Technical exam Flashcards
When may an exclusivity agreement be signed?
After receiving the information memorandum
What are pre-emption rights?
Have first refusal on the issue of new shares by a company
Do preference shareholders receive pre-emptive rights?
No, because preference shares do not normally carry voting rights, so they do not require pre-emption rights
Where do warrants go in order of liquidation?
Theoretically go last, because the warrant will be rendered effectively worthless
Are preferred stock included in fully diluted shares outstanding?
Nope - treated as a debt instrument, as will never convert to ordinary shares
What is the exclusivity agreement designed to do?
Prevent a seller from entering into negotiations with other potential purchasers
What is the market value of the business?
The total value of the business to providers of equity
Where are confidentiality agreements likely to be found?
In the non-disclosure agreement
What sort of thing would be included in the exclusivity agreement?
- Details of break fees
- No shop clause
- No talk clause
What is a no talk clause?
No one can detail terms of the deal including total consideration
Difference between cumulative and non-cumulative preference shares?
Dividends accumulate in cumulative, they are forfeited in non-cumulative
What is the order of the priority on liquidation?
- Fixed charge holders
- Preferential creditors
- Floating charge holders
- Unsecured creditors
- Subordinated debt holders
- Preference shareholders
- Ordinary Shareholders
What is the formula for ROCE?
PBIT / Capital employed
Capital employed = Equity + Non-current liabilities
Why would using a DDM for a large shareholder not make sense?
Large shareholder could influence dividend policy
What is another name for a Heads of Agreement?
Letter of intent
What is the purpose of a Heads of Agreement or Letter of Intent?
A formulation of th key terms of the agreement
What is management of liquid resources?
Prudency in managing working capital
What is and who prepares the Long-form report?
Accountants - it is an extended audit report
Why is a liquidation not a form of exit route?
Preference would go to creditors, so equity holders would get very reduced amount
What are the different ways of thinking about the internal rate of return (IRR)?
- Is the discount rate which produces a zero NPV
- Is generally determined by a process of interpolation
- Establishes a breakeven investment rate of return
Who takes overall responsibility for the CIM?
The seller / vendor
What is an underwriting agreement?
- Clarify all the terms and conditions associated with the sale of the shares in question.
What is a subscription/placing agreement?
- Sets out obligations of placing agents with regard to identifying investors and marketing the shares
What is a Competent person’s report?
- Any fundraising for mining, oil and gas companies are usually accompanied by a competent person’s report because of their complexity
What is verification in the context of transaction documents?
Line-by-line examination of the statements made in the prospectus, information memorandum, or other document.
Each individual statement in the prospectus is verified as a fact and confirmed by a member of senior management, and the source of the information is identified and placed on file in the form of verifcation notes
Three main areas of DD?
Commercial, Financial, Legal
What is the due diligence and verification associated with a prospectus?
Advisers commission due diligence before preparation of the prospectus, and carry out a verification process once it has been prepared
What is an intercreditor agreement?
Agreement that outlines how different creditors competing interests in the borrower will be dealt with.
What is a term sheet?
Lays out in bullet point format the key terms of a proposed lending or investment agreement. It may also be used in the context of VC or PE deals.
Sale and purchase agreements (SPAs)
Culmination of the negotiations of an M&A transaction. It is a legal contract that creates a binding obligation for the seller to sell and the buyer to buy the business for the price specified and on the terms and conditions outlined in the agreement.
Hold Harmless Letters?
Means by which one party agrees in advance to indemnify another in relation to a particular loss. Could be found in a wide range of agreemnts
Side letters?
Agreements between some (but not always all) parties to the transaction, which vary some of the terms of the agreement without redrafting the whole agreement
Comfort letter?
In new equity issues, the issuer’s accountants may be required to provide a comfort letter to the underwriters to the issue, confirming that there has been no material change in the issuer’s financial condition since the date of the last published financial information.
What are memorandum of understandings?
Another name for letter of intent or head of agreement
What is a letter of intent (LOI) and a heads of agreement?
Outline an agreement between two parties prior to entering into a legally binding commitment. It clarifies agreements reached on key points arising in the negotiation of a transaction.
Hold harmless clause?
Means by which one party agrees in advance to indemnify another in relation to a particular loss. Could be found in a wide range of agreemnts
Shareholder circular:
Sent to shareholders on the calling of a GM or AGM to provide them with the necessary information to come to a decision on how to vote on resolutions proposed
Shareholders agreement:
A document that governs the relationship between all, or specific, shareholders. This is a private, unpublished document, and is not governed by company law.
Disclosure letter:
The disclosure letter outlines the information that the purchaser has seen, and is listed item by item.
Warranty caps:
limits on the amount that can be claimed for breach of warranty and time limits for warranty claims. These limits the risk to the vendor.
What are indeminities?
Indemnities relate to matters where there is a known uncertainty, such as the current year’s tax liability, or ongoing litigation. The vendor confirms that if a certain event materialises, it will make good the purchaser’s expenses or losses.
What are warranties?
Warranties are used to guarantee that information is correct, and if it is not, the purchaser may sue the vendor for breach of warranty
What is the purpose of the representations, warranties, and indemnities clauses?
In a transaction, the purchaser is relying on accuracy of information that they have been provided with.
What is an engagement letter?
Used to engage an adviser for a particular assignment in the first place
What is an NDA?
Outlines the fact that you will be receiving non-public information, and that by agreeing, they will keep the information confidential.
Difference between the two formulas for the dividend discount model?
- One accounts for growing dividends, and one assumes constant dividends
What is a clawback in the context of placing
Gives a guarenteed right to participate
What is the nominal value of a company’s ordinary shares?
Minimum price at which any future new issues of ordinary shares can be made
What does an existing shareholder do if they want to reject an offer in takeover?
Do nothing
What is the advantage of reducing the issue price under a rights issue?
Cut the underwriting cost
What is the main difference between the functions of a no shop clause and a no talk clause
No shop clause restricts discussions, where as no talk clause forbids them
What is the formula for capital employed?
PBIT / Capital employed, capital employed is total assets - current liabilities
What is dividend discount model formula?
Share price = Dividend / (Cost of equity - Dividend growth)
Most liquid out of cash, accounts receivable, inventories, and intangibles?
Cash, accounts receivable, inventories, intangibles
