Definitions Flashcards
(101 cards)
1
Q
prospectus
A
a legally required document that must precede bond or share issues. It advertises the issue to potential investors and contains information about the issuer’s business, potential risks and issuing firm’s financial circumstances, in addition to terms and conditions
2
Q
insolvency
A
a company is ‘insolvent’ when it cannot pay its debts when they become due, or when the total of its liabilities exceeds the value of its assets. If a company becomes insolvent it must cease trading
3
Q
liabilities
A
legal responsibility for a particular problem, or in financial terms - outstanding debt
4
Q
syndicated loan
A
where borrowers need to raise large amounts of money, lenders may “syndicate” (group) to provide the capital and spread the risk
5
Q
leveraged buyout
A
an acquisition that is financed using a large proportion of debt in comparison to the amount of equity invested by the investor - investor typically referred to as the sponsor
6
Q
arbitration
A
a process used by parties to settle disputes.
- an impartial arbitrator (may be tribunal or panel) is nominated who may, if the parties choose, be an expert in the field of the relevant conflict.
- decisions reached are final and binding on the parties
7
Q
mediation
A
a process conducted confidentially that involves the parties in dispute nominating a neutral third party to assist in working toward a mutually beneficial arrangement
8
Q
Special purpose vehicle (SPV)
A
a legal entity created to serve a particular function. Companies may include SPVs within their corporate structures to absorb financial risk or reduce tax liabilities, for instance through registering them in tax havens such as the Cayman Islans
9
Q
Cartel
A
an association of firms, manufacturers or suppliers engaged in a formal agreement to fix prices in particular territories and consequently restrict competition
10
Q
gun jumping
A
where parties to a proposed merger or acquisition start to act as if the transaction has taken place (e.g. by implementing changes/action) before receiving formal confirmation from the relevant competition authorities that the transaction can go ahead.
11
Q
copyright
A
protects original artistic, musical, literary and dramatic works that have been recorded in some form
- does not need to be registered
- generally lasts through creators lifetime plus 70y after death
12
Q
trademark
A
protects words, signs, and symbols that are capable of graphic representation and help to distinguish the holders goods or services from those supplied by other businesses
- e.g., tesco and lidl recently - clubcard design
- can offer perpetual protection as long as it is used and the registration renewed every 10 years
13
Q
patents
A
protect inventions that have an ascertainable use or application and that are new, unique, and non obvious
- can hold rights for 20 years (Apple and Dyson)
14
Q
geographical indications (GI)
A
names or signs that identify goods as originating in specific geographical locations, where a given quality, reputation, production method or characteristic is attributable to that origin
- e.g., champagne
15
Q
sale and purchase agreement (SPA)
A
sale and purchase agreements (or asset agreements) are legal contracts that describe the outcome of key commercial and pricing negotiations and when signed, obligate a buyer to buy and a seller to sell. An SPA can be used to purchase either the assets of a company as part of an asset/business sale, or shares of a company
16
Q
loan agreement
A
main document in transactions, involving one party borrowing from another, also “facility/credit agreement”.
- records terms that will govern the lending/borrowing, including value of the loan, interest rate, tenor of loan (duration), and an array of contractual protections
17
Q
stages of a contract
A
- offer
- acceptance
- consideration (balanced)
- intention (legal relationship)
18
Q
Implied terms of a contract
A
- product must conform with its description
- the product is of satisfactory quality
19
Q
retention of the title clause
A
ensures that title to (i.e. ownership of) the goods remains vested in the seller until the buyer fulfills certain obligations (usually payment of the price)
20
Q
force majeure clause
A
these clauses predetermine the allocation of risk and free each party from liability if specified circumstances arise that are beyond the control of the parties and prevent either party from fulfilling their obligations
- e.g., strikes, pandemics
21
Q
a security
A
a right given by a borrower to a lender that typically entitles the lender to take control of some (or all) of the borrower’s assets if the borrower fails to repay the load as agreed.
