Navigating the M&A market involves a blizzard of acronyms and a whole new language of terms, phrases, documents and processes. This article serves as a reference base for those wanting to clarify their understanding at any time of day.
| Item | Acronym | Definitions |
|---|---|---|
| A/B Structure | see High Vote/Low Vote | |
| Above the Line | refers to items on an Income Statement (or Profit and Loss Statement) which are incurred before the calculation of a company’s Gross Profit. Sometime also referred in relation to what costs are or are not included within the calculation of EBITDA | |
| Accretive | means that a Business Combination will result (usually measured on a Pro Forma basis) in an increase in a Buyer’s specified measure of financial performance, such as Earnings Per Share | |
| Acquirer | another name for a Bidder, Buyer or Purchaser | |
| Acquisition | another name for a Business Combination or purchase of a Targets share capital or assets | |
| Acquisition Facility | a line of credit intended to be used to fund Acquisitions | |
| Acting In Concert | persons “Acting In Concert” comprise individuals or companies who, pursuant to an agreement or understanding (whether formal or informal), cooperate, through the Acquisition of Shares in a company, by any one of them to obtain or consolidate effective control of that company (UK) a defined term under the City Code (see Concert Party) |
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| Activist Investor | a generic term for Investors that amass blocks of shares in a Target Company in order to persuade or help persuade the Target Company to change a fundamental aspect of its business, operations or Management (including voting against a proposed Business Combination supported by the Target Company) with the goal (in the eyes of the Activist Investor) of increasing the trading value of the Target Company. Activism may range from private conversations with a Target Company’s senior Management or Board, to private or public letter writing campaigns, to Proxy Contests and other contests for control of the Target Company. | |
| Add-on Facility or Accordion | agreement increasing the credit line under the acquisition financing agreements which will be made available at the time of the Add-on Transaction | |
| Add-on-Transaction | Acquisition of further companies or Shares by an Investor subsequent to an already completed investment, aiming at additional appreciation through the Synergy among these investments. See also Buy and Build | |
| AIM | originally known as the Alternative Investment Market and abbreviated as AIM, this UK stock market is operated by the London Stock Exchange and is now known simply as AIM. It provides a lighter regulatory environment than the Main Market of the LSE, and so enables smaller and growing companies to access the public market. | |
| Allotment | means the unconditional right of a party to be included on a company’s register of members, and occurring in advance of the issuance of such shares to the party | |
| Anti-Competitive | when a potential Business Combination would prevent or reduce competition in the market; such a deal is unlikely to receive Merger Clearance | |
| Anti-Dilution Provision | a provision in a company’s contract or constituent document that is designed to protect (in a specified fashion) the holder of a Class or series of equity Security from having the holder’s Equity Interest in the company reduced or diluted by issuances of other Securities or dividends. There are a variety of common types of Anti-Dilution Provisions, so it is important to understand precisely which type of Anti-Dilution Provision is intended to be utilized in the specific circumstance. | |
| Anti-Money | see AML, Know Your Client and | |
| Laundering | KYC | |
| Anti-Sandbagging | a provision in an Sale & Purchase Agreement that limits or eliminates a Seller’s liability for inaccuracies in Representations and Warranties of which the Buyer had knowledge before Closing | |
| Appraisal | a process for the determination of the fair value of shares or assets | |
| Arbitrage | profiting by trading on price disparities involving the same item, similar items. See also Risk Arbitrage and Merger Arbitrage. | |
| Articles of Association | AA or AoA | are a multi-page document, created on incorporation but open to variation through shareholder consent, that outlines the rules and restrictions relating to the way the company is governed, operated, and owned. |
| Asset Purchase Agreement | APA | the Agreement documenting the acquisition of certain assets from a party, often unfettered and with no liabilities or obligations attached but can include the same |
| Asset Stripping | the Acquisition of a Target company followed by the break-up of that company or its assets in order to realise short-term gain or control of specific assets | |
| Assets Under Management | AUM | a term describing the purchase of a business with the intention of breaking it up (rather than running it) because its NAV is greater than the purchase price. In some contexts Asset Stripping is something of a pejorative term. |
| Assignment | a transfer of rights and, if possible, obligations under a contract (e.g., a Credit Agreement to a new Lender) under English law, while you can assign rights, you are not able to assign obligations (see therefore Assignment and Assumption and also Novation) | |
| Authorised Person | a person who is authorised for the purposes of FSMA to carry out regulated activity | |
| Authorized Share Capital | is the maximum Par Value of Shares that a company may legally issue | |
| Back-to-Back | assumption of rights and | |
| Confidentiality Agreement | obligations by a third party under a Confidentiality Agreement which has been concluded by other parties | |
| Back-to-Back Financing | a financing structure according to which the Financing Sources (mostly banks) are granted collateral which is itself comprised of loan facilities/obligations previously already advanced to other parties (often end users with those in the back-to-back chain ever more removed from the end user) | |
| Backstop Facility or Default Agreement or Overpayment Facility | a financing agreement which a bank only grants if the Borrower has no other possibility to cover its borrowing requirement and the bank wishes to provide support for the business to trade through forbearance and back out of default | |
| Bad Leaver | an employee or manager who holds Shares of the company and leaves his/her office because of his/her own interests or who is terminated for good cause (i.e., because of his/her own default or without the company giving the employee contractual notice). Leaving often results in a reduction in the Shares, Options, Earn-Out payments, etc. which may have otherwise been made to the employee. | |
| Bank Guarantee | an undertaking from a bank to cover a debt, risk or liability on a transaction. In other words, if the debtor fails to settle a debt, the bank will cover it. Similar to a Letter of Credit. | |
| Bank of England Base Rate | BEBR | the interest rate set by the Bank of England monetary policy committee |
| Base Case Model | refers to the financial Model and Business Plan required to be prepared and warranted by the Borrower and delivered to the Lenders under the Credit Agreement as a Condition Precedent, particularly in Leveraged Buyouts. The scheduled repayment instalments under any amortizing loans and the levels of the Financial Covenants are set by reference to the agreed Base Case Model (in the case of Financial Covenants, through the application of the agreed deviations from the anticipated performance of the business set out in the Base Case Model). Also referred to as the Business Plan although in certain uses of the term, the Base Case Model can be one case within the Business Plan. | |
| Base Rate | BR | the rate quoted by individual banks to their customers as the rate at which such banks are prepared to lend money and pay for deposits (HKG) in Hong Kong, also known as “Prime Rate” or “Prime Lending Rate” |
| Basis Point | BPS | one one-hundredth of a percentage point (e.g., 50 Basis Points equals 0.50 per cent). See also bps. |
| Basket | in circumstances where Indemnification is provided for, Basket generally refers to a specified minimum amount one party’s losses must exceed before the other party has an obligation to pay damages to the first party for the losses. See also Deductible and Tipping Basket. | |
| Bear Hug or Hostile Takeover | an Offer by a Bidder to buy a Target Company at a price usually meaningfully above the Target’s current Share price. Called a Bear Hug because the Acquirer hopes the price is impossible or at least hard to resist. A Bear Hug can be oral or written and can be non-public or public. A Bear Hug can also start as an oral, non-public communication and later be reiterated in writing and/or disclosed publicly. The purpose of the Bear Hug letter is to put pressure on the Target Company Board to negotiate a transaction. Also known as a Hostile Takeover. | |
| Bear Market | bad times as the stock market loses value. Hang in there for a Bull Market. | |
| Beauty Contest or Sale Process or Auction | a competitive process as one party seeks to present an opportunity, which multiple parties will submit competing tender offers to win or advance through the various stages of the Contest. | |
| Below the Line | in Financial Statements, items which are classed as Overheads or Exceptional costs and therefore don’t influence either Gross Profit (most common use) or EBITDA (occasionally used) | |
| Beneficial Owner | generally, where equity allows the use and benefit of property to belong to a person even though legal title of the property belongs to another person. the Law of Property Act 1925 requires that the transfer of an equitable interest in property (including Shares) must be in writing. The Articles of Association of some UK companies restrict the transfer of only “beneficial ownership” (as compared to the transfer of full legal title, being legal and beneficial ownership). | |
| Best and Final Bid | a term to describe the end of a bidding process and therefore any parties bidding are required to issue their last offer for the Company | |
| Best Endeavours | a common provision in an Acquisition Agreement to describe how hard a party needs to work to make good on its commitments. Like many other familiar contract terms (e.g., All or Substantially All), just what constitutes Best Efforts is far from clear. In many contracts, the nature of Best Efforts is modified by one or several adjectives, such as “Reasonable Best Efforts” or “Commercial Best Efforts” or even “Commercially Reasonable Best Efforts.” The point of the adjectives is to give greater clarity about just how hard (or not) the party must try to fulfil its promise. See also Best Endeavours. | |
| Best Knowledge or Sellers Awareness | the Seller’s obligation to assume liabilities is often restricted by a knowledge qualifier which is generally based on knowledge of specific persons or by Duty of Care obligations. The exact knowledge qualifier is to be defined in the agreement. | |
| Best Practices | a common description of the nature of a corporate governance policy or procedure. There is no authoritative source for determination of Best Practices; it is all in the eye of the beholder. Accordingly, the concept is usually used to describe or prescribe corporate governance conduct that the speaker believes, or wants a company to believe, is the “right” thing to do. | |
| Bible or Bundle | is the name given to the collection of principal deal documents which are collected together after Closing for ease of reference for the main deal participants. | |
| Bid | another name for an Acquisition Proposal or Offer made pursuant to an Auction | |
| Bid Conditions | conditions contained in a Bid | |
| Bid Deadline | the date and (often) time set by the Seller or Target Company in an Auction Process for Bidders to submit their final Bid | |
| Bid Process Letter | a letter, usually sent by a Seller’s Financial Advisor, to one or more potential Bidders describing terms and conditions of an Auction to which the Bidders must adhere. Typically contains a set of conditions and timetable to be followed. Most Bid Process Letters explicitly retain in the Seller the right to change, waive, or ignore all such terms and conditions in the Seller’s sole discretion. Nonetheless, Bidders typically comply, unless the Bidders decides to try to pre-empt the described Bid Process. See also Pre-emptive Bid. | |
| Bidco | name given to the Special Purpose Vehicle established by a Sponsor as the acquiring entity in a Leveraged Buyout or by a corporation in a Takeover. Usually Bidco will be the main Borrower in Acquisition-related Credit Facilities. | |
| Bidder | another name for an Acquirer, Buyer or Purchaser | |
| Bidder Group | a Group of two or more entities acting together to acquire a Target Company. PE Sponsors frequently form a Bidder Group to acquire a relatively large Target Company (thereby lowering each Sponsor’s investment and allowing greater diversification in the Private Equity Fund’s portfolio) or where one of the PE Sponsors may have special expertise relevant to the Target Company but its fund is not large enough to acquire the Target Company on its own. | |
| Bidding Contest | any M&A situation in which two or more potential Acquirers submit Competing Bids | |
| Binding Offer | an obligatory Offer of the prospective Purchaser to enter into an Acquisition Agreement regarding the Acquisition of a company or assets (generally made in an Auction). Also called a Binding Bid. | |
| Blackout Period | see Trading Blackout | |
| Board Recommendation | a recommendation by a Board of Directors that shareholders vote upon a proposal in a specified way. Bidders will invariably seek a Covenant and a condition that the Target Company’s Board will recommend the deal. | |
| Boilerplate | a generic name, often having or intended to have a pejorative connotation, for what is viewed by the beholder as standard provisions in a contract, such as choice of law, venue and method of giving notice. More substantive parts of an Acquisition Agreement may also be labelled as Boilerplate by participants who don’t want to deviate from their standard operating documents | |
| Bond or Loan Notes | debt Securities in transferable form issued by companies that have a fixed principal amount and a fixed (or floating) interest rate. Also known as Notes or Debentures. Bonds may be issued by an Acquirer to finance an Acquisition and are very common in LBOs as a significant part of the financing package. | |
