Glossary of US M&A Terms
Mergers and acquisitions involve complex business and legal transactions, which carry an entire lexicon that may be unfamiliar to buyers and sellers, particularly parties from other jurisdictions. The following glossary includes terms commonly used in United States acquisition transactions. The descriptions are intended to be descriptive, rather than to constitute legal definitions. Because similar terms may carry different connotations in other countries, it is advisable to check with experienced professionals on proper usage in the relevant jurisdictions.
Accretion / Dilution
An accretive acquisition increases earnings per share. Conversely, a dilutive one decreases earnings.
Baskets and Caps
In negotiating indemnity provisions, the parties sometimes agree that a party need not indemnify the other unless the damages exceed a minimum amount, called a “basket.” Sometimes baskets are a “true basket,” where a seller is not liable for damages below that amount. Other times, the basket is merely a “threshold” or “tipping basket,” in which case once that level of damages has been reached, the buyer can seek indemnity for all of its damages, including for those below the threshold. The parties may agree that certain liabilities (often for the breach of some of the representations and warranties) will not exceed a maximum level, called a “cap.”
Business Broker vs Investment Banker
A Business Broker is generally a licensed Real Estate agent or Broker working under the department of Real Estate (in California) for example. Business Brokers generally handle small business asset sales or purchase transactions for companies with less than $5million in annual sales per year.
An Investment Banker is generally a SEC and State licensed securities representative working for a federally licensed Broker Dealer. Investment Bankers not only manage the buying and selling of company assets and stock, but also can raise money for a fee, or take a company “public” via an IPO. Investment bankers can handle transactions of any size, but usually only engage and manage client transactions of larger private and public companies.
Corporate laws in many jurisdictions may impose a duty on the board of directors to consider a superior offer, notwithstanding a contractual prohibition on negotiating with other potential bidders. Some agreements provide for the payment of a fee to the proposed buyer if the seller accepts a better offer from another bidder. That fee is often called a “break fee.”
Data Rooms / Virtual Data Rooms
A “data room” is a place where a company’s records and other due diligence materials are placed for inspection by prospective buyers. Data rooms can be a physical location. Alternatively, companies may scan those documents into a website, called a “virtual data room” to permit inspection from a distance through secure internet connections.
Defensive Measures / Shark Repellant
Companies may implement “defensive measures” (sometimes called “shark repellant“) to help resist being acquired by another company, or to permit a greater opportunity to negotiate better price and terms with the bidder. Common defensive measures include “poison pills,” which often permit the target company’s shareholders to purchase additional equity to dilute the bidder, “staggered boards,” which provide for the election of directors in annual tranches, making it more difficult for the bidder to replace a majority of entire board quickly, and supra-majority voting requirements. Business entity and securities laws may govern the adoption of defensive measures. Companies should consider their duties to equity holders and others in determining whether these measures are in the Company’s best interests. Investors often resist defensive measures, due to their impact on potential sale transactions.
See “Accretion/Dilution” above.
See “Proxy Statements / Disclosure Statements” below.
Buyers sometimes agree to only pay a portion of the purchase price if the business performs at specified levels over time. The deferred portion of the purchase price is referred to as an “earn-out.” Earn-outs are often measured on sales, revenue or net income targets. Earn-outs can be used to help bridge disagreements over a target company’s value, as well as to motivate the sellers to help contribute to the future success of the business.
A “fairness opinion” is issued by an independent valuation firm to provide comfort to the equity owners of a seller that the consideration offered for their shares is fair.
Some bidders for a company will acquire a large block of the target’s equity and then threaten to launch a hostile tender offer for more shares unless the target purchases that block of stock at a premium. That tactic is often called “greenmail.”
The Hart-Scott-Rodino Antitrust Improvements Act requires larger companies to provide the U.S. government with advance notice of a pending acquisition, so the government can review the anti-competitive impact of the proposed transaction. The filing fees can be quite steep and are payable by the seller unless the parties agree otherwise.
Buyers may withhold payment of a portion of the purchase price (or that portion is placed into escrow with an escrow agent) to provide security for the seller’s indemnity obligations. The withheld amounts are often referred to as a “holdback.”
Hostile Takeovers / Hostile Tender Offers
A process whereby a bidder attempts to acquire a target company when the target’s management does not wish the company to be acquired on those terms. In a hostile transaction, the bidder will seek to acquire ownership of the company directly from its equity owners. A “tender offer” is a process in which shareholders tender their shares to a bidder in exchange for an offered amount of consideration. Tender offers are regulated by business entity and securities laws, especially for public companies.
Lock Up Provisions
Buyers attempt to prevent target companies from selling to another prospective buyer through contractual restrictions sometimes known as “lock up” provisions. Lock ups can include use of voting agreements by significant equity owners, “no-shop” provisions discussed below and other methods.
See “Transition Services Agreements / Management Agreements” below.
“Mini WARN Acts”
See “WARN Act / Mini-WARN Acts” below.
No Shop Provisions
Contractual restrictions on engaging in negotiations with other bidders are called “no shop” provisions. If the sellers have a fiduciary obligation to consider unsolicited offers and eventually accept another, they may be required to pay a break fee, discussed above.
See “Defensive Measures” above.
Proxy Statements / Disclosure Statements
A proxy statement is a disclosure document describing the material features of a transaction to be voted on by the equity owners when they are asked to give a voting proxy to another. If the equity owners are not being asked to approve the matter, applicable law often requires that they be furnished with similar information through a disclosure statement. Proxy solicitations and disclosure statements are regulated by business entity and securities laws.
A reverse merger is a process in which an active, non-public company merges into a shell company with no significant operations but has a class of equity securities registered with the securities administrators (such as the U.S. Securities and Exchange Commission). In that manner, the private company can rapidly become a public one.
Fees earned by an intermediary service provider (eg: investment banker) only if a deal transaction is successfully closed and completed.
See “Defensive Measures” above.
See “Defensive Measures” above.
This section of the U.S. Internal Revenue Code of 1986 allows the parties to treat a sale of stock as if it were a sale of assets, which may be beneficial for tax purposes.
Transition Services Agreements / Management Agreements
Transition services or management agreements are frequently used to enable a seller to provide services to the buyer for an interim period until the buyer is able to assume those duties. The agreements set forth the rights, obligations and terms under which those services will be performed. Transition services agreements are often used while buyers obtain necessary licenses and permits, or implement technological conversions necessary to operate the newly acquired company.
Virtual Data Rooms
See “Data Rooms / Virtual Data Rooms” above.
WARN Act and Mini-WARN Acts
The Worker Adjustment and Retraining Notification Act requires that companies provide the employees and the U.S. government with advance notice of mass layoffs before those employees may be terminated. Many states have similar laws (called “Mini-WARN Acts“) , but the thresholds for when the notices are required may differ.