Glossary of merger and acquisition terms

Arbitration

Arbitration, administration of justice by arbitrators, is a kind of alternative dispute resolution. It is case law by arbitrators and replaces proceedings before the court. Awards are binding on all parties and can be declared susceptible to enforcement by means of a leave of enforcement of the preliminary relief judge.

Asset (/liabilities) transaction

With such transaction, the enterprise of the company is sold and not the shares in the company. Individual assets and liabilities, the customer base, stocks, machines, possibly the real property etc. are then taken over. In an asset/liability transaction, (part of) the assets and liabilities are often transferred. The company sells (usually a part of) its assets and liabilities. Often the machines, stock, inventory, staff and things like lease contracts are taken over. The bank balances, debtors, creditors and bank debts are often not transferred. The selling company then takes care of the financial settlement of the remaining assets and debts. These are collected or paid directly by the selling party. Please note: there are no shares in the sale of a sole proprietorship. In such case we are therefore always dealing with an asset/liability transaction. The advantage of such a transaction is that one can take over the parts that one needs or finds useful. Non-useful parts or even possible “hidden skeletons” then remain with the seller. The disadvantage of such a transaction is that for each part it must be agreed what exactly will be taken over and at what price. This will all have to be well documented in many extra contracts and agreements.

Auction

Auction: this is where a company is sold through an auction. This process follows a predefined, stringent procedure and timeframe. The auction is conducted by the seller. Several potential buyers can place a bid on the company within a set period of time. Per round, the least interesting bids are dropped and the remaining candidates are given the opportunity to improve their bids. Ultimately, one buyer with the best bid remains.

Bad leaver(s)

One or more shareholders who no longer wishes to comply with the original principles of the cooperation as laid down in a shareholder agreement. A Bad Leaver is sometimes also defined as an employee/manager who leaves the company out of his own accord or within a predetermined period. The Bad Leaver then gives up certain rights, so that, for example, a different share price or conditions are declared applicable upon departure.

Business merger

In a business merger, two or more companies merge, in which one company acquires the assets and liabilities of another company, in return for shares in the acquiring company to the shareholders of the transferring company.

Business succession facility or arrangement (BSF / BSA)

The business succession facility is a (tax) arrangement whereby a person who inherits or receives a company has to pay no or less inheritance or gift tax on the value of that company if the company is continued by the recipient. Exactly how much exemption can be obtained depends on the value of the company (the business assets).

Business transfer / Business acquisition

A business transfer is when an owner sells his business to a third party and legally delivers it. In many cases, this third party is an outsider who buys the company. That can be a person (Management Buy In) or a company that makes a (strategic) acquisition. Sometimes it can also be (part of) the management team of the company that takes over the enterprise, in which case we are talking about an MBO, a Management Buy Out. A business acquisition is viewed from the buyer’s point of view. So from the person who buys and receives a company.

Binding advice

Binding advice, just like arbitration and mediation, is one of the forms of alternatieve dispute resolution, without going to court. Binding advice is based on an agreement between the parties involved. The binding advice agreement applies as a settlement agreement in the sense of the law (Article 7: 900 Dutch Civil Code). In the settlement agreement, the parties agree that they wish to have an existing dispute or uncertainty settled by means of a binding advice. Parties have binding advisers determine what will legally apply between them, and are bound by it. The legal relationship between the parties and the binding advisers is an commission contract. By concluding a binding advice agreement, the parties voluntarily and unambiguously give up their right to access to the ordinary (government) court.

Blocking clause

The blocking clause is a regulation included in the articles of association of a company. There are two variants, the offer arrangement and the approval arrangement. The offering arrangement means that if a shareholder wants to sell his shares, he is obliged to first offer these shares for sale to his fellow shareholders. The articles of association describe the procedure for this. The approval arrangement means that if a shareholder wants to sell his shares, he needs the approval of the management of the BV or the general meeting of shareholders. If nothing is arranged in the company’s articles of association, the law provides for an offering arrangement.