| Book Value | BV | the amount in the relevant currency stated for particular assets on a company’s Balance Sheet |
| Boot Collateral | such assets as which may give rise to value on liquidation but are not viewed as preferred by lenders and who instead may place little to no value on those assets until realised | |
| Borrower | a company that borrows under a Credit Agreement | |
| Bottom Line | refers to a company’s net profit or earnings before tax | |
| Breakage Costs or Redemption Costs or Termination Fee | a prepayment penalty that has to be paid by the Borrower, if the Borrower wants to repay the loan prior to its maturity or before a fixed interest rate expires | |
| Bridge Loan | short-term loans that typically (although not always) are intended to be replaced by other, more permanent, funding. The purpose of a Bridge Loan is to provide a Bidder with Committed Financing in the context of an Acquisition Agreement that is intended or required to be Fully Financed at the time it is signed, as would be the case if the long-term funding plan for the Acquisition included Notes or Bonds, which would not be issued prior to consummation of the Acquisition. The name “Bridge” comes from its purpose of bridging the timing gap in the acquisition financing plan. Traditionally, Bridge Loans are used by PE Sponsors in Auction situations, but corporate Buyers also sometimes use Bridge Loans to finance Acquisitions. In the Commitment Papers context, Bridge Loans are sometimes referred to as the Bridge Facility. See also Bridge Financing. | |
| Bucket | another name for a Basket | |
| Bull Market | good times, until a Bear Market comes along | |
| Bullet Loan | a loan that provides for payment of the entire principal at maturity (i.e., there is no Amortization prior to maturity) | |
| Bullet Maturity | see Bullet Payment | |
| Bullet Payment | when the entire principal of a Bond or Term Loan is due and payable on the maturity date (i.e., there is no Amortization prior to maturity). See also Bullet Maturity. | |
| Business Combination | a name for any type of transaction that results in the economic and legal Combination of businesses and assets of two or more entities, whether accomplished pursuant to operation of law (as in a Statutory Combination, Merger or Scheme), or by an Asset Acquisition or Acquisition of Securities of one entity of another | |
| Business MAC | BMAC | shorthand for the Condition Precedent in a Commitment Letter, Acquisition Agreement or Credit Agreement to confirm there has been no Material Adverse Change in the operations, business, or prospects of the Borrower or the Target Company. Sometimes called a Company MAC, this should not be confused with a Market MAC, which deals with Material Adverse Changes in market conditions. See also Material Adverse Change and Target MAC. |
| Business MAE | BMAE | Business Material Adverse Effect. See Business MAC |
| Business Plan | a detailed description of the plans of an existing business and its expansion plans or a new business, with financial projections. Also used to refer to the annual Business Plan which is often required to be delivered to Lenders under Credit Agreements for Leveraged Buyouts (effectively an update of the Base Case Model) | |
| Buy and Build | an investment made in a business with the intention of acquiring further “bolt-on” businesses in order to build the value of the original investment | |
| Buy-Back | the act of company or investor acquiring the shares of another party further down the company structure or cap table | |
| Buy-In Management Buyout | BIMBO | a transaction where a third party to the company acquires the business whilst also eliciting the support of the incumbent management who also share in the equity |
| Buy-Out | an Acquisition of a controlling interest in a company, generally by a Financial Buyer | |
| Buy-Side | the side of the Buyer in the context of an Acquisition of a company | |
| Buyer’s Market | a market situation in which more potential Target Companies are for sale than potential Buyers exist. This situation leads to buying conditions more favourable for the Buyer. | |
| Call | shorthand for Call Option |
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| Call Option | a contractual right, but not an obligation, of one party to call for the delivery of particular asset (i.e., Shares) at a particular point in time in the future or within a particular time period at a Strike Price. Call Options often have an expiration period, and are often used in public M&A as a tool to acquire an initial interest in the underlying Shares. | |
| Cap | often used as a shorthand for a limitation in financial definitions, Covenants, Negative Covenants, Representations and Warranties and Indemnification provisions (e.g. “a cap on the amount of Indemnifiable Damages”). Cap is also used as shorthand for a limit on the amount of cash or Stock consideration being offered in an Acquisition where the consideration is a mixture of cash and Stock. | |
| Cap table | a term used to describe the list of all shareholders of a company along with the amounts they subscribed for and have had issued | |
| Capital Expenditure | CAPEX | expenditures by a party for investments in fixed assets. Such expenditures are capitalized to the Balance Sheet of the party under applicable accounting rules and then amortized as an Income Statement expense over a period of more than one year rather than being immediately expensed to the Income Statement in full in the current period. A Capital Expenditure is distinguished from a current expense because the asset has a long-term impact that will benefit the business in future years as well as the current year. |
| Capital Gains Tax | CGT | a tax applies on the profit applied in various jurisdictions on the realizing on an asset (i.e., Shares). See also acronym CGT. Transaction structures are often considered in the context of CGT liability. |
| Capital Markets | a broad term that refers to the market for raising money through Securities offerings |
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| Capital Structure | a term referring to the overall structure of the company’s outstanding debt and equity. A company’s Capital Structure is generally divided into several distinct constituencies, such as senior debt, subordinated debt and equity (common or preferred). Note the structure may look very different pre- and post- Acquisition in a Leveraged Buyout. | |
| Carried Interest | Carry | a name for the fee structure commonly used by Private Equity Sponsors as compensation for managing the Private Equity Funds, including the Acquisition, and for managing and disposing of Portfolio Companies. The fee structure (which is not unique to Private Equity Funds) consists of the payment to the PE Sponsor of a specified amount of money (usually a percentage) of proceeds which Private Equity Funds realize on their investments. |
| Carve-Out Provision | a provision that creates an exception to a more general provision. For example, an act of war may be carved-out of events that constitute a Material Adverse Change. | |
| Carve-Out Transaction | generally refers to an Acquisition of a subsidiary, business unit or division from a larger enterprise with other operations | |
| Cash Equivalent | highly-rated, short-term, liquid investments that are readily Convertible to cash and have short maturities. | |
| Cash Flow Statement | CFS | a Financial Statement in which a company reports its incoming and outgoing cash flows during a specified time period (typically monthly, quarterly or annually) |
| Cash Free/Debt Free | CFDF | describes a concept to determine the purchase price for a Target Company on the assumption that the Target Company has neither cash nor indebtedness at the time of Closing. In order to achieve this result, the parties agree to reduce the Enterprise Value by the company’s financial debt and increase the Enterprise Value by the amount of the company’s cash. |
| Cash Management | summary of the liquid funds held by various subsidiaries at a group’s Parent company or held by a specific operating company in a Liquidity pool | |
| Cash Pooling | synonym for Cash Management | |
| Cashflow available for debt service | CFADS | that free cashflow generated by the company which is available to service financing obligations, having first served working capital and capital expenditure requirements |
| Change of Control | COC | the act of majority control being transferred to different parties through a transaction |
| Chilling a Sale | a term describing actions by a third party that would deter or preclude a sale of a company. Examples include a statement by a large, minority shareholder opposing a sale, a statement by a CEO or senior Management of unwillingness to work for a particular Bidder or for a specified type of Bidder, or adoption of Takeover Defences that would effectively deter or preclude an Unsolicited Bid. | |
| City Code | short for the City Code on Takeovers and Mergers. See Blue Book and the UK Takeover Code. | |
| Clean Room | the name often given to a Due Diligence mechanism by which a third party expert (or Clean Team) examines sensitive information on a Target Company’s business (often in a physically separate space to the full data room). The expert analysis is more often done by appropriate third party professional firms, not company employees, so the parties can continue to act as competitors as required by various antitrust regulators. | |
| Clean Team | see Clean Room. The same expert team often prepares a Synergies or Merger Benefits analysis for various different Bidders using a Bidder’s input data. | |
| Closing | the consummation of the transaction when all remaining documents are executed and the money changes hands | |
| Closing Condition | another name for a Condition Precedent | |
| Closing Date | the date on which the Closing occurs | |
| Club Deal | refers to an LBO transaction where multiple Sponsors join together in order to buy a target Partner Jennifer Perkins explains Club Deal |
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| Co-Invest | describes two or more Investors who join together in an investment on substantially identical terms | |
| Comfort Letter | a letter which allows the recipient to demonstrate reliance on independent experts for satisfaction of certain specific matters and for which those matters have been documented and appropriately qualified by a professional after undertaking reasonable investigation. | |
| Commencement Date | most commonly used to identify the date a defined period begins, such as a Tender Offer Period or a Marketing Period for the sale or placement of Securities. | |
| Commitment Letter or Credit Backed Offer Letter | the letter by which financial institutions commit to provide loans. The Commitment Letter consists of the actual text of the letter, along with annexes and exhibits that lay out the terms of the Facilities and the Conditions Precedent to funding. | |
| Committed Financing | means that the providers of the financing and the recipient of the financing have signed Commitment Papers setting forth detailed terms for the provision of the financing. | |
| Companies Act | the UK Companies Act 2006, the principal piece of legislation governing UK Public Companies and Private Companies | |
| Companies House | CH | the registry for companies incorporated in England and Wales. Its register includes the incorporation, re-registration and striking-off of companies, the registration of documents that must be filed under company, Insolvency and related legislation, and the provision of company information to the public. |
| Competition and Markets Authority | CMA | in 2014 the activities and powers of the UK’s OFT and UK Competition Commission are due to be combined under the Competition and Markets Authority (CMA). The CMA will take control of all competition and antitrust matters, including cartel enforcement, Merger analysis and market studies which the OFT and UK Competition Commission currently control. See also Competition Commission. |
| Completion | see Closing | |
| Completion Accounts | CA | the reference accounts used by the transaction, against which any post-Closing adjustments are applied to determine the final purchase price. Contrast with Locked Box as an alternate strategy for effecting measurement on completion |
| Completion Accounts | see Closing Accounts | |
| Completion Date | see Closing Date |
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| Completion Deliverables | measures and actions to be taken at Completion, potentially by a series of parties and without delivery of which the transaction will not complete | |
| Compound Annual Growth Rate | CAGR | acronym for compound annual growth rate; often a measure used in the Business Plan |
| Condition Precedent | CP | a condition which must be satisfied on, or prior to, the Closing of the relevant transaction. Also called a Closing Condition. |
| Conditionality | means the degree of conditions (e.g., Material Adverse Change, Due Diligence Condition, Financing Condition, Minimum Condition) that must be met in order for a deal to close pursuant to an Acquisition Agreement. Greater Conditionality reduces a Buyer’s risk and lessens Deal Certainty for a Seller. | |
| Confidentiality Agreement | NDA | another name for a Non-Disclosure Agreement |
| Consideration | the cash, shares, or other assets paid by a Buyer in consideration for the Acquisition of a Targets shares or assets. Consideration can be structured many ways and not all the consideration is necessarily paid at Closing of the sale and purchase. Some portion of the agreed consideration may be deferred and paid at a later date (referred to as the Deferred Consideration), or the parties may agree to additional consideration being paid if certain triggers are met (often referred to as Contingent Consideration or Earn-Out depending on their nature). The consideration may also be adjusted to take into account changes between signing and Closing, sometimes referred to as an “Adjustment to Consideration” or Purchase Price Adjustment. | |
| Constitutional Documents | a company’s Memorandum & Articles of Association, Certificate of Incorporation, Share Register etc that set out the incorporation, composition and status of the company | |
| Contingent Consideration | consideration payable in respect of a transaction which only applies if certain Triggers are met | |
