GLOSSARY
As you find out more about a career in law and the City you will come across a range of corporate and financial terms and jargon. We want users of our website to understand more about what is involved in the City and a career in law. We have therefore prepared a glossary explaining some of the key legal concepts, transaction types and institutions which are important to legal practice in the City. We hope you find it useful and enlightening.
Accelerated IPO This is the term used for a transaction in which a newly incorporated company (Newco) simultaneously acquires a business, completes an Initial Public Offering of shares (see Flotation) to institutional investors for cash and lists those shares on the Alternative Investment Market. The proceeds of the share offering finance the acquisition by Newco of the business. This technique was first used in 2003 for the acquisition of Northumbrian Water. Since then it has been used for a number of deals including Center Parcs and Dyno-Rod. It is also referred to as a "virtual bid".
Accounting Standards Board The statutory body established by the Companies Act 1985 as the operating arm of the Financial Reporting Council to set accounting standards. The Accounting Standards Board consults on proposals, then issues Financial Reporting Standards (FRS) which are to be followed by companies in the preparation of their audited accounts (although listed companies will apply International Financial Reporting Standards (IFRS).
Admission Document This is the legal disclosure document required by the AIM Rules to be produced by companies seeking admission to AIM. The Admission Document serves a similar function to the Prospectus required under the EU Prospectus Directive (as implemented in the UK by the FSA's Prospectus Rules).
AIM Company A company with a class of Securities admitted to AIM.
AIM Rules The rules issued by the London Stock Exchange for companies seeking admission to AIM and for AIM Companies. They are similar to the Listing Rules and Prospectus Rules but are less onerous. Companies seeking admission to AIM must comply with the AIM Rules and, once admitted, AIM Companies must comply with the continuing obligations set out in the AIM Rules.
Alternative Investment Market (AIM) There are two principal markets for shares in the UK: the Official List and the Alternative Investment Market (known as AIM), which is the junior market operated and regulated by the London Stock Exchange (LSE) separately to the main Official List. Companies seeking admission to AIM must comply with the AIM Rules and once admitted they must continue to comply with the continuing obligations set out in the AIM Rules. It is intended for smaller, growing companies and no particular trading record, management or minimum capitalisation is required. The AIM Rules were designed to be as flexible as possible. Today a variety of companies are AIM Companies. AIM was opened in 1985. See also Accelerated IPO.
Break Fee Also known as failure costs agreements - this is a payment from either a buyer or seller to the other if the deal fails to sign or complete. Common situations that trigger a break fee payment are a breach of an exclusivity agreement or failure to obtain shareholder or regulatory approval. It can also specifically mean an arrangement entered into between a target company and a prospective bidder for that target under which a fee is agreed to be paid by the target in certain circumstances (generally if the bidder's takeover offer is unsuccessful because it is beaten by a higher competing offer). Care should be taken to ensure that, among other things, the fee is not unlawful under the financial assistance provisions in the Companies Act 1985 and that the requirements of the Code and the Listing Rules in respect of break fees are met. Break fees are sometimes called "inducement fees" and make the target more expensive for any other potential bidder.
Buy Out See Private Equity for a description of this type of transaction.
Class Tests Under the Listing Rules certain transactions by Listed Companies may require shareholder approval or may require particular details to be disclosed. The precise requirements will generally depend on the relative size of the transaction and there are a series of tests for the classification of transactions and therefore the particular obligations required under the Listing Rules. These tests are referred to as the Class Tests. Under the Listing Rules significant transactions can be categorised as Class 1, Class 2 or Class 3 or as reverse takeovers. Class 1 transactions will generally require shareholder approval. The AIM Rules contain a similar, but less onerous, concept for AIM Companies.