- e.g., mortgage
22
Q
fixed charge/mortgage
A
if a loan has not been paid in accordance with fixed terms -> a fixed charge may give a lender the legal right to claim and sell the secured assets in order to recover the funds loaned out
23
Q
secured assets
A
assets over which the borrower has granted security to the lender
24
Q
floating charge
A
assets over which floating charges are take can be freely sold unless the floating charge “crystallises”
- the parties can agree in advance the circumstances under which it shall “crystallise”
- usually include the borrower becoming insolvent
- more suitable for stocks or cash
- less protection for lenders
25
liquidator
a party often appointed when a business becomes insolvent
functions:
- collecting money owed to bankrupt business
- selling its assets
- distributing sale proceeds/remaining cash to creditors
26
secured creditors
lenders that have been granted security over a borrowers assets
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unsecured creditors
lenders that do not have the benefit of security over any of a borrowers assets
28
arrangements to stop insolvency
- renegotiating terms of loans
- raising additional finance (new shares? avoid debt)
- monitoring profitability and improving cash flow
- turnaround specialists
29
integrate into the supply chain
- supply chain comprised of contributers who all make profits
- taking control of multiple processes should lower costs
30
offshoring
shifting elements of production or other processes abroad
31
derivatives
financial contracts relating to underlying assets (securities and commodities)
- e.g., futures agreement - transaction at predetermined date in the future
- options - gives party the right (not obligation) to puchase or sell a product at a predetermined date
32
securities (not contractual)
tradable financial instruments that are generally used to raise capital in the public and private markets e.g., shares and bonds
33
commodities
basic goods that are essentially the same regardless of producer
34
organic/internal business growth
a business employs internal strategies to expand its own activities and consequently increases its market share, customer base, revenues and profits
- marketing/branding
- expanding presence in existing markets
- entering new markets
- diversifying the business' range of products/services
- licensing aspects of the business to other orgs
- franchising
35
franchising
businesses sell theright to others to set up identical businesses under the same name in exchange for a lump sum payment and/or royalties
36
licensing
when 1 business permits another to use an element of its businsess - e.g., right to manugacture products, technology
- ususally in exchange for a royaly
37
acquisitive/external growth
occurs when a business increases its market share, customer base, revenues and profits through acquiring or merging with other companies
38
acquisition
when one business purchases another, either through mutual consent or hostile takeover
39
merger
when multiple businesses voluntarily and permanently combine to form one business
40
alliance/partership
when businesses or individuals with complementary capabilities/resources cooperate in order to advance their mutual interests
- e.g. company fundle
- decision making process may be difficult
41
synergies
refers to the benefits that can result from the interaction between 2 or more businesses
- sharing of resources to reduce costs
- leveraging greater purchasing power against suppliers
- sharing expertise
42
pros and cons of organically growing a business
PROS:
- reduced risk
- easier integration
CONS:
- slower expansion
- costs
- increased risk
43
pros and cons of M&A (external growth)
PROS:
- rapid expansion
- access to expertise and complementary resources
- economies of scale
- geographical expansion
- expansion of product/services range
- reputation
- competition (reduced)
CONS:
- expensive
- time consuming
- complex
44
valuing a business
- share price x number of shares
- assets - liabilites
- a multiple of earnings
45
depreciation
decrease in value of tangible assets over time
46
amortisation
refers to the decrease in value of intangible assets over time.
e.g. patent expiry
47
premium
paying an amount that exceedsthe going rate for something
- applicable in acquisitions (benefit)
48
earn-out
pricing mechanism that can entitle a seller to further consideration following a sale, depending on the target's future performance during what is termed the "earn-out" period
49
discounted cash flow analysis
- involved complex calculations to project financial returns over time if a target is acquired
- figure usually "discounted" to take risk into account, opportunity cost and inflation
50
The M&A process
1. PITCH: law firms must pitch to clients to be selected as their legal advisor (or one of) for a transaction - focus on firm's capabilites and experience
2. INTERNAL/EXTERNAL CHECKS: firms must check they aren't engaging cases with a conflict of interest (for other clients), must also carry out checks to ensure clients dont pose a risk in terms of illegal activities
3. INITIAL INSTRUCTIONS: firm must ascertain the client's primary objectives and agree with the client a fee structure and approximate timetable for the execution of the proposed transaction
4. RESOURCING: managing transactions can involve coordinating different practice areas internally to source specialist advice, while engaing and coordinating external parties
5. AUCTION PROCESS OR BILATERAL SALE: a business may be sold in a number of different ways, including via an auction, a bilateral sale or an initial public offering. If "auction" process - first stage is helping the client submit their bid.