| Contribution | typically a measure of profit where gross profit has been adjusted for some further identifiable overheads and which measures then the contribution against the overall overheads/profits | |
| Control Premium | the amount paid by an Acquirer over the market value of Target Company Shares to account for the added value of obtaining a controlling interest in the Target Company | |
| Controlling Shareholder | a shareholder or Group of shareholders who own a block of voting Securities of a Target Company; the exact amount may vary depending on the Capital Structure of the company and the jurisdiction, but is often at least 50 percent or more of a Target Company’s voting shares but can be much less in large companies. A Controlling Shareholder can block the approval of a Business Combination | |
| Conversion Price | the price at which a given Convertible Security can be converted to Stock. The Conversion Price is set on the pricing date at a premium above the current market price of the underlying Stock on that date. | |
| Convertible | a Security or contractual right of repayment (such as a Bond, loan or other debt Instrument) convertible into another Security, typically Ordinary Shares | |
| Convertible Preferred Stock | Preferred Stock, Preferred Shares or Preference Shares which entitle the shareholder to convert such into Common Stock/Ordinary Shares. See also Convertible Preference Shares. | |
| Cost of Capital | COC | the theoretical weighted economic cost to an entity of raising new capital |
| Cost of Equity | the theoretical economic cost to any entity (often expressed as a percentage of its notional value as set forth on the entity’s Balance Sheet) of raising new equity capital | |
| Cost of Funds | COF | what it costs a Lender to borrow funds to provide to a Borrower |
| Counterparts | under many legal systems not all signatories to a document need to sign the same hardcopy document; each separate hardcopy document that is signed is known as a Counterpart and together they create a binding agreement | |
| Coupon | the contractual interest rate stated on a Bond or Loan Note when issued. | |
| Covenant | legalese for an agreement to do something (Affirmative Covenant), not to do something (Negative Covenant) or to maintain something (Maintenance Covenant). See also Interim Operating Covenants. | |
| Credit Risk | the risk that a counterparty will default on its contractual obligations as a result of its failure or impaired financial situation. While most commonly referred to in Lender/Borrower circumstances, essentially every party to the deal weighs the Credit Risk when considering a variety of execution risks. | |
| Crystallisation | the process whereby a previously uncertain matter vests to become real, definable and measurable. i.e Crystallisation can take place as a result of a notice (e.g., after an Event of Default) or, in some circumstances, may occur automatically on an Event of Default or some other agreed event. | |
| D&O Coverage | the insurance coverage provided to a director or officer (or to all directors and officers) under a Directors and Officers Liability Insurance policy | |
| D&O Insurance | shorthand for Directors and Officers Liability Insurance | |
| Data Room | name for specified records and documents pertaining to a company and its business which are available for Due Diligence review by a party entering into an agreement with the company. See also Virtual Data Room. | |
| Dawn Raid | in the context of a Takeover, Dawn Raid describes a potential Bidder’s purchase of a substantial number of the Shares in a company as soon as the markets open in an attempt to become a significant shareholder. See also Stakebuilding. | |
| De minimis | means not material. A Latin phrase meaning “minimal things,” which in the M&A context are often excluded from Due Diligence reporting and/or Representations and Warranties and Indemnity protections. the Threshold which an agreement party must meet in order to have Indemnification claims under the agreement |
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| Deal Breaker | a key issue(s) which will cause a party to stop pursuing a transaction or will prevent a deal from proceeding or being consummated |
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| Deal Jumping | an Unsolicited Offer by a Competing Bidder to acquire a Target Company which is already in negotiations, or has a signed Acquisition Agreement, with another Bidder | |
| Debenture | a document entered into between the company and a Lender setting out details of any Fixed Charges, Floating Charges, any other Security arrangements, and the related terms and conditions | |
| Debt Financing | a borrowing transaction to raise the portion of the Acquisition Consideration consisting of borrowed funds. Debt Financing typically takes the form of bank borrowings and/or issuances of senior and subordinated Bonds in the public or private High Yield Bond markets. Debt Financing may also consist of Mezzanine borrowings from Hedge Funds or specialized funds raised specifically to provide subordinated Debt Financing for Acquisitions. | |
| Debt For Equity | the process whereby a debt interest is extinguished in exchange for an Equity Interest. Used to re-structure a company’s Balance Sheet in a Restructuring. See also Loan-To-Own-Strategy. |
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| Debt-like | the term for identifying those items which are not debt but which behave like debt i.e a deposit is money received and therefore an asset but is paid in advance of work and maybe due to a customer and is therefore typically debt | |
| Deferred Consideration | the portion of the purchase price the Purchaser does not have to pay at Closing but at a later time. |
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| Demerger | the division of a business into two or more separate organizations. Also known as a Spin-Off. | |
| Determination Period | a period of time specified in a contract for the measurement of events that determine specified contractual terms/sale at the period of time specified in an Acquisition Agreement | |
| Development Capital | also known as Growth Capital and often provided by Venture Capital firms. Development Capital is the long-term equity capital raised to allow a company to grow without relying wholly on short-term bank debt. | |
| Dilution | in a financial context, the outcome of an event that reduces a financial statistic or ownership interest. Stock issued by a company at a very low value below market can cause a Dilution in the price and value of the previously outstanding Stock. An Acquisition can cause Earnings Per Share Dilution of the Buyer’s Stock. | |
| Direct Merger | a Merger between two Parent companies (the Buyer and the Target Company). See also Parent Company Merger. | |
| Directors’ Duties | the duties owed by a director to a company are codified in Part 10 of the UK Companies Act. All directors in the UK have a duty to: act in accordance with the company’s Constitutional Documents and to exercise their powers for the purposes for which such powers were conferred (section 171); promote the success of the company for the benefit of shareholders as a whole (section 172). See also Duty of Loyalty; exercise independent judgment (section 173); exercise reasonable care, skill and diligence (section 174). See also Duty of Care; avoid a situation in which the director has, or may have, a direct or indirect interest that conflicts or may conflict with the interests of the company (section 175). See also Duty of Candour; not accept benefits from third parties (section 176); declare a direct or indirect interest in a proposed transaction or arrangement with the company (section 177); and declare a direct or indirect interest in a transaction or arrangement, which has already been entered into by the company (section 177). |
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| Disclosure | in a financial context, the outcome of an event that reduces a financial statistic or ownership interest. Stock issued by a company at a very low value below market can cause a Dilution in the price and value of the previously outstanding Stock. An Acquisition can cause Earnings Per Share Dilution of the Buyer’s Stock. | |
| Direct Merger | a Merger between two Parent companies (the Buyer and the Target Company). See also Parent Company Merger. | |
| Directors’ Duties | the duties owed by a director to a company are codified in Part 10 of the UK Companies Act. All directors in the UK have a duty to: act in accordance with the company’s Constitutional Documents and to exercise their powers for the purposes for which such powers were conferred (section 171); promote the success of the company for the benefit of shareholders as a whole (section 172). See also Duty of Loyalty; exercise independent judgment (section 173); exercise reasonable care, skill and diligence (section 174). See also Duty of Care; avoid a situation in which the director has, or may have, a direct or indirect interest that conflicts or may conflict with the interests of the company (section 175). See also Duty of Candour; not accept benefits from third parties (section 176); declare a direct or indirect interest in a proposed transaction or arrangement with the company (section 177); and declare a direct or indirect interest in a transaction or arrangement, which has already been entered into by the company (section 177). |
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| Disclosure | the process of limiting and qualifying (usually in the Disclosure Letter/Schedules) the Representations and Warranties in a SPA by disclosure of facts against which the beneficiary of a Representation or Warranty may not then use as a basis to refuse to Close the transaction or raise a future claim. | |
| Disclosure and Transparency Rules | the UK rules for Issuers on the disclosure and control of Inside Information and transactions as contained in the FSA’s Disclosure Rules and Transparency Rules Sourcebook | |
| Disclosure Letter | another name for a Disclosure Schedule | |
| Discounted Cash Flow | DCF | a common, and many consider the most reliable, financial methodology for determining the value of a business. Discounted Cash Flow is calculated by summing the present value of a projected stream of annual projected earnings, Free Cash Flow or similar metric measuring the profitability of a company over a significant period of time and discounting the total back to a present value. Like many analyses, a Discounted Cash Flow is only as reliable as its inputs, which include projections of a business’ Income Statement over a meaningful number of years (usually five), determining the amount of that income stream in perpetuity (either by calculating an assumed sale value for the business at the end of five years or by calculating the value of the stream into perpetuity, using an assumed rate of growth) and developing and applying a discount rate for purposes of calculating the present value of the projected income stream. Those inputs, in turn, obviously depend on numerous assumptions and theoretical constructs of such matters as the methodology for determining an appropriate discount rate. |
| Distressed Sale | a transaction when the Target Company is in or near the Zone of Insolvency. | |
| Distributable Reserves | generally, a company can only make a Dividend Declaration if it has sufficient Distributable Reserves to do so. This amount will be subject to technical review in each case, but a company’s profits available for Distribution are broadly its accumulated realized profits, so far as not previously utilized by Distribution or capitalization, less its accumulated realized losses, so far as not previously written off in a reduction or Reorganization of capital duly made. | |
| Distribution | see Dividend Declaration | |
| Distribution Date | the date on which a dividend or other Distribution is made | |
| Double Taxation Treaty | an agreement (usually bilateral) between countries which is intended to prevent taxpayers from being taxed on the same amount of profit or gains in each country. A Double Taxation Treaty often includes reducing the rate of Withholding Taxes that would otherwise be due in respect of payments made by a person in one of the countries to a person resident in the other country, so long as the requirements of the Double Taxation Treaty are met. |
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| Drag-Along | Drag | allows a majority shareholder to require that a minority shareholder participate in a sale to a third party. The idea is that a majority shareholder may not be able to recognize the full value of its holdings unless it can sell the entire company to a third party by dragging along minority shareholders. Drag-Along rights generally provide that the minority shareholder receive the same deal terms as the majority shareholder. Compare Tag-Along rights. |
| Draw-Down | a name for the process of obtaining cash proceeds under the terms of a Financing Facility | |
| Draw-Down Notice | a Private Equity Fund request to the Investors to make available the amount of capital the Investors committed to within a certain time period | |
| Draw-Down Period | time period during which the Private Equity Fund may make a Capital Call | |
| Drawdown | see Draw-Down | |
| Drop Dead Date | another name for End Date, Long Stop Date or Outside Date | |
| Dual Track Process | a process to sell a company whereby the applicable company simultaneously prepares an IPO on the one hand, and a private sale, usually through an Auction, on the other hand | |
| Due Diligence | what parties to an M&A transaction and their advisors do to learn about a company. The Buyer (and its lawyers, bankers and accountants) performs Due Diligence so it can understand what it is buying. The aim is to ensure that nothing contradicts the Buyer’s understanding of the current state and potential of the business. The individual elements of Due Diligence may include commercial Due Diligence (markets, product and customers), a market report (marketing study), an accountants report (trading record, net asset and taxation position) and legal Due Diligence (implications of litigation, title to assets and intellectual property issues). If a Seller’s shareholders are receiving the Buyer’s Stock as part of the Merger Consideration, the Seller (and its advisors) performs Due Diligence so it can understand what its shareholders are receiving. Due Diligence activities are broad and range from a review of relevant documents (see Data Room and Virtual Data Room) and Financial Statements to plant visits and interviews with Management, outside accountants, counsel, customers and suppliers. |