Code The Code is known as the City Code on Takeovers and Mergers, the City Code, the Takeover Code or the "Blue Book". These are a set of statutory rules and general principles used when the Takeovers Directive is applicable. These are also a set of non-statutory rules and general principles which relate to all other transactions to which the Code rules apply. The Code is administered by the Panel on Takeovers and Mergers. This provides an orderly framework within which takeovers are meant to be conducted and represents the collective opinion of those professionally involved in takeovers as to business standards and how fairness to shareholders can be achieved.Regulatory authorities expect those who seek to use the Securities markets in the UK to comply with the Code (including the spirit of the principles and the rules) and can apply sanctions to those who do not. The Code generally applies to offers for listed and unlisted public companies (and a restricted number of private companies where in the past there has been an element of public trading in their shares) considered by the Panel to be resident in the UK, the Channel Islands and the Isle of Man and in addition certain takeovers where there is a shared jurisdiction between the UK and other EEA countries.
Combined Code This is the Combined Code on Corporate Governance with which directors of Listed Companies are required to comply. See Corporate Governance. Contested Bid See Hostile Bid.
Convertible Securities A Security (commonly a convertible preference share or a convertible loan stock) which at some stage can be converted into a different form of Security (commonly an ordinary share) according to a pre-agreed formula.
Corporate Governance In addition to their duties at common law and under various statutory provisions, directors of Listed Companies are required to comply with various non-statutory rules and regulations designed to ensure the proper running of Listed Companies and accountability to shareholders. These are set out in the Combined Code which forms part of the Listing Rules. Although not having the force of law, compliance is required by the Listing Rules. The guidelines have been produced by committees of prominent City individuals, each committee's name bearing the name of its Chairman. The rules and regulations produced by these committees comprise the Cadbury Report on financial aspects of corporate governance, the Greenbury Report on directors' remuneration, the Hampel Report drawing on the Cadbury and Greenbury Reports to produce a composite code on corporate governance, the Turnbull Report on internal corporate controls, and more recently the Smith Report on aspects of the audit function and the high profile Higgs Report (following the Enron scandal) on the role and effectiveness of non-executive directors.
Credit Rating The formal score of a company's creditworthiness provided by a specialist institution known as a rating agency (such as Moody's or Standard and Poors). The formal score is known as a rating and each rating agency has its own grading system. These grades are closely followed by the investment community and are particularly relevant in the context of companies seeking to raise funds through the issue of Debt Securities. The debt instrument will be ranked and, in the simplest terms, this will to some extent set the parameters of the yield (interest) which investors will expect to receive on the investment. A debt instrument of a company rated Baa or above by Moody's, or BBB or above by Standard and Poors, is referred to as being "investment grade": below that level the debt will be termed "junk" or "high-yield".
CREST A paperless settlement system developed for recognised investment exchanges and used by the London Stock Exchange. Previously when shares (and certain other Securities) were bought and sold on the stock market, the transaction would be settled by delivery of a stock transfer form and a share certificate by the seller to the buyer and payment of the purchase price by the buyer to the seller. It was a paper based system of settlement. CREST is a paperless system for the settlement of these trades. With CREST, as before, the legal record of shareholding is a company's share register. Issuing companies decide to make their Securities "CREST-eligible". It is a requirement of the Listing Rules that shares the subject of an application for listing are eligible for electronic settlement.
Dawn Raid The term given to the attempt by a potential bidder to acquire a small, but substantial, stake in a company before making a takeover offer. The purchase would be made in a short space of time commonly as soon as the market opens (hence the term). (Dawn Raid has a separate meaning in another context, when it refers to visits made by regulators to the premises of companies with little or no warning.
Debt In very simple terms, debt (which may carry a right to interest and may be payable or repayable on a certain date or on demand, for example in the case of an overdraft facility or invoices for trade debts) contrasts with share capital (which normally carries a right to dividends and will not be repaid, except, after repayment of debt and all other creditors and expenses) on a Winding Up or Liquidation or in other very restricted circumstances). Debt can be described in various ways including: secured or unsecured (depending on whether the lender is granted security over assets); senior or mezzanine (or junior) which ranks the debt in terms of order of payment priority (the more senior being payable first and having first claim (or ranking) on any security) so that the more senior debt should be the least expensive for the borrower (that is, it will have the lowest interest rate or margin). The term subordinated is another way of describing debt as ranking behind another form of debt. Debt Securities are a form of debt (in general meaning borrowing) but you would not call all forms of debt a security in City jargon.
