Mergers & Acquistions Terms

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"A" reorganization

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IRC 368(a)(1)(A)- a reorganization that is structured as a statutory merger or consolidation of two corporations and meets certain other tests, allowing for the deferral of recognition of income (or loss) for federal income tax purposes with respect to the buyer's stock (or stock of its parent) received by the target's shareholder.

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Acceleration

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Advancing of certain rights, such as the vesting of options or restricted stock, usually caused by an acquisition or other change in control.

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Access covenant

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A covenant in an acquisition agreement or letter of intent requiring the target to give the buyer access to the target's books, records and properties, generally for the purpose of conducting due diligence.

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Accretion/Dilution

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Diminution in the proportion of net income and net assets to which each share is entitled. Transactions are often measured by the degree of dilution the buyer's common stock will suffer as a result of the transaction and the period of time until the transaction becomes accretive. Also, the effect on the net income or net assets per share if all convertible securities were to be converted and options and warrants were to be exercised. See also equity dilution.

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Equity Dilution

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The issuance of addt'l shares of a class or series of stock, thereby diluting the voting and other rights of the original shares.

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Acquiror/Buyer

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The acquiring person in an acquisition, whether it be an entity, an individual, or any combination, which may be the parent in an acquisition using an acquisition sub.

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Acquisition

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A generic term referring to the acquisition of a business, whether the form is a purchase of assets, a purchase of stock, a merger or some variation.

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Acquisition Agreement

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An agreement to consummate an acquisition that addresses all essential terms and therefore is legally binding. The acquisition agreement will usually specify the consideration, structure, payment and other terms of the transaction, and will contain representations, warranties, covenants and conditions. This is to be contrasted with a latter of intent, which is intended to create no legal rights other than as specifically provided with respect to a narrow range of matters. Sometimes called a definitive agreement or a purchase agreement and, less frequently, a purchase and sale agreement.

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Acquisition Sub

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A subsidiary formed for purposes of facilitating an acquisition. See also triangular merger.

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Actual knowledge

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Means that a person in fact knew about a particular fact or circumstance, as distinguished from constructive knowledge. Sometimes actual knowledge is elevated to a higher standard, such as conscious awareness of the consequences (e.g., that a particular fact constitutes a breach of representation). See also constructive knowledge.

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Add-on acquisition

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An addt'l acquisition, usually involving a financial buyer, within the same line of business to add to a platform acquisition. See also platform acquisition.

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Affiliate

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For purposes of the federal securities laws, an affiliate of a person is one who controls, is controlled by or us under common control with that person. This definition is frequently used in acquisition agreements, even those that do not implicate the federal securities laws.

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Agreement in principle

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A written document that contains many, but typically not all, of the essential terms of an acquisition. It may purport to be binding, but that will depend on whether it is legally enforceable under state law. Sometimes called heads of agreement. See also acquisition agreement and letter of intent.

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Agreement of merger

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An acquisition agreement for a transaction structured as a statutory merger, or a summary document required to be filed with a state official to effectuate a merger. Sometimes called articles of merger. See also certificate of merger.

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AICPA

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American Institute of Certified Public Accountants

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Allocation of Risk

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The distribution of risk among parties to an acquisition agreement as a result of the parties' bargaining and documented in an acquisition agreement as to which party will bear the financial or economic risk of certain conditions, events or occurrences. A buyer will attempt to shift to the seller the risk of any losses or damages that might be incurred after the closing. A seller will attempt to reduce its risk through use of qualifiers such as "material" and "actual knowledge."

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Alternative dispute resolution (ADR)

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A provision in the agreement that provides for alternatives to litigation (such as arbitration or mediation) for the resolution of disputes arising under the agreement.

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Amortization

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An accounting concept in which the historical cost (or estimated value) of an intangible asset is systematically recorded as an expense over its useful life, resulting in a portion of the historical cost being charged to income for each financial reporting period, with a reduction in the carrying value of the asset in the amount expensed. This is distinguished from depreciation, which is a similar treatment for tangible assets.

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Ancillary agreements

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Agreements, other than the acquisition agreement (e.g., employment or consulting agreements, noncompetition agreements, leases, or escrow agreements), that are delivered in connection with an acquisition. Forms of the ancillary agreements typically are attached as exhibits to an acquisition agreement, and execution and delivery are conditions to closing. Sometimes they are signed and delivered concurrently with the execution and delivery of the acquisition agreement.

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Anti-assignment provision

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A provision in an agreement that prohibits a party from assigning the agreement (or its rights and obligations under the agreement) without the consent of another party or parties to the agreement.

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Anti-dilution provision

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The protection afforded holders of securities, such as warrant, options, convertible debentures or convertible preferred stock, against changes in the outstanding number of shares of common stock or of other classes or series of stock underlying such securities.