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| Due Dilligence Questionnaire or Information Request List | DDQ or IRL | The document used by diligence parties to schedule the information and questions that require answers to as part of their process. Can be called an Information Request List as well |
| Duty of Care | the Duty of Care is customarily articulated using the so-called objective “reasonable man” standard—that in making a decision a member of the Board of Directors must use the same degree of care as a reasonable business person would do in the conduct of his/her own business affairs | |
| Earn-Out | a provision in an Acquisition Agreement that provides for payment of additional consideration to the shareholders of the Target Company if the Target Company achieves specified objectives (usually financial, but sometimes also event driven, e.g., achievement of regulatory or other milestones) during a period following the Acquisition. | |
| Earnings before interest tax and depreciation | EBITDA | acronym for earnings before Interest, taxes, Depreciation and Amortization. Because this calculation eliminates the effects of financing and accounting decisions, EBITDA is often used to assess a company’s ability to generate cash. Also known as Adjusted EBITDA in the event non-recurring costs are added back which wouldn't reoccur after completion of the transaction |
| Earnings Per Share | profit after tax divided by the number of issued and outstanding Shares of Common Stock or, if applicable, Ordinary Shares in issue | |
| Effective Date | see Effective Time | |
| Effective Time | means the point in time at which an agreement becomes operational or otherwise goes into effect. Acquisition Agreements usually provide for an Effective Time, at which point the Acquisition goes into effect as a legal matter. | |
| EGM | acronym for Extraordinary General Meeting |
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| Electronic Data Room | another name for a Virtual Data Room | |
| End Date | another name for Outside Date, Long Stop Date or Drop Dead Date. Also the date that an agreement comes to a natural end. | |
| Engagement Letter | EL | is most often used to describe a formal retention agreement between a company and its Financial Advisor (or sometimes its legal advisor). Virtually all Financial Advisors have a form of Engagement Letter covering such matters as fees, reimbursement of expenses, duration of engagement, rights of termination and the client’s obligation to indemnify the Financial Advisor. Although the terms of an Engagement Letter typically are extensively negotiated, the Indemnification provisions are customarily considered sacrosanct by the Financial Advisor and thus not subject to meaningful negotiation. |
| Enterprise Value | EV | means the value of a business on a debt free, cash free basis, i.e. irrespective of the sources of capital used to finance it. Commonly determined by adding the value of a company’s debt to its Equity Value, minus cash and Cash Equivalents. |
| Entrepreneurs’ Relief now known as Business Asset Disposal Relief | ER or BADR | allows individuals or certain trustees to claim relief from Capital Gains Tax in respect of a disposal of assets or Shares of a company upon certain conditions being met |
| Equity Check | see Equity Contribution | |
| Equity Commitment | in a Leveraged Buyout, a Sponsor’s commitment to make the Equity Contribution to a Special Purpose Vehicle or otherwise thinly-capitalized Purchaser entity | |
| Equity Contribution | think of this as the Sponsor’s “down payment” in a Leveraged Buyout. Equity Contribution is the amount of funds the Private Equity Fund contributes to finance a portion of the Acquisition Consideration. The amount of and terms and conditions for provision of the Equity Contribution are generally documented in the equity Commitment Letter. See also Rollover Equity. | |
| Equity Interest | generally refers to an ownership interest in a company which is distinct from debt and entitled to a share of profit or earnings of the company. An Equity Interest may consist of Stock or Shares (preferred or common) in a corporation, Limited Liability Company or membership interests in a Limited Liability Company, Partnership interests (limited or general) in a Partnership, etc. | |
| Equity Kicker | an Equity Interest offered to a debt provider (i.e., a Lender under a Credit Agreement or a Bond Buyer), usually in the form of Warrants issued by the company to such debt provider, typically as an incentive for such Lender or bondholder to buy the debt |
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| Equity Sponsor | an Investor, typically a Private Equity Fund. See also Private Equity Sponsor. | |
| Equity Value | the term given to the cumulative effect of Enterprise Value plus adjustments required to make debt-free-cash-free plus adjustments to normalise working capital plus any other one off adjustments agreed within the sale | |
| Escrow | the act of placing money (or other items) with a third party (an Escrow Agent) to secure a future obligation. |
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| Escrow Account | a bank account on which the Escrow Amount is credited | |
| Escrow Agent | the Fiduciary who administrates the Escrow Account | |
| Escrow Amount | the sum of money used in an Escrow as security for receivables from a contract party |
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| Estimated Outcome Statement | EOS | the summary of expected realisations from the asset and equity base with regards to what a sale of all of those items would yield in a marketing process |
| Exclusivity Agreement | an agreement to deal with one party exclusively with respect to a business opportunity. Buyers sometimes seek exclusivity provisions from Sellers with respect to negotiations involving an Acquisition. Private Equity Sponsors sometimes seek exclusivity provisions from one or more Financing Sources to prevent the Financing Sources from simultaneously dealing with other Bidders in an Auction. See also Exclusive Financing provisions and Lock-Up. |
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| Execution Risk | the risk that a deal will not Close. See also Conditionality. | |
| Exercise Price | the price at which an Option or Warrant may be exercised. See also Strike Price. | |
| Exit | the opportunity for Investors to sell their investment. Normally, the Exit from investment in a Private Company occurs either through a sale of the company or through its IPO/Flotation on the stock market. | |
| Exit Multiple | MROIC | on an Exit, the Multiple of EBITDA (or a similar metric) received as consideration in the transaction also known as money returned on invested capital |
| Expiration Date | another name for Termination Date | |
| Extension | granting a party more time to perform an obligation under an agreement or moving a Termination Date further into the future | |
| Extraordinary General Meeting | EGM | a general meeting of a company’s shareholders called in order to seek their consent for matters requiring or deemed by the Board of Directors to require such consent, particularly pursuant to the company’s Articles of Association or under the relevant law |
| Facility | another name for loan or credit line | |
| Financial Buyer | generally, a Sponsor which is acquiring a business or Target Company as an investment rather than to achieve Strategic Synergies. Compare Strategic Bidder. |
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| Financial Conduct Authority | FCA | in 2013 the FCA became responsible for regulation of conduct in UK retail, wholesale and financial markets, and the infrastructure that supports those markets. See also Financial Services Authority and Prudential Regulation Authority. Partner Graeme Sloan explains Financial Conduct Authority |
| Financial Covenants | provisions in a loan agreement according to which the Borrower is obligated to maintain or fulfil specific financial target settings during the duration of the loan | |
| Financial Services Authority | FSA | the former regulator for the UK financial services industry, given statutory powers by the Financial Services and Markets Act 2000. The Financial Services Authority’s statutory objectives were to maintain market confidence and financial stability, promote public awareness, protect consumers and reduce financial crime. Anyone carrying out a Regulated Activity in the UK had to be authorized by the Financial Services Authority or able to rely on an exemption. In 2013, the FSA was replaced by two new regulatory bodies; (i) the Prudential Regulation Authority (PRA) became the UK’s prudential regulator for deposit-takers, insurers and designated investment firms; and (ii) the Financial Conduct Authority became responsible for regulation of conduct in retail, as well as wholesale and financial markets and the infrastructure that supports those markets. |
| Financial Statements | FS or MI | the Income Statement, Balance Sheet and Cash Flow Statement of a company |
| Financing Commitment | usually refers to a binding agreement from a financing source to provide Debt Financing for an Acquisition transaction on specified terms (usually contained in an extensive Term Sheet) subject to the drafting and negotiation of a definitive loan agreement. Financing Commitments are usually obtained from a commercial or Investment Bank or banks, but are sometimes provided by other types of Lenders, including Hedge Funds or entities specializing in providing acquisition financing. See also Commitment Letter. | |
| First Round | an initial round of Bid solicitations serving to determine the most interested potential Bidders for a Target Company or business. Often certain information will be withheld from potential Bidders until the field is narrowed to a select few contenders. | |
| Floating Charge | a charge taken under English law over all the assets or a class of assets owned by a company from time to time. The charge “floats” over the assets and allows the Chargor to continue to deal with the assets in the Ordinary Course of Business until Crystallization. A Floating Charge ranks behind a Fixed Charge in the order of repayment in Insolvency. | |
| Flotation | when a company initially trades its Shares on the public market. See Initial Public Offering. | |
| Framework Agreement | a skeleton agreement which comprises provisions that should apply to several contemporaneous or subsequently concluded agreements |
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| Free Cash Flow | FCF | the net operating cash a company generates during a period after deducting all cash costs of doing business (including payment of taxes and Capital Expenditures). A popular measure for a company’s ability to create value. FRS102 outlines the format of the Cashflow Statement most often used to express this |
| Funds Flow | FF | the Closing document that outlines where the money is going. In more complex transactions, the memorandum is often executed or organized by the legal teams of either side |
| Gearing | the ratio of debt to equity capital. See also Leverage. | |
| General Disclosures | qualify Representations and Warranties by reference to matters appearing in specified public records and/or of which the Buyer ought to be aware on the basis of Due Diligence documents, inquiries or searches | |
| Generally Accepted Accounting Principle | GAAP | generally accepted accounting principles. UK GAAP refers to GAAP in the United Kingdom and is the standard by which many UK companies report their Financial Statements, although IFRS is also commonly used (and required for all European Public Companies) |
| Golden Handcuffs | a term often used to broadly describe employment incentive arrangements designed to ensure an employee does not leave a business | |
| Golden Handshake | agreement between a company and a member of the Management which connects the termination of employment with a substantial financial settlement | |
| Good Leaver | a manager who holds Shares of the company and leaves his/her office in consent or without being terminated for good cause. When a person ceases to be an employee of a company, a Good Leaver will usually mean leaving employment on grounds of death or disability and a Bad Leaver will usually mean leaving in circumstances connected with employee dismissal. The concept of Good Leaver/Bad Leaver is sometimes used to determine the Acquisition price of the Shares held by the manager or employee. | |
| Goodwill | the value of intangible assets on a company’s Balance Sheet. Goodwill includes the business’s reputation, contacts and intellectual property etc | |
| Gross Up | a provision in an agreement which increases the amount of a specified payment so that, after payment of all applicable taxes owed by the recipient resulting from the payment, the recipient receives what it would have received if the payment had not been subject to the applicable taxes. | |
| Group | generally when two or more persons agree to act together for the purpose of buying, holding, voting or disposing of a company’s Securities. Proving when persons have actually formed a Group versus when persons just happen to all be taking similar actions at similar times can be difficult. | |
| Growth Capital | see Development Capital | |
| Hedge | an investment or strategy which attempts to reduce the impact of adverse fluctuations in the price of one asset by taking an offsetting position in another asset. For instance, many companies Hedge their foreign exchange exposure by entering into a Currency Swap and their interest rate exposure by entering into an Interest Swap. | |
| Hedge Fund | a fund that invests essentially at the derivatives market in derivative instruments such as Options and futures or that exploits price differences of financial instruments through other innovative portfolio strategies | |
| High Vote/Low Vote | a structure in which different classes of Shares have different voting rights (e.g. a Class A Share may provide a holder with one vote per Share, while a Class B Share may provide its holder with ten votes per Share). The High Vote/Low Vote structure permits Insiders, family members or early Investors etc to continue to meaningfully influence control years after further capital is raised | |