Debt Securities These are Securities representing borrowings and will have the common characteristic of one party lending money and borrowing money, with the borrower obliged to repay the loan on a specific date. The particular type of security or name given will depend on the precise terms constituting the loan or borrowing. Debt securities can be secured or unsecured. Debentures, loan stock, loan notes and bonds are examples of debt securities. See also our explanation of Debt. Debt Securities issued by Listed Companies will typically be listed on the London Stock Exchange or another recognised investment exchange in Europe (typically Luxembourg or Dublin) for tax reasons.
Debt-for-Equity Swap A transaction involving the exchange of a Debt instrument for Equity. This often occurs when a company in financial distress needs to rebuild its capital structure. Creditors of the company, such as bank creditors and bond holders, will exchange their Debt or Debt Securities for newly issued shares in the company and in most cases will assume control of the company, and the existing shareholders will be significantly diluted.
De-Listing The removal of a company's listing of its shares on a stock exchange. A de-listing will usually occur following a successful takeover bid and will almost always occur upon a Take Private.
Demerger The separation of a company's business or a group of companies into two or more parts. In contrast to a sale of the business, a demerger will result in the shareholders of the company receiving additional shares in the demerged entity (as well as retaining their existing shares) so that generally the shareholder base of that entity will be a "mirror image" of the shareholder base of the original company.
Derivative A generic term for a range of financial instruments whose value is determined (derived) from one or more other Securities , currencies, interest rates, commodities or events. The price of a derivative is influenced by the features of the derivative contract, including the timing of contract fulfilment, the value of the underlying Security or commodity and other factors such as volatility. Some derivatives involve the right to buy or sell the underlying Security or commodity at some point in the future for a predetermined price. If the price of the underlying Security or commodity moves in the right direction, the owner of the derivative makes money; otherwise they lose money. Depending on the terms of the derivative contract, the potential loss or gain may be much higher than if they had traded the underlying Security or commodity directly.
Disclosure Letter A letter prepared by a seller and delivered to a buyer immediately prior to the signing of a Share Purchase Agreement , and containing facts and information constituting exceptions to the Warranties in the Share Purchase Agreement. See also Due Diligence.
Due Diligence When a buyer considers buying a business, it will wish to make sure it understands that business fully and any risks or problems that the business has. To make sure that it does fully understand the business, the potential buyer will conduct due diligence which will (depending on the buyer's access to information, the number of other potential buyers and other factors) involve a thorough investigation of the business, including in particular examining detailed financial information, important contracts, the assets that the business owns, and if there have been any recent problems such as legal proceedings or environmental pollution. If it can, the buyer will still wish to negotiate Warranties in the Share Purchase Agreement to give it contractual protection. A seller on the other hand will wish to ensure that information disclosed to a buyer as part of the Due Diligence exercise is formally disclosed in the Disclosure Letter so that the buyer cannot make claims against the seller for breach of Warranty in respect of matters disclosed in the Disclosure Letter. In a public takeover (see Hostile Bid and Recommended Bid) this type of contractual protection (other than as to the ownership of the shares in the target company) is rarely available. Although the term " Due Diligence " is most commonly used in the context of an acquisition (public or private), it can be used in the context of any transaction (for example banks will carry out Due Diligence on borrower companies before lending).
Earn-out An arrangement under which at least part of the purchase price of an asset is calculated by reference to the future performance of the asset (commonly a company or business) being purchased (and therefore paid at a future date when that performance is known).
