delicate situation.
Indeed, they may have to pay tax without having received immediate liquidity.
In some countries, tax deferral or rollover relief mechanisms exist for this type of transaction. However, the rules vary depending on the jurisdiction. It is therefore essential to obtain a detailed tax analysis before the transaction.
According to general M&A principles described in specialized literature, tax Structuring is often a decisive factor in the success of such transactions.
4. Mutual Warranties
Finally, as with any business sale, warranties must be put in place.
The seller usually provides warranties regarding the shares sold and the situation of the target company.
However, in this type of transaction, the buyer may also need to provide assurances regarding the value or condition of their own shares, since they are used as a form of payment.
These mechanisms aim to secure the transaction for both parties.
Roll-Over: A Strategic Lever in M&A Transactions
In conclusion, paying for an acquisition with shares is a credible alternative to cash payment.
This solution allows:
• alignment of interests between seller and buyer
• additional value creation potential
• preservation of the buyer’s cash resources
However, its implementation requires rigorous legal and tax Structuring. Issues such as liquidity, shareholder rights, and taxation must be anticipated.
For this reason, these transactions are generally supported by specialized M&A lawyers and tax advisors.
When properly structured, a roll-over can become a powerful strategic lever in business transactions.