6. BUYER PROTECTION: a prospective buyer will want to carry out due diligence to ascertain the company's value and whether it will need certain contractual protections. The buyer may also want an exclusivity agreement
7. DEAL EXECUTION: if the client has been selected as the "preferred bidder" the firm will then need to help structure the transaction, negotiate main deal terms, draw up key transaction documents and ensure that any required financing is in place before deal is scheduled
51
auction process
involves multiple bidders competing to buy a target company
- sellers want to keep bidders involved for as long as possible to drive up prices
- progresses through multiple rounds where bidders are narrowed down
- sellers select 'preferred' bidder based on price and terms
52
bilateral sale
- a sale process involving a seller and only one prospective buyer
- usually start out with a prospective buyer seeking out a target and engagin with the owner of that target
53
exclusivity agreement/ lock-out agreement
- usually involves one party agreeing to contract exclusively with another party
- in acquisition context a prospective buyer may be granted exclusivity in respect of the deal for a limited period of time
54
business angels
- wealthy individuals who invest their personal income in an early-stage business in exchange for equity
- can be beneficial if the business angel has knowledge/experience of the industry
55
Institutional investors
institutions with specialist knowledge that buy, sell and mange investment securities in large quanitites on behalf of others
e.g. pension/hedge funds
56
Private equity vs. venture capital
Private equity firms invest in:
- target businesses with high growth potential
- not listed on stock market (may invest in public to take private)
- more mature businesses, larger stakes
Venture capital firms invest in:
- earlier stage investee businesses
- invest in small equity stakes
57
take private
where a buyer purchases all the shares of a public company and subsequently converts that public company back into a private company
- a take private may be a more attractive option when the equity capital markets drop/ are more volatile
- this is as the shares may become available at a price lower than the real value of the target company
58
buy-side
when people work on the "buy-side" this essentially means they are working with/for the buyer
59
warranties
statements of exisiting fact that are contained in a contract
- amount to assurances or promises relating to present condition of an object, enity or state of affairs. the breach of which may give rise to a legal claim for damages
- e.g. a seller may warrant to a buyer that it is not currently involved in some form of litigation
60
undertakings
statements, given orally or in writing, promising to take or refrain from taking certain actions in the future
- must be given in the course of business by someone held out as representing the firm/business, to a party that places reliance on them
- e.g. a seller may undertake (to buyer) that it wont commit to major capital expenditure in the period between signing the sale contract and the deal completing
61
non-compete agreement
usually contain restriction on the extent to which an individual or organisation can engage in work that "competes" with the activities of another contractual party during the course of the agreement and/or after the agreement terminates or expires
- e.g. may exist in employment contracts to prevent workers from working with a competitor organisation
- restrictions usually be limited in time and scope
62
entire agreement clause
a clause stating that only the terms contained within the contract will apply to the agreement, meaning that the parties will not be bound by any previous negotiations, representations or oral statements that have not been recorded in the contract
63
conditions precedent
in M&A context these are conditions that must be fulfilled before the parties will be bound to perform their obligations under a contract, usually between the signing and completion of a deal
- if conditions are not met the parties can usually walk away from the deal without liability to one another
64
due diligence
- typically carried out by transactional teams
- process under which a company (usually prospective buyer) and its advisors carry out an in-depth investigation into a variety of aspects of a company or group of (typically prospective acquisition target)
- to gain an understanding of the company's business and/or market and to check for any existing or potential issues that could impact a deal
- creates a "due diligence report"
65
vendor due diligence
- the process under which a seller and its advisers carry out an investigation into the company that the seller is intending to sell
- "vendor due diligence" report
- may make available to prospective buyers
66