EBITDA Earnings Before Interest, Tax, Depreciation and Amortisation. It is a measure of the revenue generated by the business. It excludes interest payable by a company on any borrowings, tax payable on profits, depreciation of fixed assets and amortisation of intangible assets such as goodwill on the grounds that these can significantly distort the view of the underlying performance and can obscure comparisons with other similar businesses.
Equity A company's Equity is the total of its share capital and other reserves, and represents the amount available in aggregate for shareholders after all of the company's Debt has been repaid. Equity Securities usually refers to shares in a company's share capital.
Financial Promotion A communication of an invitation or inducement to engage in investment activity (such as buying and selling Securities ). The Financial Services and Markets Act 2000 (FSMA) restricts these communications and unless certain exemptions apply Financial Promotions must only be communicated by persons authorised by FSMA, unless the contents of the communication have been approved by such an authorised person.
Financial Services Authority Commonly referred to as the City's Watchdog, this is the body responsible for the regulation of financial services and markets in the UK having the functions and responsibilities conferred on it by the Financial Services and Markets Act 2000.
Flotation Also known as an IPO (Initial Public Offering) or "going public". The process by which a company becomes listed. See Listed Company.
FRSFinancial Reporting Standards. Accounting reporting standards for the presentation, disclosure and treatment of accounts laid down by the Accounting Standards Board.
Gearing Almost all companies, irrespective of their size, will be financed by a combination of Debt in one or more forms and share capital (referred to as Equity). The ratio of a company's Debt to its Equity is known as gearing or leverage.
Hedge Fund A hedge fund is a form of investment fund which typically uses a wide variety of trading strategies, techniques and instruments (including Derivatives , short-selling and leverage) rather than simply investing in straight Equity investments, with the aim of achieving a particular strategic objective, which may for example be to achieve above average market returns without taking on more risk than is present in the market or to achieve market returns whilst reducing risk.
Hostile Bid A takeover offer which is rejected by, or does not have the support of, the board of the target company. This is also known as a Contested Bid.
Inducement Fees See Break Fees.
Information Memorandum A sales document prepared for the purpose of eliciting offers for companies and businesses. It will not bind the seller and the seller will disclaim liability for the contents although even if there is a disclaimer of liability, the seller will remain liable for fraudulent misrepresentation claims. Various laws and regulations may be relevant to the preparation of this document. For example, it is likely to be a Financial Promotion.
Insider Dealing Insider dealing is a criminal offence. An individual who has information as an insider (for example as a director or employee of a company or as an adviser to it) is guilty in certain circumstances if he or she deals in Securities that are price-affected Securities (in simple terms Securities where the price or value could be affected by the disclosure of unpublished price sensitive inside information), if he or she encourages another person to deal in price-affected Securities or if he or she discloses unpublished price sensitive inside information. The offences are contained in the Criminal Justice Act 1993 and each term is defined in that statute. A person may also be guilty of the offence of Market Abuse.
Investor Protection Committees These are organisations which represent the interests of large institutional shareholders, and are also known as IPCs. The two most important are the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF). The IPCs issue guidelines on a variety of matters concerning shareholders and, although not having the force of law, Listed Companies generally comply with these requirements, given the significant holdings in Listed Companies that institutional shareholders have.
Initial Public Offering (IPO) See Flotation.
Irrevocable Undertakings Before making a takeover offer, a bidder will want to obtain binding commitments from a limited number of shareholders in the target company that they will accept the bidder's offer. These are called irrevocable undertakings (or "irrevocables") and the Code contains certain rules concerning these and the approach to shareholders in advance of making an offer (since at that stage the fact of the offer will be unpublished price sensitive information). A "hard" irrevocable is one which is binding in all circumstances. A "soft" irrevocable is one which allows a shareholder to accept a higher offer in certain circumstances.
LIBOR London Interbank Offer (or "Offered") Rate. The rate at which banks will offer to make deposits with each other for a given period (normally for a period of between overnight to five years). Debt is often priced by reference to LIBOR (for example 200 basis points above LIBOR, meaning two per cent above LIBOR).