| Hive-Down | a form of Reorganisation of a company or group of companies whereby a company transfers a part of the business to a subsidiary | |
| Hockey Stick | a descriptive term for a Target Company’s projections which show a sharp upward trajectory in future trading periods | |
| Hold Harmless | where one party agrees (often by letter agreement) not to hold another contracting party responsible for claims and/or liabilities which it may incur | |
| Hold-Separate Agreement | agreement entered into in connection with a Cross-Border Merger according to which specific companies in certain countries of a Target group are to be treated separately until obtaining the respective Merger Clearances in order to enable the parties to consummate a substantial part of the transaction independent therefrom beforehand | |
| Holdback | another term for an Escrow |
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| Holdco | shorthand for Holding Company | |
| Holdco Debt | debt at the Holdco level. Particularly where the Holdco has no operations or assets other than its Stock in the operating company, Holdco Debt is an interesting creature, generally not guaranteed by the operating company below it. So from the Holdco debtholders’ perspective, Holdco Debt is debt. But from the lower operating company perspective, the Holdco Debt is essentially equity because payments on the Holdco Debt can only be paid with dividends up from the operating company. The ability to incur new debt at a Holdco level depends on whether the operating company Indentures and Credit Agreements restrict Holdco Debt. |
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| Holding Announcement | an announcement made by a Listed Company in the event of a leak of a potential material corporate event and generally advising shareholders to exercise caution when dealing in the Shares of the company | |
| Holding Company | a company which sits on top of (or “holds” the Stock of) one or more operating subsidiaries. This concept sometimes connotes a company that does nothing else (i.e., has no operations). | |
| Hostile Takeover | frequently used to describe a Business Combination or a proposed Business Combination that, at least initially, is opposed by the Target Company or proposed by a Hostile Bidder. There are many degrees of hostility, ranging from an initial Unsolicited Acquisition Proposal which is withdrawn if the Target Company turns it down, to a Tender Offer or Exchange Offer which is made in the face of a Target Company’s fierce opposition. Note that once a Target Company agrees on the terms of a Hostile Bid, the deal becomes negotiated and is no longer a Hostile Bid. Hostile, as a description of an Acquisition Proposal or an Acquirer, usually is intended as a pejorative connotation, although the connotation is usually mostly in the eyes of the Target Company’s Board of Directors, Management and employees, not the market. | |
| Hurdle | the term typically used to describe the level after which certain commercially agreed terms will apply. For example, a director may receive additional equity in the event that the Hurdle percentage Return on Investment in a transaction is reached. | |
| Hurdle Rate | a defined break-even point in a Private Equity or Venture Capital Fund which has to be reached so that a fund manager receives a remuneration in the form of Carried Interest |
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| Income Statement or Profit & Loss | a Financial Statement on which a company reports its Results of operations over a period of time (usually monthly, quarterly or annually). Also commonly referred to as a Profit and Loss Statement or PAL Statement. | |
| Indemnification | a promise to pay the other party in the amount of damages suffered by reason of a false Representation and Warranty or a breach of Covenant. In general, Indemnification is an amount paid to a party to make the whole with respect to a loss incurred against which the party had been indemnified or where recovery may not be available under contract or law. | |
| Indemnification Caps | a limit on the amount of Indemnification | |
| Indemnity | see Indemnification | |
| Indemnity Clause | see Indemnification | |
| Indicative Bid | see Preliminary Offer | |
| Indicative Offer | see Preliminary Offer | |
| Information Memorandum | IM | refers to the marketing document used to give potential Bidders an initial understanding of the Target Company. |
| Inside Information | a defined term in the SFO, and refers to specific information about a company, its shareholders or officers or the listed securities of the company or their derivatives which is not generally known to the public but would, if generally known to them, be likely to materially affect the price of the listed securities. | |
| Insider | a person who possesses Inside Information | |
| Insider Trading | describes the act of dealing in Shares on the basis of Inside Information. Insider Trading is a criminal offence in the UK under the Criminal Justice Act 1993 (CJA), which also makes it an offence to disclose Inside Information to another or to encourage another to deal in Shares on the basis of Inside Information (the “tipping offence”). See also the civil law Market Abuse regime, which applies to a broader range of abusive conduct (and may additionally apply to companies as well as individuals). | |
| Insolvency | the more common expression used for describing Bankruptcy (which in certain jurisdictions is more usually applied to the Insolvency only of natural persons, although the terms are colloquially often used inter-changeably). The word describes both certain formal procedures, as well as the financial condition of being “insolvent,” which is the inability to pay one’s debts. This inability can trigger either Balance Sheet Insolvency (liabilities exceeding assets) or cash flow Insolvency (the inability to pay debts as they fall due), which vary according to the jurisdiction (see for example over-indebtedness which is a formulation of what can be seen as Balance Sheet Insolvency). In some jurisdictions, such as England or Germany, both the first two of these measures of Insolvency are in use and will determine eligibility to enter Insolvency proceedings. There is a significant amount of judicial authority on both cash-flow and Balance Sheet Insolvency, meaning that Insolvency is not necessarily easily proven, particularly by a creditor. As a result, and as a general precaution, European finance documents commonly include much wider situations of potential financial distress, including for example, the commencement of any security enforcement, which would be an Event of Default. |
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| Insolvency Act | refers to the United Kingdom Insolvency Act 1986 which sets out the statutory framework for personal and corporate insolvencies in the UK | |
| Intercreditor Agreement | ICA or ICD | an agreement which sets forth the rules of engagement between two groups of Lenders with respect to shared Collateral or other intercreditor relationship matters. Apart from addressing the obvious point that the first lien Lenders get paid out first from collateral proceeds and the second lien Lenders get paid out second in first lien/second lien deals, Intercreditor Agreements also lay out a number of important provisions regarding the right of each Lender group to take action with respect to the collateral and the Borrower generally. |
| Interested Person Transaction | see Related Party Transaction | |
| Interim Accounts | a financial report that contains either a complete or condensed set of Financial Statements for a period shorter than an entity’s full financial year. Typically, interim accounts are subject to a review, but not an audit, by the entity’s auditors. | |
| Intermediary | adviser that brings together the principals in a deal or prospective deal. Intermediaries are usually accountants, other corporate advisers and merchant bankers. |
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| Internal Rate of Return | IRR | an index number for the success of an investment. The IRR is an internal discount rate which has to be applied on the expected cash flows arising from an investment so that the net present value of the investment equals zero. |
| International financial reporting standards | IFRS | International Financial Reporting Standards issued by the International Accounting Standards Board (IASB). This is the international equivalent of US GAAP. More than 100 countries permit or require use of IFRS for preparing Financial Statements of Listed Companies, including countries in the European Union, Australia, Brazil, Canada, Chile, China, India, Israel, Mexico, South Africa and South Korea. Rule amendments which the SEC adopted in December 2007 allow foreign private Issuers to use Financial Statements without reconciliation to US GAAP if the Financial Statements are prepared using the English language version of IFRS. See Latham & Watkins Client Alert No. 667, SEC Accepts Financial Statements From Foreign Private Issuers Without Reconciliation to US GAAP If Prepared Under International Financial Reporting Standards (January 16, 2008), available at www.lw.com. |
| Investment Committee | IC | a committee which controls and advises the Management on all investments, the long-term investment policy and planned business expansions |
| Investment Grade | a rating of Baa3 or better by Moody’s, BBB — or better by S&P or BBB — or better by Fitch. For a discussion of Investment Grade Bond Covenants, see White Paper, Improving Covenant Protections in the Investment Grade Market (December 17, 2007), published by the Credit Roundtable in association with the Fixed Income Forum, available at www.creditroundtable.org. | |
| Investor | provider of capital for the long-term, as distinct from a Lenders of short-term capital. Investors have rights, which Lenders don’t enjoy — and accept risks to which Lenders are not exposed. | |
| Irrevocable Undertaking | IU | a binding agreement by a Target Company’s shareholder to accept a Takeover Offer. Bidders often seek Irrevocable Undertakings from the Target Company’s major shareholders to accept the Bidder’s proposed Offer to secure the success, or increase the success rate, of their Offer. See also IU, Lock-Up and Hard Undertaking. |
| Issued Share Capital | is the aggregate par value of Shares issued by a company |
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| Joint and Several Liability | JSL | where two or more parties assume liability and each is treated as having assumed the obligation both collectively and individually for itself. A third party may proceed against any one or more of the co-obligors for the full performance of the obligation, irrespective of which of them caused the breach. Guarantors will have Joint and Several Liability. See also Several Liability. |
| Joint Venture | JV | not a legal definition, but rather a description of the commercial agreement between parties to promote joint business interests. A Joint Venture can take a number of legal forms for the purpose of undertaking the particular joint business |
| Keyman Policy | life assurance policies taken out on certain key executives. May be required as a Condition Precedent to some Credit Facilities. No doubt should be called Keyperson Policy. |
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| Know Your Client | KYC | refers to policies in place and information required to establish a client’s identity to safeguard against money laundering risks and to comply with multi-jurisdictional regulatory requirements. See Anti-Money Laundering, AML and KYC. |
| Last Twelve Months | LTM | acronym for “latest twelve months” which refers to an accounting period consisting of a recent 12 consecutive months. The term is usually used to refer to the most recently completed fiscal four-quarter period (even if that is not the latest 12 months). LTM also sometimes refers to the latest 12 months even if not coincident with fiscal quarters. Compare NTM. |
| Lead Investor | a financial Investor who leads a consortium of financial Investors or initially makes an investment on its own and invites other financial Investors later to Co-Invest |
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| Lead Lender | the bank that negotiates a Financing Package and takes a lead role in syndicating the Financing |
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| Leaver Scheme | regulates in a Management Participation contract the legal consequence of the withdrawal of a manager from his/her function and/or his/her employment contract. See Good Leaver and Bad Leaver. |
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| Legal Opinion | a lawyer’s written explanation answering one party’s judicial subjects in the context of a transaction or financing |
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| Letter of Credit | a bank’s payment promise, mostly arranged like a Bank Guarantee | |
| Letter of Intent or Heads of Terms | LOI or HOT | these letters may closely resemble a contractual letter, but are usually no more than non-binding expressions of intention which may include binding provisions which would otherwise be included in separate agreement, i.e., No Shop, Confidentiality Agreement, and which often outline the terms of a transaction prior to definitive and more detailed documentation |
| Leverage Ratio | an important measurement of a company’s Leverage, which compares the company’s overall debt level as of a particular date to the EBITDA (or another measure of cash generation, such as Adjusted EBITDA) generated over the most recently completed four-quarter period. Investors and analysts care about the Leverage Ratio because it measures the company’s debt level against the company’s cash performance measure. Credit agreements traditionally (although not always) have Maintenance Covenants requiring a Borrower maintain a certain Leverage Ratio. |
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| Leveraged Finance | a form of financing more traditionally associated with unsecured lending or more accurately lending expressed as multiple of future years expected profits or EBITDA |
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| Limitation Period | the time period within which court action must be commenced in respect of a contract, tort or any obligation contained in a deed. Similar to a Statute of Limitations in the US. | |