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Antifraud rules

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Rules that serve as the principal means of enforcing federal and state securities laws by generally prohibiting fraudulent or manipulative acts in connection with the purchase or sale of securities.

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Anti-sandbagging provision

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Generally, a seller-oriented provision in an acquisition agreement that requires the buyer to inform the seller of any misrepresentation or breach of which it has knowledge prior to the closing, in order to provide an opportunity to cure the problem, or that precludes a buyer from recovery for a misrepresentation or breach by the seller if it had been known, actually or perhaps constructively, by the buyer prior to closing. See also sandbagging. There can also be a buyer-oriented provision in an acquisition agreement where the buyer is making extensive representations.

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Appraisal rights

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A statutorily created right of shareholders to receive the fair value (or, in some states FMV) of their shares, in cash, as determined by a court in certain extraordinary transactions, such as a merger or sometimes a sale of assets or exchange of securities. In a merger, it will be in lieu of the merger consideration offered by the buyer. Also called dissenters' rights in some states.

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Asset acquisition

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The acquisition of all or some of a target's assets, usually accompanied by the assumption of certain of its liabilities.

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Asset-based financing

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Financing provided on the basis of the security of assets that have commercial value, primarily equipment, inventory and receivables.

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Assignment

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The transfer by a party of intangible personal property or contract rights, as distinguished from a bill of sale, which is typically used to transfer tangible personal property. Sometimes an assignment and a bill of sale are combined in one document. See also bill of sale.

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Assumed liabilities

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A term often used in an acquisition agreement to refer to those liabilities being assumed by the buyer.

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Assumption (of liabilities)q

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An undertaking to assume and discharge liabilities.

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Auction

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A process for the sale of a business, ranging from a controlled auction, in which negotiations are conducted with a limited number of potential buyers are approached or a proposed sale is publicly announced and the time parameters are highly structured.

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Audit

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An examination of the accounting books and records of a business by independent, outside auditors for the purpose of evaluating whether specified financial statements are fairly presented, in all material respects, in conformity with GAAP. An audit results in rendering an auditor's report on the financial statements. See also Compilation and Review.

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"B" reorganization

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IRC 368(a)(1)(B) - reorganization that is structured as a "stock-for-stock" acquisition in which one corporation, solely in exchange for its voting stock (or voting stock of its parent), acquires stock of another corporation, such that immediately after the transaction the acquiring corporation has at least 80% control and meets certain other tests allowing for the deferral of recognition of income (or loss) for federal income tax purposes with respect to the buyer's stock (or stock of its parent) received by the target's shareholders.

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Balloon payment

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A final payment of principal at the maturity of debt that is significantly greater than other principal payments, if any, during the term of the debt.

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Bank line

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Typically, a line of credit, including a revolving line of credit, from a bank.

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Basis

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The value assigned to a taxpayer's investment in property that is used to compute gain or loss from sale of the property. The basis can be outside basis (i.e. the basis of stock owned by a shareholder), or an inside basis (i.e. the basis of an entity in its assets.

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Basis points

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A unit for measuring yield (interest rate) that equals 1/100th of 1%. For example a 1% change in rate = 100 basis points.

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Basket

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A term describing a provision in an acquisition agreement dealing with indemnity obligations, so named because only certain types of claims or those exceeding in the aggregate a specified dollar amount are said to "hit" or "fill" the basket. Typically, recovery for identification is permitted only for the excess over the amount specified. Sometimes called a cushion, deductible, or deductible basket. A similar concept might be used for individuals and unrelated claims. See mini basket and threshold.

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Beneficial owner

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Generally, a person having (alone or with others) the ultimate power to vote or dispose of securities, either directly through the record owner of the securities.

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Best efforts clause

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A clause in an acquisition agreement that imposes a legal obligation on one or more parties to use "best efforts" to carry out the terms and intent of the agreement as a whole or specific terms of the agreement. Sometimes the clause is modified to apply a lesser standard, such as "reasonable efforts" or "reasonable commercial efforts."

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Bid

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An acquisition proposal submitted in an auction.

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Bidders

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Those who submit bids in an auction, a proposal in a negotiated acquisition or a tender in a tender offer.

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Bidding procedures

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Procedures developed and distributed to potential bidders to control the process and timing of an auction.

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Bill of sale

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An instrument of transfer of title to tangible personal property, as distinguished from an assignment, which is typically used to transfer intangible property or contract rights. See also assignment.

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Blue Sky laws

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The securities laws of the various states. Depending on the state, these laws may prohibit fraudulent activities in the sale of securities, require licensing or persons offering securities, or require the registration or qualification of securities with the state securities administrators.

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Book (the)

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A marketing document, generally prepared by the seller with the assistance of its financial adviser, which is distributed to potential buyers and includes an overview of the seller's business and operations, limited industry info, management's background and selected historical and projected financial results. Also called an offering memo, a confidential memo, or simply a memorandum.