Commercial Knowledge

Question 1

What is the difference between share purchase and asset purchase?

Answer 1

An asset purchase involves the buyer acquiring select assets and rights and sometimes assuming responsibility for certain liabilities relating to the target business.

Share purchase involves the buyer acquiring the shares in the company.

Question 2

What is the difference between debt finance and equity finance?

Answer 2

Debt financing is based in loans and equity financing is based in selling shares.

Question 3

What are securities?

Answer 3

Securities are fungible and tradable financial instruments used to raise capital in public and private markets.

There are primarily three types of securities: equity, debt, and hybrids—which combine aspects of debt and equity.

Question 4

What happens when a company goes insolvent?

Answer 4

Typically, when a company is ‘unable to pay its debts’, it is considered to be insolvent.

In the Insolvency Act 1986 two basic tests are described to help determine when a company is insolvent: the cash flow test (currently, or will in the future, be unable to pay its debts when they fall due) and the balance sheet test (unable to pay its debts if the value of the company’s assets is less than the amount of its liabilities. this test also takes into account contingent and prospective liabilities)

Question 5

What are some commercial/economic drivers behind a merger or acquisition?

Answer 5

Three main factors drive mergers and acquisitions (M&A) activity – supply, demand, and the availability of capital. This year has offered its own unique set of circumstances that have changed the sentiment of sellers, buyers, and lenders alike as they adjust to current market conditions.

Question 6

What is leverage in the context of an acquisition?

Answer 6

Leverage is the use of credit or borrowed funds to increase one’s investment capacity and increase the rate of return on a buyer’s equity investment. Investing with borrowed funds amplifies potential gains while also increasing the risk of losses.

Question 7

What is private equity?

Answer 7

Private equity is an alternative investment class that invests in or acquires private companies that are not listed on a public stock exchange.

Question 8

What is an angel investor?

Answer 8

An angel investor is an individual who provides capital for a business or businesses start-up, usually in exchange for convertible debt or ownership equity. Angel investors usually give support to start-ups at the initial moments and when most investors are not prepared to back them.

Question 9

What is a hostile takeover? When does it occur?

Answer 9

An acquiring company takes over a target company against the wishes of the target company’s management. This can be achieved by going directly to the target company’s shareholders or fighting to replace its management.

Hostile takeovers may take place if a company believes a target is undervalued or when activist shareholders want changes in a company.

Question 10

What are golden shares?

Answer 10

A share in a company that gives control of at least 51 per cent of the voting rights, especially when held by the government.

Question 11

What is EBITDA?

Answer 11

EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s overall financial performance and is used as an alternative to net income in some circumstances. EBITDA, however, can be misleading because it does not reflect the cost of capital investments like property, plants, and equipment.

Question 12

What is goodwill in the context of an acquisition?

Answer 12

Goodwill is a miscellaneous category for intangible assets that are harder to parse individually or measure directly, e.g. customer loyalty, brand reputation.

Question 13

What caused the financial crisis?

Answer 13

In summary: excessive risk-taking in a favourable macroeconomic, increased borrowing by banks and investors, regulation and policy errors.

Question 14

What is a derivative?

Answer 14

A derivative is a securitized contract whose value is dependent upon one or more underlying assets. Its price is determined by fluctuations in that asset.

Question 15

Where does blame lie with the financial crisis?

Answer 15

Lenders: freely granted loans to people who couldn’t afford them because of free-flowing capital
Borrowers: taking on loans they knew they may never be able to afford
Rating agencies: some argue they should have foreseen the high default rates
Investors: bought mortgage-backed securities at ridiculously low premiums, fuelling demand for more subprime mortgages

Question 16

What do lawyers do in a corporate acquisition?

Answer 16

M&A lawyers assist their clients with the appropriate financing for mergers and acquisitions and provide advice concerning the drafting, negotiation, and performance of contracts for the sale of portions of the business.

Question 17

What is the difference between public and private M&A?

Answer 17

In public M&A, the buyer is acquiring a company whose stock is already being sold on an equity index.

Private M&A, by contrast, involves companies that are not publicly traded, and have very few disclosure requirements.

Question 18

What do lawyers do in an IPO?

Answer 18

Due diligence - very rigorous as it deals with money from the public at large.
Drafting of red herring prospectus and other documents - circulated by an entity ahead of time
Strategising/deal structuring
Legal and regulatory advice
Seeking regulatory approval

Question 19

What is an IPO?

Answer 19

An IPO refers to the process of offering shares of a private corporation to the public in a new stock issuance for the first time. An IPO allows a company to raise equity capital from public investors.

Question 20

What are the pros and cons of an IPO?

Answer 20

• Huge influx of cash without incurring as much debt
• Easier to raise capital in the future
• Can make a company more appealing to vendors and customers
• Finances must be made publicly available
• Must answer to the SEC, e.g.
• IPO prep is expensive and long

Question 21

What’s the difference between an IPO and venture capital?

Answer 21

Both are cash generation methods but are specifically different in their purposes and end results. In VC stock transactions the private company seeks investment from other private companies or individuals only.

Question 22

What is private equity?

Answer 22

Private equity is an alternative investment class that invests in or acquires private companies that are not listed on a public stock exchange. Private equity funds invest in private companies or engage in buyouts of public companies.

Question 23

How do private equity firms raise money?

Answer 23

They raise money from institutional investors/external financial institutions (LPs).

Question 24

Why do companies merge?

Answer 24

Economies of scale
Market share
Acquire new tech/expertise
Synergies
Geographical diversification
Vertical integration
Cross-selling
Taxation
Financial

Question 25

How can companies raise money?

Answer 25

Retained earnings
Debt capital
Equity capital

Question 26

What do you see as the main challenges facing commercial law firms today?

Answer 26

Recruitment and talent retention
Fee-earner burnout
Lawyer competency
Meeting your clients' digital expectations
Having the right technology
Thriving as a hybrid-working law firm
Cybersecurity
Compliance
Interpreting law firm data

Question 27

What are the needs and challenges of national retailers? Compare the impact of e-commerce

Answer 27

POS changes - customers have quite literally become the POS
Lack of consumer-centric customer relationship management
Digital consumption
E-tailing specialists
Operating systems and infrastructure
Associates - an expense, not a strategic differentiator

Question 28

What have been the impacts of Brexit?

Answer 28

Labour issues
Free trade agreements with non-EU markets
Fall of the pound makes British products cheaper for international markets and more appealing
UK businesses can apply for AEO status
Tariffs on British exports
Disruption in supply chain
CE markings
Confidence in the UK
Loss of passporting rights