Mergers and acquisitions are a very complex business surrounded by legal transactions and terms that may be unfamiliar to buyers and sellers. The following is a glossary of terms which are commonly used in US acquisition transactions. However, some of these terms may mean something different in other countries.
Earnings per share increase with an accretive acquisition. Earning are decreased with a dilutive one.
Baskets and Caps
Sometimes when negotiating indemnity provisions, parties agree that there is no need for indemnification between the parties unless damages exceed a minimum amount. This is called a basket. When a seller is not liable for damages below that amount, it’s sometimes called a true basket. A threshold or tipping basket is when a buyer can seek indemnity for all its damages including those below the threshold, once a level of damages has been reached. A cap is when parties agree that certain liabilities will not exceed a maximum amount.
The fee that a proposed buyer is paid, if the seller accepts a better offer from another bidder, is called a break fee.
Data Rooms/Virtual Data Rooms
A data room is the place where all materials and documents are placed for prospective buyers to inspect them. Data rooms can be a physical room or documents scanned into a website, which is called a virtual data room.
Defensive Measures/Shark Repellant
Defensive measures also referred to as shark repellant are the strategies that a company can use to resist an acquisition. Common defense strategies are poison pills and staggered boards. Poison pills allow the target company’s shareholders to buy additional equity to reduce the bidder’s equity. Staggered boards allow directors to be elected for annual terms, which makes it more difficult for a bidder to replace the majority of an entire board quickly.
An earn-out is the deferred portion of the purchase price, when a buyer agrees to only pay a portion of the purchase price if the business performs at specified levels over time.
Sales, revenue, or net income targets are the measurements used for an earn-out. An earn-out is used to help with disagreements over a company’s value and to motivate sellers to contribute to the success of the business.
The opinion issued by independent valuation firms to reassure the seller that the price offering is fair, is called a fairness opinion.
Bidders acquire a large stake of the target’s equity and then threaten to offer a hostile tender offer for more shares unless the target pays a higher premium for the stake of stock. This tactic is called greenmail.
The Hart-Scott-Rodino Antitrus Improvements Act – requires that the US government be given advanced notice of a pending acquisition so the government can review the anti-competitive impact of the proposed bid. Filing fees are very steep and the seller has to pay them unless the parties have a different agreement.
A holdback is the portion of the purchase price withheld or placed into an escrow account with an escrow agent to provide security for the seller’s indemnity obligations.
Hostile Takeovers/Hostile Tender Offers
When a bidder attempts to acquire a target company and the target’s management does not want the acquisition on those terms. Bidders attempt to acquire ownership directly from the equity owners.
Lock Up Provisions
The contractual restrictions a buyer uses to prevent the target from selling to another prospective buyer are called lock up provisions. Lock ups include voting agreements by significant equity owners, no-shop provisions, and other methods.
No Shop Provisions
The contractual restrictions that prevent negotiations with other bidders are called no shop provisions.
Proxy Statements/Disclosure Statements
When equity owners are asked to give a voting proxy to someone else, they will have a proxy statement that discloses and describes the material features of a transaction to be voted on. When equity owners aren’t being asked to approve a matter, laws require that they are furnished with similar information through a disclosure statement. These statements are both regulated by business entity and securities laws.
When an active non-public company merges into a shell company with no significant operations and has a class of equity securities registered with the US Securities and Exchange Commission is called a reverse merger. Private companies can quickly become public companies with a reverse merger.
The 1986 US Internal Revenue Code that allows parties to treat the sale of stock like the sale of assets.
Transition Service Agreements/Management Agreements
Transition services or management agreements are used so a seller can provide services to the buyer until the buyer is able to assume those duties. These agreements are used when buyers need to obtain necessary licenses and permits or implement technological conversions needed to operate the newly acquired company.
WARN Act and Mini-WARN Acts
The Worker Adjustment and Retraining Notification Act requires that companies notify employees and the US government with advance notice of mass layoffs before they can terminate employees. A number of states have similar laws which are called Mini-WARN Acts.
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