M&A VOCAB

Question 1

Arbitrational clauses in M&A transactions

Answer 1

• Appropriate mechanism for dispute resolution or dispute settlement
• structures dispute resolution according to the needs of the party

(NOT PUBLIC)
- No negative PR
- No business secrets out in the open

quicker than regular court proceedings
less costly but depends on chosen institution

Elements of an arbitration clause:
- explicit agreement to acknowledge the arbital award
- choice of law for the underlying contract
- arbitral tribunal and applicable rules of procedure
- seat of the arbitral tribunal
-Possible prior mediation procedure

in Cross border transactions the New York Convention offers a International mechanism to enforce arbitral awards

Question 2

Auction Sale

Answer 2

Bidding process in which bidders have the opportunity to win the acquisition of the target by making the most attractive bid possible during a sales process.

broad auction
- call for bids directed at a very broad group of bidders

limited auction or targeted sollicitation
- pre-selected group of bidders which is composed of a few specifically contacted (and often rather strategic) investors

The process of auction sale
1. NDA & Information memorandum
2. request for non-binding offer (so seller can see who to reject imediately and who to give more detailed information to for DD)
3. data room set up for DD (can contain a vendor DD report)
4. provide prospective buyer with (preliminary) purchase agreement
5. buyers may amend their bid or the conditions and the seller decides which buyers to let into the next selection phase
6 Negotiations limited to very few buyers or even exclusively
(+optional extra DD phase)

Question 3

Audit vs Review vs agreed-upon procedure vs. complication

Answer 3

Audit
An audit provides reasonable assurance about whether the financial statements are free from material misstatement. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit will always detect a material misstatement when it exists.

Review
A review provides a certain level of assurance that the financial statements do not require any major adjustments (conclusion on the financial statements). A review includes primarily making inquiries among personnel and performing plausibility checks of financial data. Typical audit procedures, such as observation or obtaining confirmations, are not performed here.

Agreed-upon procedures
Agreed-upon Procedures (AUP) are tests of certain selected areas of the balance sheet and/or income statement. Here, individually agreed-upon procedures, such as target/actual comparisons, recon-ciliations and confirmations are carried out and any deviations identified are presented. No assurance is expressed here.

Compilation
presentation of information and data by the management in the form of the preparation of financial statements. It essentially includes summarising financial information after any accrual/deferral postings. No tests are carried out in this case. Thus, there are no inconsistencies and no opinion or conclusion is expressed. In contrast to the options presented above, independence of the accountant is not a requirement for a compilation engagement.

Question 4

Bank Guarantee

Answer 4

an irrevocable commitment by a bank to stand in for a company’s or an individual’s debts as part of a transaction if certain conditions are met.

A bank guarantee refers to a specific amount and a specific period and specifies the conditions under which it applies to the contract

1. A direct guarantee, which the bank of the obligor issues directly to the beneficiary,
2. An indirect guarantee, in which a second bank is involved.

The latter is often selected if the beneficiary wants additional security, because, for example, there are concerns about the creditworthiness of the banks in the country of the obligor, other country risks should be mitigated, or regulatory requirements need to be met.

Question 5

Break up Fee

Answer 5

obligates the seller to pay a predefined amount of compensation if he is unilaterally responsible for the failure to conclude the contract or if he unilaterally breaks off the negotiations. The events for which the seller shall be deemed to be responsible for are explicitly to be included in the respective agreement in advance.

A seller may also protect himself by means of a so-called reverse break-up fee. The potential purchaser undertakes to pay a reverse break-up fee to the seller if the reasons for the failure to conclude the contract relate to the seller, i.e. if the seller is responsible for the failure. The seller is exposed to different risks than the potential buyer.

Question 6

Bring Down certificate

Answer 6

it is common practice that the seller confirms to the buyer that the declarations, warranties and guarantees given in the reps and warranties section will be equally true and valid without any modifications as of the closing date; this conformation is made either directly in the framework contract or in a separate document,

Question 7

Carve out

Answer 7

The process of separating a business unit to consolidate it into a legally independent entity or a group of entities.

the goal is to maximise the proceeds realisable from a transaction or flotation through clear structuring and focussing on a specific line of business.

A carve-out may also become necessary to minimise risks in the course of a transaction: for example, currently, the risks potentially associated with doing business in Russia may outweigh the profit realisable or realised there, so the buyer may demand that the business divisions involved in such business be excluded from the transaction.