LIFFE Formerly the London International Financial Futures and Options Exchange, LIFFE was purchased by Euronext (the pan European Exchange) in 2001, and is now called Euronext.liffe. It is an exchange that specialises in trading Derivatives.
Listed Company Technically this is a company any class of whose Securities is admitted to the Official List, also known colloquially as a quoted company. Although an English company cannot seek an admission to the Official List unless it is a public company, not all public companies are Listed Companies and the two should not be confused. This is important when we talk about the City Code on Takeovers and Mergers (see the Code).
Listing Rules The Financial Services Authority's rules which lay down the minimum standards for the admission of Securities to Trading and the continuing obligations with which Listed Companies must comply.
Liquidation An insolvency procedure instigated either voluntarily by the shareholders or creditors of a company (voluntary liquidation) or by the initiation of court proceedings (compulsory liquidation) leading to the appointment of an insolvency practitioner (known as the liquidator) whose principal duty will be to realise the assets of the company and distribute them to those entitled. This is also referred to as Winding Up. Insolvency procedures (such as administration and administrative receivership) do not necessarily result in the liquidation of the company.
London Stock Exchange The London Stock Exchange is a recognised investment exchange under the Financial Services and Markets Act 2000 (a market facilitating the buying and selling of Securities by investors). It has its own Admission and Disclosure Standards which are relatively brief compared to the Listing Rules and Prospectus Rules (to minimise overlap). We talk about Securities being admitted to trading on the London Stock Exchange. (The London Stock Exchange used to be the competent authority for the purposes of admission to the Official List before that function was transferred to the UKLA).
MAC This means Material Adverse Change. You will commonly encounter MAC clauses in acquisition or lending documents. For example a buyer of a business or a company may wish to have a right to terminate or "walk away" if there is a MAC in the business of the target company in the period (if any) between signing the contract and the date set for completion. The delay, or gap period, usually arises since certain conditions may require to be satisfied before completion can occur. Similarly a lender may wish to have a right to terminate a lending commitment or immediately demand repayment of funds already advanced if there is a MAC in the business or finances of the borrower. MAC clauses can be drafted in a variety of ways and will be the subject of much negotiation. In Securities offerings, there will often be a so-called "Market MAC", entitling the underwriters to withdraw (or "pull") the offering if there is a MAC affecting the Securities markets generally, such as a currency crisis or market collapse.
Management Buy-out (MBO) When the existing management of a company together with institutional investors (commonly funds managed or advised by Private Equity Houses ) buys the company or division in which they are employed. The management will be incentivised to grow the business and meet financial targets. A Buy Out is a more common transaction in this area. See Private Equity.
Mandatory Offer Under the Code , when a person (itself and together with certain other persons acting in concert with it) acquires shares carrying 30% or more of the voting rights of a company to which the Code applies, that person must make a cash offer to all shareholders at the highest price paid for a share in the target company by it or its concert parties in the previous 12 months. Where a party (and its concert parties) holds or together hold between 30% and 50% of a company's voting rights any increase in that holding will trigger a Mandatory Bid under the Code. See also Whitewash.
Market Abuse This is a civil offence under Part VIII of the FSMA 2000. In order for behavior to constitute market abuse it will fall within the seven types of behaviour set out in the Act. They are: insider dealing, improper disclosure of inside information, manipulating transactions, manipulating devices, disseminating information likely to give a false or misleading impression, and misleading behaviour or distortion. The Market Abuse Directive (MAD) applies to any financial instrument admitted to trading on a regulated market or those where a request for admission to trading has been made.
Market Cap Market capitalisation is the value of the company measured by the price of its shares as quoted on a stock exchange multiplied by the number of shares in issue. A company will be referred to as Small Cap, Mid Cap or Large Cap depending on its approximate market capitalisation.