| Limited Liability Company | a type of company and organizational form which combines many of the attributes of a corporation with attributes of a Partnership. Like corporations, the equity holders in a Limited Liability Company (called Members) generally do not have personal liability for the company’s liabilities and obligations. Members’ liability is a fixed sum, usually limited to the investment in the company or Partnership made by the individual Member. |
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| Limited Partner | LP | acronym for either a Limited Partner or a Limited Partnership |
| Liquidated Damages | a specified amount, or amount determined pursuant to a defined formula, which is payable by one party to a contract to another in the event the other party does not meet a contractual obligation. Generally entails an acknowledgement by the parties that the recipient will incur damages as a result of the other party’s failure to meet its obligations and that the actual damages would be difficult or impossible to determine. Liquidated Damages should also be a reasonable approximation of actual damages, or the Liquidated Damages may be unenforceable as a penalty under applicable law and/or a court may modify the amount. | |
| Liquidator | a person appointed by the shareholders or unsecured creditors of a company or by a court order, to manage the Winding Up of a company by selling off its assets |
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| Liquidity | the degree to which an asset can be converted into cash, with liquidity often expressed as the amount of cash a business holds | |
| Loan Note | LN | financial Instruments evidencing the existence of a debt and the promise by the Issuer to repay the amounts due under the Notes to the noteholder(s). In the M&A context, Loan Notes are often used as a method of subscription investment by a Private Equity Investor or are issued as consideration to selling shareholders in order that consideration is released to them over a period of time |
| Loan-to-Own-Strategy | an investment strategy in which an Investor initially acquires a company’s debt, transforms it into equity capital of the company and thereby secures the control of the company. See also Debt for Equity. | |
| Lock-In Period | another name for a Lock-Out Period | |
| Lock-Out | often required by the Underwriters in connection with IPOs and other equity offerings, a Lock-Out is a restriction on the ability of officers, directors, large stockholders and other Insiders, as well as the Issuer, to issue or sell new Equity Interests during a certain period following the Closing of the offering. The purpose of the Lock-Out is to help stabilize the price of the Equity Interests following the offering by controlling the supply into the market. In some jurisdictions, including Hong Kong, called a Lock-up. | |
| Lock-Out Period | the period of time during which a Lock-Out applies | |
| Locked Box | a Completion mechanism whereby the amount payable by the Buyer is calculated off a historical Balance Sheet of the Target Company. Therefore debt, cash and Working Capital are known at the date of signing rather than in a standard Completion mechanism where accounts are prepared post-Completion with the amounts of cash, debt and Working Capital. | |
| London Stock Exchange | one of the largest stock exchanges in the world, the LSE has a number of primary markets, including the Main Market and AIM | |
| Long Stop Date | another name for Outside Date | |
| Long Term Incentive Plan | LIP | an award of Shares to an employee at no cost subject to the fulfilment of certain conditions, such as meeting performance targets or continuing employment with the company |
| Lower Mid-Market | LMM | a company with a medium market capitalization - typically £25-100m |
| Luxco | a company incorporated in Luxembourg, often used in European Leveraged Buyouts for tax efficiency reasons, including Luxembourg’s extensive network of Double Taxation Treaties and favourable Withholding Tax rules (attributes shared by a number of other jurisdictions in Europe), and now increasingly for Security interest efficiency reasons under Double Luxco Structures | |
| MAC Clause | a clause in an Acquisition Agreement or a financing treaty that entitles the Buyer or the financing bank to refuse the implementation of the Acquisition Agreement or the payment of the loan if a Material Adverse Change or a Material Adverse Event is existent | |
| Make Whole | a term given to the amount a Borrower would pay to a financier ahead of the agreed expiry date and ensure that the financier earned the same amount out of the early cancellation as they would had the facility ran its full term | |
| Management | MI | accounting reports intended to |
| Accounts | furnish the managers of a company with information relating to the company’s performance | |
| Management Buy-In | MBI | where an outside Management team acquires the Target Company, with or without a Sponsor |
| Management Buyout | involves the Management of a business, usually with the backing of external financing, taking over ownership of the business where they are employed. MBOs are a common way of changing ownership. Often, a large company hives off one of its subsidiaries by selling to its Management. Another source of MBOs is family businesses where the owner wishes to retire. See also Going Private transaction. | |
| Market MAC | refers to a Condition Precedent that there shall not have been any material adverse disruption or change to the financial, banking or Capital Markets generally. Compare Business MAC. | |
| Market MAE | another term for Market MAC | |
| Marketing Period | a specified period of days prior to Closing that a Buyer may require in order to market some or all of the debt the Buyer is using to finance the Acquisition. |
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| Material Adverse Change | MAC | acronym for Material Adverse Change |
| Material Adverse Change | MAC | just like it sounds, this phrase refers to a “material adverse change” in something — generally either the business (see Business MAC) or the debt or equity markets (see Market MAC). Material Adverse Change is an extraordinarily high standard in Acquisition Agreements (no Delaware court has ever found a MAC to have occurred). This term is used in two general contexts: either (i) as a Condition Precedent (for instance, a Seller would not have to Close on an Acquisition if there had been a Material Adverse Change to the business); or (ii) as a qualifier to Representations and Warranties (for instance, the environmental Representation is limited to instances where violations of the Representation could (or would) lead to a Material Adverse Change). See MAC. Also referred to as Material Adverse Effect or MAE. |
| Material Adverse Effect | MAE | another name for Material Adverse Change |
| Memorandum of Association | MA or MoA | a document that records the names of the subscribers (founding shareholders or guarantors) and their formal agreement to become members of the company |
| Memorandum of Association | MOU | the company’s constitution, which sets out the company’s structure and aims |
| Memorandum of Understanding | MOU | a written agreement of parties stating the intention to conclude an Acquisition Agreement under specific conditions. Similar to a Letter of Intent; though the Letter of Intent is a unilateral written declaration. Also referred to as an MOU. |
| Mergers & Acquisitions | M&A | a phrase that covers the process of buying, selling and merging businesses. See also Business Combination. |
| Mezzanine | Mezz | types of high risk debt which have some attributes of debt and some of equity. Mezzanine ranks and is repaid after senior/junior debt but before institutional loan Stock. Generally carries an Option/Warrant or redemption fee, which tends to distinguish Mezzanine from junior debt. |
| Mid Cap or Mid Market | MM | a company with a medium market capitalization - typically £100-250m + turnover |
| Milestones | contractually agreed targets on the way to reach the overall target which fulfilment Triggers specific (agreed) consequences | |
| Minimum Condition | a Condition Precedent in a Tender Offer or Exchange Offer establishing a minimum number of Target Company Shares that must be tendered in order for the Offer to become effective. A majority of the outstanding votes of all equity Securities entitled to vote for election of directors on a Fully Diluted basis is the most common Minimum Condition. However, Offers sometimes contain higher Minimum Conditions, which match the number of votes required to effect a Merger or Combination under the laws of the Target Company’s jurisdiction of incorporation and under the Target Company’s Charter. |
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| Mitigate | the duty that arises following a breach of contract, whereby a claimant cannot recover damages for loss which could have been avoided had the claimant taken reasonable steps to reduce or eliminate the damages | |
| Model | the product of the financial analysis of the performance of the Target business or asset by reference to a set of projections and parameters | |
| Money Returned on Invested Capital | MROIC | acronym for Multiple of Money seen by investors on sale of their investments |
| Mortgage | a Security Agreement which grants a particular type of ownership-based Security interest typically used for real property interests | |
| Multiple | factors by which certain performance figures of a company are to be multiplied (e.g., turnover, EBITDA). Most commonly taken as a multiple of earnings to derive a simple form discounted cashflow | |
| Negative Assurance | a reference to what the auditors say in the Comfort Letter about the quarterly financials and the period since the end of the last quarter (hopefully without material changes). Negative Assurance is a “we didn’t see anything” standard, not a promise that everything is okay. | |
| Negative Covenant or Pledge | legalese for an agreement not to do something. Negative Covenants governing the Target Company’s operations during the interim period are also sometimes referred to as Interim Operating Covenants because they restrict the conduct of the company between the signing and Closing of an Acquisition Agreement. | |
| Net Asset Value | NAV | value of an entity’s assets minus its liabilities. Also called NAV. |
| Net Debt | amount of a company’s total debt minus its cash and Cash Equivalents | |
| Next Twelve Months | NTM | acronym for the period of the next twelve months trade expected to occur after completion or the most recent set of management accounts or filed accounts |
| No Leakage Provision | in the context of a Locked Box concept, the Purchaser requests protection from any value drain of the company between signing and Closing by restricting the Seller from implementing certain measures, such as dividend Distributions and other distributions of proceeds, granting of loans to the company’s shareholders, and agreement on certain services not at arm’s lengths | |
| Nominated Adviser | NOMAD | an adviser for companies listed on AIM that is approved by the LSE. AIM companies must retain a Nominated Adviser at all times. Also known as a Nomad. |
| Non-Compete Clause | a contractual restraint on competition | |
| Non-Disclosure Agreement | NDA | a generic name for an agreement by one party not to disclose publicly information provided by a second party. Non-Disclosure Agreements are very common in the M&A context and are almost an invariable feature of any Due Diligence process. Non-Disclosure Agreements in an M&A context typically also prohibit potential Bidders from publicly disclosing the existence of the M&A process and often impose Standstill restrictions on potential Bidders so that the Target Company can maintain control of the Auction Process. Also referred to as a Confidentiality Agreement or NDA. |
| Non-Distributable | certain reserves such as a Share | |
| Reserves | Premium Account, which companies are generally prohibited or restricted in distributing to shareholders | |
| Non-Solicitation | agreement not to poach or hire a company’s employees. See No Poach. Not to be confused with a Non-Solicitation Agreement in the Public Company Merger Agreement context. | |
| Non-Solicitation Agreement | another name for a No Shop. Not to be confused with the Non-Solicitation of a company’s employees. | |
| Normalized Working Capital | the estimated average Working Capital required for the day to day running of a company. Normalized Working Capital is usually calculated by reference to an average over a discrete time period of all working capital accounts i.e current assets and current liabilities but excluding cash | |
| Novation | the name given to the process by which obligations as well as rights are transferred by one party to another or (in some civil law jurisdictions) the name given to the process by which an existing obligation is morphed into a different obligation. Contrast (in the former case) with Assignment. Novations can cause the loss of Security granted in certain European countries (if you do not phrase your Novation carefully enough) hence the use of Assignment and Assumptions in these instances. | |
| Observer (status) | usually granted pursuant to a shareholders’ agreement in a Private Equity transaction and which permits an individual to attend, participate in, and receive information relating to, meetings of a company’s Board of Directors. An Observer is not permitted to vote on matters and is not himself/herself a director of the company. | |
| Offer Letter | a generic term for a document that contains an Acquisition Proposal | |
| Open Kimono | a graphic term used to describe the act of sharing previously undisclosed information about a company, structure or situation. | |
| Opinion Letter | a Legal Opinion from lawyers on a discrete matter which another party (such as the Lenders in a loan transaction or the Underwriters in a Bond transaction) will rely upon. A typical example of an Opinion Letter would be an opinion given as to whether a particular agreement is valid and enforceable in a particular jurisdiction or whether a particular party (typically the Issuer/Borrower) has capacity and authority to enter into certain agreements. |