Question 8

Cash Conversion Cycle

Answer 8

a metric companies use to assess effective cash flow management and optimize their cash flow.

The ratio provides an indication of how long it takes in days to convert a company’s investments in inventory into cash.

The process covers the time it takes to sell off inventory (Days of Inventory Outstanding, DIO), collect payments from customers (Days sales outstanding, DSO) and pay suppliers (Days payables outstanding, DPO). Whereas DIO and DSO are correlated with the company’s cash inflow, DPO resembles cash outflows. This can be summarized in the following formula:

Cash Conversion Cycle = DIO + DSO – DPO

Question 9

Discounted cash flow method

Answer 9

method of determining the potential value of an investment by estimating its expected future cash flows and enterprice value

Question 10

Cash and debt free

Answer 10

Purchase price mechanism whereby the vendor is theoretically entitled to retain all cash and pay off all debts

Question 11

Cash pooling

Answer 11

a common tool of centralized cash management within national or international company groups operating their business from different subsidiaries, branches, or divisions.

It allows for a more efficient approach to cash liquidity (i.e. more interest earned and less interest paid) within a group of companies with one central unit providing sufficient, but not excessive liquidity to subsidiaries or business units

Question 12

Change of control

Answer 12

enable the benefitting party to assert certain rights when certain changes occur within the target company.

The main idea behind agreeing on such a clause is that under certain circumstances it should be possible for a contracting party to release itself from its contractual obligations, for example in the event of a takeover by a competitor or other significant changes in the other contracting party’s shareholder structure.

Question 13

Choice of law clauses

Answer 13

a deliberate and expressly agreed upon choice of law selecting a national law governing the contract in order not to be subject to international private law and its complex Conflict of laws rules

Question 14

Closing accounts mechanism

Answer 14

the determination of the purchase price based on the financial statements of the target prepared as of the day of the actual share transfer

Question 15

Locked box

Answer 15

the purchase price determination is concluded in the same way as the closing account but a point in the past is taken as a anker point-> most often the balance sheet day of the last annual financial statements

the relevant documents are already available for the purchases at the start of the procedure for thorough review during DD

Question 16

Leakage

Answer 16

the outflow of assets between the determination date in a locked box mechanism and the actual transfer of the company. most of the time explicit clauses against leakage are part of the SPA.

certain types of leakage can be permitted (It costs etc) -> permitted leakage

Question 17

closing conditions

Answer 17

requirments of the purchase agreement that must be fulfilled by one of the party’s before closing can take place

seller -> seeks to put in as little as possible
Risk-averse buyer -> will want many to avert legal, commercial and opertational uncertainties.

Question 18

Covenants

Answer 18

Enable the buyer to set conditions to be met between signing & closing to ensure the contract gets executed properly

Question 19

Deadlock

Answer 19

stalemate between 2 or more parties
can occur at the shareholder level or at the board level (here the shareholders can intervene)

Question 20

debt pushdown

Answer 20

Debt incurred to buy a company is allocated to the balance sheet of the target for tax purposes

usually the debt is through a bridge loan

Question 21

down-stream merger

Answer 21

occurs when a parent company ceases to exist and is absorbed into its subsidiary.

Question 22

control premium

Answer 22

An amount or percentage by which the controlling interest, exceeds the non-controlling interest in an entity to reflect management power -> if the shares come with voting power you pay extra for that power

Question 23

dicount for lack of control

Answer 23

discount on the share price of a share because it doens’t come with power to decide anything

Question 24

Due dilligence

Answer 24

the essential factors for the buying decision need to be evaluated, classified, and the pluses and minuses weighed up.

generally this can only be done on the basis of the information available to the buyer.

For M&A transactions, special attention has to be paid to the legal, tax and financial aspects of the transaction

Question 25

Earn-out

Answer 25

Delays part of the purchase price, making it conditional on the target company’s future performance (e.g., hitting revenue or profit targets).

Question 26

escrow agreement

Answer 26

a legal arrangement used during mergers and acquisitions (M&A) to secure part of the purchase price in case the buyer later has valid claims against the seller — for example, due to breaches of warranties or indemnities under the Share Purchase Agreement (SPA).