Nominated Adviser (Nomad) The London Stock Exchange maintains a register of nominated advisers (generally institutions providing financial advice). An applicant company to AIM must appoint a Nominated Adviser in the same way that a company seeking admission to the Official List must have a Sponsor.
Offer Document The document by which a bidder (or offeror) makes a formal takeover offer. In legal terms, it is an offer to enter into a contract made to the shareholders of the target company together with a form of acceptance. Shareholders wishing to accept that offer (and enter into a legally binding contract) complete and return the form of acceptance. Cash offers for Listed Companies and AIM Companies are made by Offer Document prepared in accordance with the Code. Even if a company is not subject to the Code, if a company has a large number of shareholders, an acquisition for cash of that company sometimes proceeds by way of an offer not too dissimilar to a Code offer. This should be contrasted with an acquisition by way of a Share Purchase Agreement. See also Scheme of Arrangement. Following the implementation of the Prospectus Directive, offers for listed companies, AIM companies and even unlisted companies involving transferable Secruties as consideration require the publication of document containing information 'equivalent' to that contained in a Prospectus.
Offering Memorandum or Offering Circular Has the same meaning in the UK as a Private Placement Memorandum but is often used in the US and in international Securities offerings to refer to a Prospectus or equivalent public offering document.
Official List The list maintained as the official list by the UKLA of Securities that have satisfied the requirements of the Listing Rules for admission to listing, not to be confused with the London Stock Exchange's Daily Official List which sets out the prices at which Securities have been traded on the London Stock Exchange. We talk about Securities being admitted to the Official List. To be "admitted to listing", Securities must also be admitted to trading on a recognised investment exchange's market (see London Stock Exchange).
Option An option is the right to buy or sell shares (or any other Security or asset) within an agreed time period and at a price that will be fixed when the option is bought (or otherwise when the agreement is entered into). An Option is similar to a Warrant.
Panel The Panel on Takeovers and Mergers which is a body which oversees the operation of the Code. Individuals are nominated by the Governor of the Bank of England (including those to the position of the Chairman and Deputy Chairman) and also by certain other City, financial services or business representative bodies. The day-to-day operation of the Panel is through the Panel Executive. During takeovers, parties will consult with the Panel Executive, and may be expected to make representations to the Panel Executive and comply with a Panel Executive direction. Appeals can be made to the full Panel, and there can be a further appeal under certain circumstances to an Appeal Committee.
Poison Pill Action taken by the target company which is intended to create difficulties for a bidder or potential bidder. Target companies may, for example, issue large numbers of Securities to the employees (e.g. under an Employee Stock Option Plan or "ESOP"). This is more common in the US (where the term originated) as UK law and regulation is not favourable to poison pill activity. Careful consideration should be given to such proposed courses of action to ensure they do not infringe any laws or regulations (particularly the Code provisions).
Private Equity The term given to a form of asset management on behalf of investors (such as banks, insurance companies and pension funds, and in some instances wealthy individuals). Private Equity funds are pooled investment schemes where these investors commit to advance funds to be managed by professional fund managers (commonly known as a Private Equity House) generally to acquire majority stakes in companies (in certain instances alongside management as minority shareholders). There are other forms of fund management: for example, professional managers investing on behalf of investors in public Securities. The key differences are that, in Private Equity transactions, funds will look to acquire entire companies or majority stakes and that in doing so typically will borrow a significant part of the purchase price (see Debt). The Private Equity fund will also have fewer investments compared to a fund investing in public Securities , where the individual holdings will change regularly, sometimes on a daily basis. Private Equity funds will hold their investments for a longer period and will look to realise their investment through the sale of the company or a substantial part of it to an individual purchaser or on the public markets through a Flotation. These transactions are called Buy Outs. In today's market the term Management Buy Out is becoming outdated and only really applies where the initiative for the transaction comes from the incumbent management. Most Buy Outs are initiated by the Private Equity House , often in response to a seller putting an asset up for sale through an auction process, and would be termed Institutional Buy Outs or, because of Debt, Leveraged Buy Outs (LBOs) (see Gearing). We have only described the classic form of Private Equity. There are different forms of investment: for example, venture capital (or early stage or "seed" investment), development or growth capital. Private Equity transactions may involve the acquisition of private companies from an individual or small group of individuals (though a Share Purchase Agreement) or can involve the takeover of a public company (see Take Private).