confidentiality agreement/ non-disclosure agreement (NDA)
- to restrict and control a party's access to and use of sensitive/confidential information relating to another party
- a seller typically requires a prospective buyer to sign an NDA prior to giving them data room access
67
liquidity
how easily a business' assets can be converted into cash. A highly liquid company can easily do this
- may be important depending on buyers intentions
68
change of control clause / break clause
can enable parties that are contracted to work with a business to terminate the contract - wihtout incurring any liability for breach of contract - if control of that business changes hands
69
non-solicitation clause
a clause (or group of) that sets out a contractual promise
- usually given by seller to buyer
- not to approach/poach e.g. employees, suppliers, customers for a time period and/or in a particular jurisdiction
70
indemnities
Contractual promises to pay the other party pound for pound compensation if specified scenarios take place. Indemnities are usually used to target specific risks, especially risks that are not easily quantifiable
- e.g. seller agreeing to reimburse buyers for money required to pay in relation to a lawsuit
- may be subject to time limitations
71
considerations in an acquisitions (buyer perspective)
competition law
Due diligence:
- assets
- contracts (employees, suppliers, distributors, customers)
- liabilities
72
examples of liabilities (acquisition)
- outstanding litigation
- debt
- pension scheme liability (purchaser liable for future pension payments)
73
Due diligence linked to:
1. warranties and indemnities
2. disclosure
3. further negotiation
4. liability caps
1. W&I: may be used to protect buyer from some/all issues exposed during due diligence process
2. D: seller can disclose against the warranties in order to avoid a claim for breach of warrantly at a later date if elements of the warranties do not reflect the actual position of the target
3. FN: if a seller discloses against a warranty and buyer needs protection in light of this, the buyer may try to negotiate an indemnity or reduction in price to compensate for this issue
4. LC: seller is likely to then attempt to negotiate caps on liability, to reduce its potential future liability
74
disclosure (transaction context)
refers to the exchange of legal, commercial and financial information between one or more parties
- for the purposes of enabling those parties to better understand a particular business or group of businesses
- warranties subject to disclosures made by seller
- sellers motivated to disclose issues
75
basket/ "tipping basket" (context of limitations on liability)
- provides that a party who has given an indemnity will not have to pay out in respect of that indemnity until the other party's losses exceed an agreed amount
a) tipping basket: at this threshold the party that gave the indemnity must pay out is respect of the total losses incurred to date
b) deductible: when threshold is reached the indemnifying party only liable to pay for losses in excess of threshold
76
de minimis clause
restrict the ability of an injured party to bring a claim unless that claim is worth at least a minimum specified amount
- prevents parties from spending time administrating trivial claims
77
de maximis cap
places a cap on the maximum amount that can be claimed for particular breaches of contract, therefore limiting the potential liability of the parties
78
share options
contractual rights to acquire shares in the future
- usually in quantity and at a price that has been agreed in advance
- the receipt of share options is also typically subject to certain conditions being met - "vesting" provisions
- vesting refers to the process under which an individual becomes entitled to share options, usually under a set period of time
- the receipt of share options may also/instead be tied to the individual or the company hitting certain performance-based milestones
79
earn-out
pricing mechanism that can entitle a seller to further consideration following a sale, depending on the target's future performance during what is termed the "earn-out" period
- can incentivise a seller to contribute to continued success of business post acquisition
- unlikely to accept earn outs unless they are likely to continue to exert a level of influence over the target's performance during this period (e.g. by retaining a seat on the target's board)
80
share sale/purchase
involves purchaser buying either all of another company's shares, or a controlling stake in another company
- following a share sale, the target company retains all it's assets and liabilities
- the purchaser simply acquires all (or some) of the target company itself
- purchaser will indirectly own/take assets through ownership of shares
81
pros and cons of a share sale
PROS:
- control: easier for purchasers to fain full control over a company
- logistics: more likley to result in business continuity post-acquisition - assets/resources already in place
- savings: purchasers exempt from goods and services tax
CONS:
- shareholders: difficult to convince a significant proportion of shareholders to sell
- risk: purchasers take on target's existing liabilities and obligations
82
asset sale
involves a purchaser buying specific assets owned by another company, such as intellectual property, real estate or vehicles
83
pros and cons of an asset sale
PROS:
- flexibility: can cherry pick the right assets
- valuation: may be less subjective
- due diligence: may be quicker
- risk: lower risk of unforeseen liabilities
- tax: tax law in UK enables the market value of assets purchased to be offset against tax (may incure stamp duty land tax)
CONS:
- control: no control over entire company
- seller may want a clean break: seller may refuse an asset sale
84
capital markets
financial markets that link organisations seeking capital with investors looking to supply capital
- securities including shares and bonds are traded in the capital markets between groups
85
cash reserves
financing operations using existing cash resources (e.g. retained profit)
86
pros and cons of financing a deal with cash
PROS:
- control
- cost saving
- easy to arrange
CONS:
- may lack sufficient funds
87
bank loan/overdraft
businesses can borrow from banks and then pay back the loans in instalments, plus interest
- interest rate can be fixed or floating
- floating - linked to fluctuation of benchmark interest rate
88
pros and cons of financing a deal with loans
PROS:
- control: full ownership as long as payments are met (however, securities)
- cost savings: interest payments are tax deductible
- guaranteed access to funds
- can be easy to arrange
CONS:
- security: may need to be granted to the lender
- cost: interest rates
- repayable on demand: some loans are repayable on demand, which can cause cash-flow issues
89
bond issue
a company issues debt instruments called bonds to investors through the capital debt markets in exchange for cash
- bonds entitle investors to regular interest payments (coupon payments) over a predetermined period
- at the end of period the bonds "mature" and each investor is entitled to receive their initial investment (principal amount) in full
- bonds are tradable
90
pros and cons of financing a deal with bonds
PROS:
- control: issuers do not have to offer purchases a stake in their business or security over their assets
- access to large sums of money
CONS:
- demand led: depends on credit rating
- costly to arrange
91
underwriters
bond issues can involve underwriters (e.g. investment banks) which agree (for a fee) to purchase all the bonds in advance and sell them to investors - ensures sufficient capital for the issuer
92
share issue/allotment
where a company sells its shares. Investors pay money in exchange for shares that represent an ownership stake in the company, with the aim of reaping returns in the form of capital growth and dividends
93
initial public offering (IPO)
where a company lists its shares on a stock exchange for the first time in order to sell those shares through the equity capital markets
- facilitates subsequent trading of those shares
94
dividends
payments made by a company to its shareholders out of its profits/retained earnings, typically annually
95
pros and cons of selling shares
PROS:
- cash flow: no interest payments
- no security
- complementary skills: from investors
- profile: enhances profile
CONS:
- control: loses stake in business
- cost: more profits will need to be shared
- demand led
- administration: share sales can be time consuming and costly
96
factors considered when choosing between different methods of financing
- assets: which security can be taken over
- capital structure: to support repayments
- the market (i.e. demand, conditions, rates)
- restrictions: existing agreements
- time frame
97
aspects of the market to consider when financing a deal
- demand
- market conditions (recession etc.)
- interest rates
- banks
98
credit rating agencies
assess the likelihood of organisations or sovereigns being able to repay their debts
99
articles of association
a document that is first drawn up by the founders of a company (or automatically generated) at the time the company is incorporated
- sets out written rules that govern the running of the company
100
rights issue
where existing shareholders receive the option to purchase additional shares, usually at a discount, in proportion to their existing shareholding
- enables companies to raise new capital whilst affording existing shareholders the opportunity to retain the proportion of ownership they had held before a new share issue
101
default
the failure to do something required by law or to comply with a contractual obligation