Question 27

fair disclosure

Answer 27

Means a revelation should not only be materially correct, but also clear and detailed. the buyer should be able to understand what is being shared. the disclosure cannot be vague, hidden, or unclear

Question 28

Financial factbooks

Answer 28

provides a detailed and comprehensive presentation of a company's financial situation. It contains key financial data and analysis, including balance sheets, profit and loss statements, cash flow statements and key financial ratios. This document serves to give the potential buyer a clear and in-depth insight into the economic situation of the company.

Question 29

Vendor Due Dilligence

Answer 29

a process in which the seller of a company conducts an independent review of its financial, legal and operational situation before offering the company for sale. The aim is to identify and address potential weaknesses and risks at an early stage in order to accelerate the sales process and strengthen the negotiating position.

Question 30

GAAP

Answer 30

Generally accepted accounting principles such as International financial reporting standards (IFRS)

Question 31

Goodwill

Answer 31

intangible asset that occurs when a buyer pays more than fair market value for a company (strong brand name, client base etc etc)

Question 32

Hell or high water Clause

Answer 32

Clause that entails that one or more contracting parties agree to assume an obligation to be fulfilled at all costs. in the context of m&a these clauses are usually found with regard to obtaining a required antitrust clearance. this clause usually requires the buyer to take all measures and bear all costs necessary to obtain an antitrust clearance and, in particular, to comply with the official require-ments for the completion of the merger.

Question 33

Hold harmless clause (indemnity clause)

Answer 33

obliges the seller to hold the buyer harmless in respect of any and all detriments that might arise from the respective set of facts. a way for the buyer to keep the seller liable, even for known risks. Sometimes the roles are reversed. If a seller knows of a rare but serious legal flaw (e.g. something formal from the company’s incorporation decades ago), they might say: “This risk is theoretical and very unlikely, but I want to be 100% sure you won’t hold me liable.” So the seller asks the buyer to agree to a hold harmless clause — protecting the seller this time.

Question 34

Holder Control

Answer 34

Holder control is the legal framework that regulates and assesses the suitability of acquiring shareholders in regulated financial institutions such as: Credit institutions (banks), Financial services institutions (e.g. investment firms), Insurance undertakings, Pension funds, Certain insurance holdings.

Question 35

Idemnity and warranty

Answer 35

a warranty is a contractual assurance by the vendor in relation to the properties or the condition of the company being sold, an indemnity is a promise by the vendor to hold harmless the buyer for a particular risk.

Question 36

Information memorandum

Answer 36

What is an Information Memorandum A document used in M&A processes to provide potential buyers with key information about the target company. It presents the business model and equity story to help buyers decide whether to proceed in the transaction process. Who prepares the memo Prepared by an M&A advisor on behalf of the shareholders, in close consultation with the client. The advisor gathers detailed information through workshops and drafts the IM based on buyer expectations, with final approval from the client. Placement in the M&A process Shared after potential buyers sign a non-disclosure agreement, following an initial teaser to gauge interest. It forms the basis for submitting an indicative offer for the acquisition.

Question 37

Informational request list or Due dilligence request list

Answer 37

a detailed document created by the buyer (or their advisors) during an M&A process, listing all the documents and information they require to investigate the target company.

Question 38

Legal Opinion

Answer 38

a special form of legal report by a lawyer. Generally follows a three-stage structure: 1. Assumptions, 2. Opinion Statements and 3. Qualifications. The Assumptions serve to substantiate the facts to be examined. Here, facts are often assumed to be true that are reasonably beyond the knowledge/verifiability of the author of the opinion, e.g. statements on the legal capacity of persons acting. The Opinion Statements form the core of the opinion. Herein, for instance, the validity of a contract is confirmed. The necessary legal restrictions or reservations with regards to the Legal Opinion depend on the individual case and may relate to entire areas of law or specific issues, such as restrictions on the enforceability of collateral in insolvency scenarios.

Question 39

Letter of intent

Answer 39

a non-binding declaration of intent used in M&A transactions to document the interest and seriousness of a potential buyer and to outline the initial understanding of the deal. Although generally not legally enforceable, certain clauses (such as exclusivity and confidentiality) can be binding, and breaches may lead to damages. An LOI is often unilateral (from the buyer), but can also be bilateral, in which case it's often referred to as a Memorandum of Understanding (MoU). In rare cases, a "hard" LOI may be signed, containing binding terms like purchase price or deal structure.

Question 40

how do you prevent claims based on pre-contractual statements ?

Answer 40

by adopting an entire agreement clause in the SPA