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| Option | a contract that provides the contract owner the right, but not the obligation, to purchase (in the case of a Call Option) or sell (in the case of a Put Option) an asset at a future date at an agreed price (known as the Exercise Price or Strike Price). When a Call Option’s Strike Price is below the current market price of the underlying asset, or when a Put Option’s Strike Price is above the current market price of the underlying asset, the Call Option or Put Option is In the Money. When a Call Option’s Strike Price is greater than the current market price of the underlying asset, or when a Put Option’s Strike Price is lower than the current market price of the underlying asset, the Call Option or Put Option is Out of the Money. Options are commonly used in the context of LBOs to secure the Shares held by the Management. See Call Option, Put Option and Stock Option. | |
| Ordinary Course of Business | the term used to distinguish between extraordinary risks and risks arising from measures carried out in the Ordinary Course of Business; such distinction is often used to limit Representations and Warranties only to such circumstances outside the Ordinary Course of Business. Further, the Seller usually undertakes to carry out only such measures which are in the company’s Ordinary Course of Business between signing and Closing. | |
| Ordinary Resolution | a resolution of a company’s shareholders (or Class of shareholders) passed by a simple majority of shareholders on a show of hands at a general meeting, or by a simple majority of the total voting rights of shareholders on a poll at a general meeting or by Written Resolution | |
| Ordinary Shares | see Common Stock | |
| Ordinary Shares or Stock or Equity | the bottom of the Capital Structure but where differing share classes can give differing rights to differing shareholders across an array of circumstances |
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| Owner-Manager | Owner-Managers of substantial businesses, many of whom became owners as a result of a Management Buyout or Management Buy-In | |
| PAL Statement | shorthand for Profit and Loss Statement | |
| Par Value | means the face value of Shares or loan notes (as applicable) | |
| Parachute | short hand for Parachute Payment | |
| Parachute Payment | payments made to executives in connection with a Change of Control. Parachute Payments may be Double Trigger or Single Trigger. See also Golden Parachute. | |
| Parent | another name for Holding Company | |
| Parent Company Merger | a Merger of an Acquirer Parent and Target Parent entities. The Surviving Entity can be either Parent entity, although it is most common for the Acquirer Parent to be the Surviving Entity. A Parent Company Merger is distinguished from a Triangular Merger which uses a wholly-owned subsidiary of the Acquirer Parent as the entity to be merged with the Target Parent and results in the Acquirer Parent becoming the Parent of the Target Company. See also Direct Merger. | |
| Pari Passu | equality of treatment, e.g., in a right of payment | |
| Part Cash/Part Share | a Combination transaction in which the consideration consists of both Share and cash. | |
| Pay-in-Kind | a feature of a Note or Bond (or a Preferred Stock) which allows the Issuer to pay Interest (or dividends) in the form of additional Notes or Bonds (or Shares of Preferred Stock) in lieu of paying in cash. See PIK. | |
| PIK Debt | PIK | debt where Interest is only paid in PIK |
| PIK Loans | PIK | loans that only pay interest by way of PIK |
| PIK Notes | PIK | perhaps the most common form of PIK Debt, being Notes with a PIK feature |
| Power of Attorney | an instrument permitting an individual to serve as the attorney or authorized agent of the grantor. In the Secondary offering context, selling shareholders will generally grant a Power of Attorney to someone (often a company officer) authorizing that person (an “attorney in fact”) to sell to the Underwriters the number of Shares listed in the Underwriting Agreement and to execute the Underwriting |
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| Pre-emptive Rights | existing shareholders’ rights to first refusal on the transfer of existing Shares or the issue of new Shares by a company, unless such rights are specifically not applied. See also Dilution. | |
| Pre-Pack | PP | the term generally used to describe any Insolvency proceeding or arrangement in which the Restructuring plan has been fully agreed to and the necessary approvals already obtained before filing for Insolvency. In England, Pre-Pack is more specifically used in relation to Administration proceedings, in which a sale of the company’s assets has been pre-agreed by the prospective Administrator, and will be implemented immediately upon his/her appointment. |
| Preferred Equity | Preferred Equity sits in between debt and Ordinary Shares in the Capital Structure. Preferred Stock has priority over Ordinary Shares in a Liquidation or exit, generally pays a fixed dividend (the equivalent of the Interest paid on debt) | |
| Preferred Shares | see Preferred Stock | |
| Price Sensitive Information | see Inside Information | |
| Price/Earnings Ratio | PER | a business’s market price per Share divided by the Earnings Per Share. The P/E Multiple is sometimes applied to a business’s profits to calculate the value of the business. |
| Private Company | a company with Shares that do not trade in public markets. The term is often used in counter-distinction to the term Public Company. | |
| Private Equity | PE | a generic term sometimes used as shorthand for a Private Equity Sponsor and/or the business of raising and managing Private Equity Funds |
| Pro Forma | a reference to a pre-agreed format of a complex principle, setting out clear calculation and the component parts | |
| Process Letter | see Bid Process Letter | |
| Public to private | P2P | shorthand for Public to Private, i.e., a transaction whereby a Public Company is taken private. See also Public to Private, Going Private and Privatisation. |
| Purchase Price Adjustment | PPA | a generic term for any mechanism built into an Acquisition Agreement which, if triggered, would change the amount of consideration (either up or down) received by Target Company shareholders. Purchase Price Adjustments are common in Acquisitions of Private Companies, but rare in Acquisitions of Public Companies. The most common example being Completion Accounts. See also Locked Box. |
| Purchaser | another name for an Acquirer, Bidder or Buyer | |
| Qualified Majority | see Supermajority | |
| Real estate investment trusts | REIT | acronym for real estate investment trust |
| Recitals | a name for the words at the beginning of many Acquisition Agreements that explain who the parties are and the basic terms of the transaction | |
| Redact | to blank out sensitive information in a document, either by hand or electronically. Certain confidential or commercially sensitive information is usually redacted from documents before they are disclosed to third parties. | |
| Refinancing | repayment of existing debt with the proceeds of a new debt issuance. Any Refinancing will require a careful review of existing Indentures and Credit Agreements to make sure the debt being Refinanced can, in fact, be repaid and to verify that any debt left in place permits the incurrence of the new debt. Indenture and Credit Agreement debt Baskets will generally allow the Refinancing of existing debt, but subject to certain conditions that must be read carefully. See Latham & Watkins Client Alert No. 696, Restructuring High Yield Bonds: Getting Ready for the Next Phase of the Cycle (April 21, 2008), available at www.lw.com. | |
| Regulated Market | an exchange recognized as such by the relevant authorities. A Regulated Market has an exchange license, operates on a regular basis, and established disclosure requirements subject to the provisions of the Prospectus Directive. Other markets, such as AIM, are often “Recognised Investment Exchanges” when they are not prescribed Regulated Markets. | |
| Release Letter | a certificate from the advisor of the company/Seller/Buyer provided to the Financing Sources according to which the respective Due Diligence report (or any other experts’ opinion) may be released to the Financing Sources. A Release Letter typically states the financing banks may not rely on the content of the disclosed documents. According to the Release Letter, the liability of the originator is usually excluded (or at least limited). |
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| Reliance Letter | a letter which establishes that the named recipient may rely on certain provisions of an auditor’s opinion, independent expert opinion or Legal Opinion, or an expert’s Due Diligence report, as if the original opinion/report were addressed and delivered to the named recipient. Reliance Letters with respect to Due Diligence reports are typically given to original Lenders and those becoming Lenders in initial Syndication. | |
| Reorganization | a generic term referring to some fundamental change in a company’s Capital Structure and/or in its financial and legal obligations as a result of an M&A transaction | |
| Rep & Warranty Insurance | insurance which provides cover from losses arising from a breach of Representation and Warranty or Indemnity. Such a policy is available to either Sellers or Buyers and, if structured properly, having the insurance policy can result in: (i) the Seller having immediate access to the sale proceeds, a reduced period of risk and, in many cases, no requirement to leave funds in Escrow; or (ii) the Buyer having a satisfactory level of recourse (which may have otherwise been unavailable) through an insurance policy with financially-rated insurers. Sometimes referred to as R&W Insurance or W&I Insurance. | |
| Representations and Warranties | an assertion of fact in a contract (such as an Acquisition Agreement, Merger Agreement, Credit Agreement or Underwriting Agreement). Representations and Warranties are the means by which one party to a contract tells the other party that something is true as of a particular date. Representations and Warranties can also be used to allocate a risk of unknown facts and/or future events if appropriately drafted to do so. | |
| Restrictive Covenant | a kind of Negative Covenant, often a restriction placed on a Seller of a company or its current or former employee, usually in the form of a Non-Solicitation or Non-Compete Clause | |
| Restructuring | bringing about fairly major changes in the organization of a company by changing the Management and/or the Share ownership structure | |
| Results | a company’s financial earnings and profitability, which may be shown in the company’s Profit and Loss Statement | |
| Retained Liabilities | a Seller’s a liabilities that are not transferred to or assumed by a Buyer of some or all of such Seller’s assets | |
| Retention Bonus | a bonus paid to an employee to encourage the employee to remain in the employ of the company, often during a specified period. See Golden Handcuffs. | |
| Return on Investment | ROI | a calculation used to evaluate the efficiency of an investment. ROI is the amount of proceeds received from the sale of an investment less the cost of the investment, divided by the cost of the investment. |
| Reverse Takeover | an acquisition of a company by one which is smaller than the target | |
| Revolver | RCF | a senior secured Credit Facility structured as a line of credit that can be borrowed, repaid and reborrowed at any time prior to maturity, at the Borrower’s discretion. A Revolver or Revolving Facility can also often be used for the issuance of letters of credit. |
| Rights Issue | fundraising structure whereby existing shareholders are invited to purchase additional Shares in the Issuer at a reduced price in proportion to their existing holding | |
| Roll-Up | a series of Acquisitions by one company of other companies in the same line of business. The resulting combined entity is also sometimes called a Roll-Up company or simply a Roll-Up. Sometimes also called a build-up. | |
| Rollover Equity | the use of investment proceeds to which a person is entitled, e.g., cash on a sale of Shares, to reinvest in the same or a similar investment. In a Private Equity context, managers may “rollover” their equity in a Target Company with the effect, on a tax deferred basis, that instead of receiving cash for their Shares they receive new Shares in the Target Company. | |
| Sale & Purchase Agreement | SPA or S&PA | a generic name for any type of agreement that accomplishes a Business Combination or an Acquisition of shares or assets of another party |
| Sale and Purchase Agreement | SPA | sometimes used to describe an Asset Purchase Agreement or a Share Purchase Agreement |
| Sandbagging | a common provision in an Acquisition Agreement antithetical to an Anti-Sandbagging provision. A Sandbagging provision effectively prevents the Buyer’s remedies from affecting any investigation conducted by, or any knowledge obtained or capable of being obtained by, the Buyer at any time prior to the Closing with respect to the accuracy of or compliance with any Representation and Warranty or Covenant of the Seller in the Acquisition Agreement. |
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| SDLT | acronym for UK’s Stamp Duty Land Tax | |
| SDRT | acronym for the UK’s Stamp Duty Reserve Tax | |
| Secondary | in a Private Equity context, a “secondary buyout” describes the sale of a business by its managers and Private Equity shareholder to a new (or existing) Management team with new financing provided by a different Private Equity Fund. See Secondary Buyout. | |
| Seller | another name for a Target Company or party selling assets or Securities in a Business Combination | |
| Several Liability | alternative to Joint and Several Liability, Several Liability results in each party taking responsibility only for their own obligations and no one else’s. Multiple arrangers and Lenders will require Several Liability as they will not commercially agree to be on the hook for the obligations of other unrelated financial institutions. Each party should ensure their specific obligations are clearly defined and agreed. | |
| Severance Plan | a plan covering a large group or all of a Target Company’s employees, which provides payments upon involuntary termination. Some companies maintain Severance Plans in the Ordinary Course of Business. Others adopt Severance Plans at the time of or in anticipation of their Acquisition. | |
| Share Buyback | a company’s repurchase of its own Shares (UK) in the UK off-market, purchases are available to both private and public limited companies. However, only certain Public Companies are able to make on-market purchases of their own Shares to hold in treasury. Subject to the detailed requirements of the UK Companies Act (and limits on the level of buy back applying to Public Companies), Share Buybacks can be funded from Distributable Reserves or a new Share issue (and capital in the case of a Private Company). |