Private Equity House The term given to a firm of professional investors who will manage investors' money and seek to generate substantial returns principally through Buy Outs (see Private Equity).
Private Placement Memorandum A legal disclosure document similar to a Prospectus but not required to be published (or required to contain the information required) by the Prospectus Directive. Although not required by the Prospectus Directive, various laws and regulations may be relevant to the preparation of this document (not least the law concerning pre-contractual misrepresentation). Care should also be taken to ensure that there is no Public Offer of Securities requiring a Prospectus.
Prospectus The legal disclosure document containing information about an offer of Securities (and about the nature and terms of the offer) required by the FSA's Prospectus Rules. Subject to certain limited exceptions, a prospectus must be published if a company makes an application for a listing of Securities or the Securities are to be offered to the public in the European Economic Area (EEA).
Prospectus Rules The Financial Services Authority's rules implementing the Prospectus Directive and setting out when a Prospectus is required.
Public Offer of Securities An offer of Securities to the public or to any section of the public which may, subject to certain exceptions, require the preparation and publication of a Prospectus under the Prospectus Rules.
Recommended Bid A takeover bid which is recommended by the board of directors of the target company. Where no recommendation is given or the board of directors reject the offer, the bid is referred to as a Hostile Bid.
Related Party Transaction These are transactions (subject to certain exceptions) between (a) directors or significant shareholders of a Listed Company (or any of its subsidiaries), or a person who has in the past 12 months been such a director or significant shareholder, or any associated person or entity; and (b) the Listed Company (or any of its subsidiaries). Under the Listing Rules Related Party Transactions require shareholder approval. The AIM Rules contain a similar, but less onerous, concept for AIM Companies.
Rights Issue An offer of new Securities to existing shareholders in proportion to their existing holdings.
RNS The regulatory information service operated by the London Stock Exchange to enable Listed Companies and AIM Companies to distribute information to the public. It is fundamental to the maintenance of orderly financial markets that the "market" is regularly informed of developments concerning Listed Companies and AIM Companies. Information disclosed through RNS will cease to be unpublished price-sensitive information (see Insider Dealing). Listed Companies and AIM Companies, through their financial advisers, will send information electronically to the London Stock Exchange for distribution through RNS; this is often referred to as sending information "down the wire". (RNS is one of a number of "regulatory information services" approved by the FSA under the Listing Rules. Listed Companies can choose which "regulatory information service" they wish to use, but must choose one which is on the FSA's approved list.)
Sale/Leaseback A transaction where a company simultaneously sells an asset and enters into a lease to lease back the use of that asset. It is usually seen as a method of raising money from a company's assets. A sale and leaseback arrangement is useful when companies need to untie the cash invested in an asset for other investments, but the asset is still needed to operate the business.
Scheme of Arrangement An arrangement under the Companies Act 1985 between a company and its shareholders (or its creditors) to alter the capital structure in some way. The scheme involves a court approval process and can be used as an alternative way of structuring a Recommended Bid (but not a Hostile Bid). In a conventional takeover offer, if a bidder receives 90% acceptances it can invoke a compulsory acquisition procedure under the Companies Act 1985 to acquire the remaining shares. Because a Scheme of Arrangement proceeds with the approval of 75% of shareholders, control of the entire company can be achieved at a lower "acceptance" level.