Buy-out regulation of minority shareholders

This is a legal dispute settlement scheme that allows large shareholders (> 95%) to buy out minority shareholders.

Cash and Debt free

Cash and Debt free means that the company is transferred without debts and without cash. The debts are paid off and/or settled before the date of acquisition and the cash is withdrawn from the company. The buyer will have to provide new (working) capital himself.

Closing

Closing is the final conclusion of a commitment whereby the transaction has been concluded. The closing takes place in the presence of a notary, whereby the shares are transferred and the purchase price is received.

Corporate litigation

Preventing and resolving disputes between shareholders, between shareholders and companies or between companies at administrative and/or financial level.

Damage statement procedure

The judge passes a verdict for compensation payment, to the extent that this is possible, of the damages in the judgment. If it is not possible to estimate the damages in the judgment, the court will pass a verdict for the compensation payment to be determined in a statement.

Data room

The room or area (can also be an electronic environment , also called a virtual data room), in which certain information about the company is collected. A data room is often used in a due diligence investigation or in a bidding procedure. By giving the buyer (and their advisors) access to this space, the buyer is given the opportunity to read these documents and to get a picture of the company.

Deadlock

A deadlock provision can be included in a shareholders’ agreement or a takeover contract. This provision specifies subjects that are so essential to the company’s operations that if a dispute arises about this, the shareholders must follow a procedure to break the deadlock. This could ultimately – in the absence of an amicable solution – result in a termination of the cooperation or negotiations or the withdrawal of one or more of the shareholders. All kinds of variations are possible here with wonderful terms such as: “Russian roulette”, “Texas shoot-out”, “Dutch auction” etc.

Diluting

A share that becomes less valuable due to an increase in the number of shares issued, usually through the issue of new shares. The value of the share capital in that case is therefore divided over more shares, as a result of which the value per share decreases or becomes diluted.

Disclaimer

In the case of takeovers, the concept of indemnity generally refers to liability. When someone is protected by law or by an interested party, this person is not liable for what he is protected against

Disclosures

Disclosure ensure that the parties have full understanding about such information. No guarantees are usually issued about this information.

Dispute settlement

The statutory regulation regulating the forced transfer of shares, buy out of minority shareholders and the forced take over (buy up) of shares.

Drag along / Tag along

A drag along is an obligation that is included in the shareholders agreement to sell the shares if the other party sells its package of shares. A tag along is a right that is included in the shareholder agreement to sell the shares if the other party sells its package of shares. In contrast to drag along, this is not about an obligation but about a right.

Due diligence investigation (DDI)

The buyer of a company often requires an investigation into the financial, legal and fiscal aspects of the acquisition. Such an investigation is called a due diligence investigation (DDI). Depending on the agreements between the seller and buyer, the nature and depth of the DDI is determined. The formulation of the subareas to be investigated and the possible influence of the outcomes on the purchase price and conditions can be decisive for the successful completion of the transaction. If the information investigated deviates from the information already provided, this may be a starting point for the buyer to question the previously agreed conditions.

Earn-out arrangement

An earn-out arrangement is in principle a deferred payment of part of a purchase price. Part of the purchase price is paid at the time of the transfer and another (variable) part of the purchase price is determined at a later stage, based on the performance of the company after the transfer. The agreements in this regard may vary per transaction, such as achievement of turnover, gross profit or result targets.

Economic loss

Damage incurred by breach of contract or an unlawful act by a third party. This may relate to incurred losses, lost profits, costs to limit the damage and costs to recover them.

Escrow

In some cases, the buyer may wish to obtain assurance about a claim made within the agreed guarantees and indemnities. Such claim can be assured by depositing part of the purchase price with an independent third party, often a notary or a bank, in an escrow account. Arrangements are laid down in the escrow agreement between buyer, seller and independent third party on payment of (part of) the escrow amount. An escrow account is often easier than a bank guarantee, because with a bank guarantee the text of the guarantee must often be negotiated with the bank. The disadvantage of an escrow account is that in many cases it is unclear to whose assets the escrow amount belongs, especially in the case of bankruptcy of the buyer or seller.

