This glossary provides a brief explanation of legal terms commonly used in the context of business transactions. If you need tailored legal advice, contact our specialist commercial and corporate law team.
Glossary of terms:
Articles of association:
The articles of association are the constitutional rules governing how a company operates.
Asset purchase agreement (APA):
An asset purchase agreement is a contract which sets out the terms relating to the sale and purchase of business assets.
Call option:
A call option, in relation to shares, grants an individual or entity the right (but not the obligation) to purchase shares from a shareholder under predefined terms.
Completion accounts:
Completion accounts are financial statements prepared after a transaction completes to determine final purchase price adjustments.
Data room:
A data room is a secure online platform used in corporate transactions to share, review and manage due diligence documents confidentially between buyers, sellers and their advisors.
Debenture:
A debenture is a document creating a charge over all or most of a company’s assets as security for the obligations of the company to a third party (usually a lender).
Disclosure bundle:
The disclosure bundle comprises supporting documents referenced in a disclosure letter, providing evidence of facts disclosed against warranties during a share or asset sale.
Disclosure letter:
A disclosure letter is prepared by the seller to reveal known issues or exceptions to warranties in a sale agreement.
Dividend in species:
A dividend in specie is the distribution of an asset (instead of cash) to a shareholder.
Drag-along rights:
Drag-along rights enable the shareholders that hold a specified proportion of shares in a company and who are proposing to sell their shares to a buyer to require that the other shareholders sell their shares to the buyer too.
Exclusivity agreement:
An exclusivity agreement seeks to prevent a seller from negotiating with other potential buyers for a specified period.
General meeting:
A general meeting is a formal meeting of company members to discuss and vote on company related matters.
Good leaver / bad leaver clauses:
Good leaver and bad leaver clauses determine how departing employees’ shares are valued based on the circumstances of their exit, impacting share purchase terms.
Heads of terms (term sheet):
A heads of terms document (also known as a term sheet or memorandum of understanding) outlines preliminary terms for a proposed business deal, guiding the drafting of final contracts.
Hive up / hive down:
Hive up refers to transferring assets from a subsidiary to its parent company, while hive down describes moving assets from the parent to its subsidiary.
Indemnity:
An indemnity clause provides financial protection against specific losses or damages arising from certain events or contractual breaches.
Intellectual property (IP):
Intellectual property refers to legal rights protecting creations such as trademarks, patents, copyrights and design rights.
Joint venture agreement:
A joint venture agreement governs the relationship between two or more parties collaborating on a specific business project.
Management buy-out (MBO):
A management buy-out occurs when a company’s existing management team acquires part or all of the business they manage.
Memorandum of Association:
The memorandum of association is a constitutional document required on company formation, stating that the initial members wish to form the company and agree to become members of the company.
Nominal value:
The nominal value (or par value) is the face value assigned to a share, distinct from its market value.
Non-compete clause:
A non-compete clause prevents a party from engaging in competing business activities for a specified period.
Pre-emption rights:
Pre-emption rights ensure existing shareholders are given priority when new shares are issued or existing shares are sold.
Put option:
A put option, in relation to shares, allows a shareholder to require another party to purchase their shares under agreed-upon terms.
Quorum:
A quorum is the minimum number of participants required to hold a valid members’ or directors’ meeting.
Reserved matters:
Reserved matters are significant decisions typically listed in a shareholder agreement and requiring the approval of a certain number or percentage shareholders.
Service agreement:
A service agreement in relation to a director is an employment contract between a company and one of its directors.
Share buyback:
A share buyback occurs when a company purchases its own shares from one or more shareholders, often to reduce share capital or return capital to the shareholders.
Share purchase agreement (SPA):
A share purchase agreement details the terms governing the sale and purchase of shares in a company.
Stamp duty:
Stamp duty, in relation to shares, is a tax levied on share transfers, typically payable by the buyer.
Statutory registers/company books:
Statutory registers are official company records required to be maintained by law, including details of directors, members and persons of significant control (PSC).
Stock transfer form:
A stock transfer form is used to transfer company shares and which is provided to the company for the purpose of registering the transfer in the company’s statutory registers.
Tag-along rights:
Tag-along rights protect minority shareholders by conferring on them the right to sell their shares at the same time if other shareholders sell a controlling interest in the company to a third party.
TUPE regulations:
TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006) safeguards employees’ rights during business transfers or service provision changes.
Warranties:
Warranties are contractual assurances about certain facts or conditions in a transaction. Breach of a warranty may entitle the affected party to claim compensation.
Warranty and indemnity (W&I) insurance:
W&I insurance provides protection from financial losses arising from breaches of warranties or indemnities in merger and acquisition transactions.