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| Share Capital | see Capital Stock | |
| Share Option | see Stock Option | |
| Share Option Plan | see Share Option Scheme | |
| Share Premium | the portion of the shareholders’ | |
| Account | funds which represents the premium paid for new Shares above their nominal value. A Share Premium Account forms part of a company’s Non-Distributable Reserves. | |
| Share Swap | an agreement under which the Shares of one company are sold or exchanged for the Shares of another company | |
| Shareholders’ Meeting | the meeting of a company’s shareholders held on an annual or special basis, as applicable, to elect directors, vote on corporate matters (e.g., a Merger or other Combination), and to ratify certain Management actions. See also Special Meeting. | |
| Small and Medium Sized Businesses | SME | business typically range up to £50m turnover |
| Small Cap | a company with a small market capitalization (below Mid Cap). The relevant threshold between what is considered Small Cap and Mid Cap can range between EUR 250 million and EUR 1 billion depending on the jurisdiction. | |
| Special Purpose Acquisition Company | SPAC | Shelf Companies that have no operations but are formed and raise capital in order to merge with or be acquired by a company with the proceeds of Special Purposed Acquisition Company’s Securities offering. See also SPAC. |
| Special Purpose Entity | SPV | an entity, often a company, incorporated and used for a very specific purpose. Most often used for acquiring a specific company |
| Special Resolution | SR | a resolution of a company’s shareholders (or Class of shareholders) passed by a majority of at least 75 percent of shareholders on a show of hands at a general meeting, or by shareholders representing at least 75 percent of the total voting rights of shareholders on a poll at a general meeting or by Written Resolution |
| Specific Disclosures | disclosures which qualify Representations and Warranties by reference to actual and identifiable matters | |
| Spin-Off | a distribution by a company of one or more of its businesses to its shareholders in the form of a dividend of the Stock of a newly created entity in which the business resides. Also used to describe a part of a business which has been split from the rest of the business and sold. See also Demerger. | |
| Sponsor | shorthand for the Private Equity Sponsor or other financial Investor whose fund (or SPV) is the Purchaser in a Leveraged Buyout, or the primary holder of the Equity Interests in a particular Borrower/Issuer | |
| Stakeholder | any party with a vested monetary (e.g., employees, unions, pensioners) or non-monetary interest in a business | |
| Stamp Duty | a tax charged on certain written documents (can be a fixed or ad valorem charge). The term is a UK, Hong Kong and Singapore tax law term, but other jurisdictions also impose similar taxes (sometimes generically referred to, among SDLT and SDRT and their equivalents in other jurisdictions, as Transfer Taxes). Stamp Duty is typically chargeable in respect of transfers of Shares, other marketable Securities and certain transactions involving Partnerships. In the UK, transfers of qualifying loans/Bonds are typically exempt from Stamp Duty. See also Franchise Tax, SDLT, SDRT and Capital Duty. | |
| Stamp Duty Land Tax | a UK tax charged in respect of transfers of real estate. Other jurisdictions impose similar real estate transfer taxes. See also Stamp Duty. | |
| Stamp Duty Reserve Tax | a UK tax charged in respect of certain agreements to transfer Shares and other types of Securities (introduced as an anti-avoidance measure in response to attempts to avoid Stamp Duty by not formally documenting certain transfers of interests). See also Stamp Duty. | |
| Sterling Overnight Index Average Rate | SONIA | the interest rate set from averaging an array of tier-1 banks and the rate which they lend to each other. This rate replaced LIBOR, the London Inter-bank Overnight Rate whose composition and manipulation came under scrutiny in the light of the global financial crash of 2008 |
| Strategic Bidder | a general name for a Buyer that has Strategic reasons to be interested in acquiring a Target Company. The term is often used in distinction to a financial Bidder which acquires a Target Company in order to improve its performance by changing its internal structures and policies. Presumably, a Strategic Bidder, as its name implies, believes it can create synergistic value through a Combination with the Target Company or between the Target Company and its other businesses. Strategic Bidders are often thought to have an advantage over Strategic Buyers in an Auction because they usually expect to benefit from Synergies if the deal goes through and (at least in theory) can therefore “afford” to pay more for the Target Company. This concept is sometimes referred to as “sharing the synergies,” in the sense that some of the expected synergistic value is paid to Target Company shareholders. |
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| Strawman | an outline proposal or paper summarising a complex matter but drawing out the key themes/actions/parties | |
| Subordinated Shareholder Loan | a loan granted to the company — by one of its shareholders or by a person who controls one of its shareholders — which is subordinated to all other debts. Terms and Conditions, Indentures and Credit Agreements often will provide Carve-Out Provisions to the debt Covenant or equivalent that allows incurrence of Subordinated Shareholder Loans, provided such loans have a maturity which extends beyond the maturity over the Notes/loans, and such loans are deeply subordinated. For tax reasons in European LBOs, often a Subordinated Shareholder Loan provides the Equity Contribution. | |
| Success Fee | a fee payable only upon successful Completion of a transaction. Investment Banking M&A fees typically consist predominantly of Success Fees. Lawyers’ M&A fees are rarely Success Fees. | |
| Sunset Provision | a provision which typically used by sellers to protect themselves from the company being sold for a significant profit in a short period of time. Also known as Anti-Embarrassment provision | |
| Sweat Equity | where a party receives an ownership interest in a business or project in return for non-financial contributions, such as their work or effort (and, by proxy, their blood, sweat and tears) | |
| Sweet Equity | Shares issued at a lower price, usually as an incentive to existing Management in the context of a Buy-Out | |
| Syndication | the process by which a Lender sells a portion of its debt to other Lenders in order to reduce its own exposure and spread risk | |
| Synergies | the cost savings and other efficiencies projected to materialize when two companies are combined. Examples include reduced SG&A, increased purchasing power, more efficient utilization of factories, warehouses and distribution centers, and headcount reduction in the sales force. See Strategic Bidder and Merger Benefits. | |
| UK Competition Commission | an independent statutory body that shares responsibility with the Office of Fair Trading (OFT) to investigate and report on issues affecting competition, antitrust and trade, Mergers, markets and certain functions concerning major regulated industries in the UK. In 2014, the UK Competition Commission (along with the OFT) will be replaced by the Competition and Markets Authority. See Competition Commission. |
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| UK Takeover Code | the set of general principles and rules which establish the framework for Public Company Takeover transactions in the UK, “developed since 1968 to reflect the collective opinion of those involved in the field of Takeovers as to appropriate business standards and as to how fairness to shareholders and an orderly framework for Takeovers can be achieved” (according to the UK Takeover Panel). Also known as the City Code and the Blue Book. | |
| UK Takeover Panel | the Panel on Takeovers and Mergers, the body that administers the UK Takeover Code and supervises/regulates Takeovers and other matters to which the UK Takeover Code applies |
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| UKLA | acronym for the United Kingdom Listing Authority, the competent authority for listing on the LSE. Part of the FSA. | |
| Upside | estimated increase in the value of a Share price or, of a business’s profitability, as a result of a particular transaction | |
| Use of Proceeds | the specification in the Term Sheet (or Prospectus or Offering Memorandum) of how the proceeds of the financing will be used, and a Borrower’s Representation and Warranty and Covenant in a Credit Agreement (or an Issuer in an Underwriting Agreement) affirming this is in fact where proceeds will go | |
| Vendor | party that wishes to sell the Shares or business of an entity in which it is a shareholder. Vendors may hold minority or majority interests in the Target and can take the form of a Parent company, owner/manager, trust vehicle or, other corporate or individual shareholders. |
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| Vendor Due | VDD | the process of the vendor |
| Dilligence | undertaking pre-emptive dilligence in readiness for a sale process, which could entail legal, financial, commercial, operational and technical matters. Often not used in small deals but the larger the deal the more the vendor may wish to outline their own diligence and therefore require that any buyers are required to do arguably less work | |
| Vendor Finance | also known as “Seller Capital.” Where a Vendor invests in the purchase of its own Target Company by way of a subordinated loan to the Acquirer or, by subscribing to Shares. Vendor Finance is usually provided to assist the Acquirer in raising the required consideration for the Target. The Vendor may structure a loan-based Vendor financing arrangement by charging interest on the loan or, such that the Acquirer’s repayment of the loaned amount represents Deferred Consideration for its purchase of the Target. The structure of the investment can depend on the Acquirer’s risk profile and deal-specific tax considerations. | |
| Verification | process undertaken to verify that information contained in a Prospectus or admission document is true, accurate and not misleading, thereby minimizing the director’s risk of potential criminal or civil liabilities. The Verification notes or a Verification memorandum will take the form of questions and answers, for which the directors and Management accept ultimate responsibility when they sign. The responses to the Verification questions should be given by reference to authoritative sources and copies of those sources should be retained in a Verification file kept by the company. | |
| Vesting | technique commonly used in relation to Stock Options / Share Options, whereby the rights to exercise the Options are released to the beneficiary in a staggered manner, becoming exercisable at certain points over a particular Vesting period after the Options have been granted |
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| Veto Right | term often used to describe minority shareholder protection provisions contained in a company’s Articles of Association and/or the Shareholders Agreement. These reserved matters may be subject to Supermajority approval at the Board and/or shareholder level of a company. See also Blocking Right. | |
| Virtual Data Room | VDR or DDR | Data Room that consists entirely of documents in digital format. A number of providers have developed software for the creation and operation of Virtual Data Rooms. Virtual Data Rooms have become ubiquitous and increasingly Data Rooms rely less and less on hard copies of the relevant documents. |
| Warrant | another name for an Option or a derivative Security which gives the holder the right to purchase Shares in a company at a pre-determined price (the “strike” or “exercise” price). A Warrant is a long term Option, usually valid for several years or indefinitely; sometimes a feature of Mezzanine Financing which provides a higher return to Mezzanine Investors. | |
| Warranties and Indemnities | the legal undertakings often required by the Purchaser of a business or asset from the previous owners to confirm there will be no nasty surprises post-Completion | |
| Warranty | assurances from one party to the others as to the state of affairs subject to the contract (e.g., as to the condition of the Target Company or business). Breach of Warranty will only give rise to a successful claim in damages if the claiming party can prove breach and quantifiable loss. | |
| Waterfall | sometimes called a Payment Waterfall, generally refers to the pre-determined flow of funds and priority of Distributions or allocations between or among debt or equity holders. Typically, Payment Waterfalls are agreed contractually between parties to override any order of payments which may apply automatically by operation of law. Think of the funds in question as water running down a flight of stairs with a bucket placed on each step — the water (money) flows to the top step first and fills that bucket before the overflow continues on to the second step, and fills that bucket before proceeding to the third step, etc. So, if your deal stipulates you get paid before someone else, your proverbial bucket will be placed higher in the Waterfall. The one most likely to be left with an empty bucket (or in practice, an unpaid obligation) is of course whoever is at the bottom of the Waterfall. | |
| Weighted Average Cost of Capital | WACC | the weighted average Cost of Capital of the types represented on a company’s Balance Sheet |
| Withholding Tax | tax levied frequently, but not exclusively, with respect to recurring payments, collected by requiring the payer to make a deduction on account of income tax before making the payment. Withholdinng Tax frequently applies to payments of dividends (although not those paid by UK companies, for example), interest and royalties. This liability is often reduced or eliminated under a Double Taxation Treaty. Essentially a method of tax collection, rather than a different tax as such. | |
| Working Capital | a measure of a company’s short-term Liquidity, calculated by subtracting current liabilities from current assets |