Exit

An exit often means the total or partial alienation of a shareholding. This can, for example, take place through an initial public offering or a sale to a strategic party, a new group of investors or to management.

Forced transfer of shares

This is part of the legal dispute settlement. If a shareholder, because of his conduct, damages the interests of the company in such a way that it is unreasonable for him to keep his shares, he may be obliged to sell his shares to co-shareholders.

Forced take over (buy up) of shares

This is part of the legal dispute settlement. In the event that a shareholder’s rights or interests are adversely affected by the behaviour of his fellow shareholders that he cannot be forced to retain his shares, he may oblige the fellow shareholders to buy his shares.

Forensic valuation

Determining the economic value of interests in companies in civil, administrative or criminal matters and/or determining the extent of economic loss in the event of damage caused by breach of contract or unlawful act.

Guarantees

The guarantees are a description of what the buyer can expect from the purchased item. They bring about a risk distribution between the buyer and seller. If guaranteed properties of the purchased compant are missing, this is at the risk of the seller. If the seller does not guarantee certain properties, this means that the lack of such properties is at the risk of the buyer. When selling shares, the guarantees do not only relate to the shares, but also to the company in which the shares are held and to the enterprise of that company.

Non-disclosure agreement (NDA)

A confidentiality agreement (or Non-Disclosure Agreement) must first be signed by interested parties before they receive more detailed information about the company. This document describes the rules and sanctions for handling the information that the seller provides to the potential buyer.

Goodwill / Badwill

This is the difference between the net asset value of the company and the acquisition price. Goodwill exists when the acquisition price is higher than the net asset value. When an acquisition price is lower than the net asset value, there is badwill.

Information memorandum

This is a document describing a company. It usually consists of a summary, the history, description of products and/or services, market positioning, corporate structure and financial information. In general, an information memorandum is drawn up for companies that are offered for sale and is provided to interested parties after a confidentiality statement signed by them has been received.

Letter of intent (LOI)

A Letter of Intent is drawn up when the seller and buyer have reached an agreement on the price, the main lines of their agreement and the resolute conditions. As resolute conditions, it is often stated that the financing must be met and that the book investigation (Due Diligence) does not disclose hidden shortcomings.

Legal merger

In a legal merger, two or more companies merge where the acquiring private company ‘legally’ acquires the assets and debts of another private company and where the shareholders of the other ‘legally’ become shareholders in the acquiring private company and the transferring private company ceases to exist.

LBO: Leveraged Buy Out

Leveraged Buyout (LBO) is a financing method where the acquisition of a company is mainly based on borrowed money, which must later be repaid by the acquired company. The assets of the acquired company are used as collateral for the loan. In this way, investors can take over a company with a minimum stake of their own capital. The disadvantage is that the acquired company is faced with large debts.

Locked box

A locked box system is a contractual agreement in the event of a company takeover in which the period between the last available balance sheet and the closing date is not covered by closing accounts, but by a contractual agreement that no value can ‘leak’ from the company, for example through the payment of dividends or management fees. All other cash movements remain within the company and are therefore assumed to have no value impact.

Majority Stake

Stake in (the shares of) a company with more than 50% of the voting rights.

Management agreement

This is an assignment agreement whereby the person performing management duties charges a management fee to his client. This is explicitly not a wage or salary item, and the contractor may not be employed by the client. The contractor can be a natural (private) person or a legal person. The agreement is laid down in writing, but this is not (legally) required. For multiple partners or shareholders, the management agreement also defines the responsibilities and obligations per partner/shareholder towards each other and towards the company.

MBI: Management Buy-In

An MBI is a form of business acquisition, in which a person/manager or group of people (management) previously not involved with the company takes over the company wholly or in steps. This buyer will take over the management/ownership of the company immediately after the transfer.

MBO: Management Buy-Out

An MBO is a transfer of the company from the existing owner to the current management or part of the management. The advantage is that both buyer(s) and seller know each other well. The transaction value is often lower than when selling to a buyer from outside the company.

Mediation

Mediation is nothing more than the resolution of a conflict under supervision. A major advantage of mediation is that a case is often resolved faster than when it is taken to court. That is why it is cheaper in many cases. Because the parties come up with the solution themselves, it often is a better fit with the wishes of the parties involved. The chance of a lasting agreement and a reasonable understanding is therefore greater after a successful mediation than it is with a legal case.

Merger

From an economical perspective, a merger is the sustainable fusion of two or more economic units. There are various forms of business, namely share merger, corporate merger and legal merger.

Merger & Acquisition (M&A)

Merger & Acquisition (M&A) is a general term that has a very wide span. In addition to the well-known business acquisition, a management buy-out or setting up a joint venture are also examples of M&A. Broadly speaking, it is an M&A project as soon as two companies start working together regardless of the final structure.

Minority Stake

Stake in (the shares of) a company with less than 50% of the voting rights.

Newco

When a takeover is established by a newly incorporated that acquires the shares of an existing company, this new company is often referred to as Newco.

Non-performance

Failure to, incorrectly, or not in a timely matter perform contractual obligations.

Provisional expert report

The provisional expert report can be prepared prior to an ongoing procedure at the request of a party, for example to estimate the chances in a procedure before it is submitted. A provisional expert report may also be requested because it is not possible to wait until the legal proceedings have reached the stage at which the court appoints an expert or because one of the parties wants a counter-expertise.

Selling price

The selling price is the price that the buyer and seller agree on for the acquisition. This price will appear in the LOI, together with the resolute conditions.

Settlement clause

An agreement between partners to settle income and/or assets with each other.

Shareholders agreement

If a company has several shareholders, the relationship between the company and the shareholders, and between the shareholders themselves, is not usually governed solely by the company’s articles of association. Often, the shareholders also formalize their mutual agreements in a shareholders agreement. Provisions may be included here in deviation or in addition to the articles of association, such as control of the company, the interests and position of majority and minority shareholders and the way in which shareholders will say goodbye to each other in the future.

Share merger

Issue of shares by the acquiring company in return for shares in the acquired target company.

Share transaction

In a share transaction (a number of) the shares in a company are sold to a buyer and transferred. The transfer takes place by signing a notarial deed and must be recognized by the company

Share Purchase Agreement (SPA)

A SPA is the final agreement between buyer and seller about the sale of the company, often with a number of reservations included therein.

Success fee

The success fee is a reward that a M&A consultant receives as a variable part of the fee for his work. The success fee is often a percentage of the transaction value.

Teaser

This is a document that contains important key data of the company offered for sale, such as the region, indication of revenue, description of the business activity and a profile of the desired buyer. It has been prepared and formulated in such a way that it is not clear which company it is based on the sales profile. The purpose of the document is to attract potentially interested buyers. Serious buyers must sign a confidentiality agreement (NDA) and then receive further company information.

Tombstone

Reminder of the successful conclusion of a deal in the form of a perspex plate that usually takes the form of a tombstone. All parties involved in the deal are named on this.

Unlawful act (6: 162 paragraph 2 Dutch civil code)

An unlawful act is (i) an infringement of a right, or (ii) an act or omission in violation of a legal duty, or (iii) an act or omission in violation of what befits unwritten law in society. If damage is the result of an unlawful behaviour of a (legal) person and can be attributed to him, then he must compensate the damage.

Vendor Due Diligence (VDD)

The Vendor Due Diligence (VDD) is an independent and complete study of the company, conducted by the seller of a company. In doing so, one looks at business history, current business operations and future perspectives. It offers both the seller and (potential) buyers the necessary insights. Extensive research and reporting exclude potential blind spots and support both seller and (potential) buyer in making a decision regarding the final purchase or purchase agreement.