Secondary Buyout An exit route used in Private Equity transactions where the portfolio company is sold to another Private Equity House backed vehicle. Private Equity Houses will seek to realise the investments they have made generally by selling the whole or a majority of the portfolio company to an individual purchaser or to the public markets through a Flotation. This realisation is known as an Exit. However, it is becoming common now for a Private Equity House to realise its investment by selling to a purchaser backed by funds managed by another Private Equity House , which believes that there is still considerable growth opportunity. The management team will be expected to re-commit to the purchasing entity (by retaining a substantial shareholding).
Section 793 Notice This is a notice sent out by a public company under the Companies Act requesting information on the ownership (including as to beneficial interests) of its share capital. It allows the company to identify the effective ownership of its shareholder base and is commonly used by companies the subject of bid rumour.
Securities A wide variety of different types of investments, including shares, Debt Securities , units in a Collective Investment Scheme, Warrants , Options , Derivatives and certificates representing Equity or Debt Securities. Various statutes and regulations use the term in different ways and care should be taken to check and use the appropriate definition. You are familiar (we hope) with the term share (in its simplest form a share is a collection of rights representing part ownership of a company) and the various types of share that exist. We explain elsewhere in this glossary some of the other terms.
Securities Exchange Offer This is a takeover offer where the consideration offered for the target company's shares is Securities of the bidder itself. It has a particular definition under the Code
Securitisation A means of raising finance secured on the back of identifiable cash-flows derived from a particular class of assets, such as rents, receivables or mortgages. The issuer in effect receives a lump sum in cash by selling its right to receive future cash receipts. For example, in 1997 David Bowie raised $55m by selling the royalty revenue to be generated from future sales of a number of his hit records.
SPA (Share Purchase Agreement or Sale & Purchase Agreement) The key document in the purchase of a company negotiated privately between a purchaser and the seller or a group of sellers. This should be contrasted with a public takeover where the number and spread of shareholders make it impractical to negotiate privately with all shareholders or where the Code requires an Offer Document. The agreement will set out the agreed terms and conditions for the purchase of shares in a company or group of companies. Where a business or series of assets are being acquired the term given to the document is a Business Purchase Agreement (or a BPA). The SPA will typically contain Warranties.
Sponsor A company seeking admission to the Official List must have a sponsor (as must a Listed Company in relation to a transaction or matter required by the Listing Rules to be reported to the UKLA ). A Sponsor will typically be an investment bank or a broker, and must be approved by the UKLA to act as a sponsor. The Listing Rules set out the services expected of a sponsor.
Standstill Agreement In a takeover situation this is an agreement between a company and another party (whether or not a shareholder) restricting the ability of that party to acquire shares in, or other Securities of, the company. It is commonly used in the context of a Recommended Bid where the target board has provided a potential bidder with access to confidential information to assist the bidder in finalising its bid. In addition to a confidentiality undertaking from the potential bidder, the target board may request a Standstill Agreement.
Syndication As a way to spread the risk of investing or lending a large amount of money, the investor or bank may share out that investment or loan amongst a group of other investors or banks - a "syndicate".
Take Private In the UK market, the term "Take Private transaction" (otherwise known as "public to private" or "P2P") is used to describe a Private Equity backed bid for a Listed Company (or an AIM Company ). The acquisition is usually achieved by way of an offer under the Code made by a special purpose vehicle owned by the funds managed by the Private Equity House (and perhaps the management team). Once the appropriate level of target shares has been acquired by the bid vehicle, the public company will then be De-listed and re-registered as a private company. Take Private can also take the form of a significant founder shareholder (with his or her own funds and perhaps with support from wealthy individuals or banks) through a special purpose vehicle acquiring all of the company and De-listing the Company.
UK Listing Authority (UKLA) This is the Financial Services Authority acting in its capacity as the competent authority for the purposes of the Financial Services and Markets Act 2000 to regulate the admission of Securities to the Official List.
Underwriters In conjunction with an application for admission to the Official List a company may seek to issue further Securities to raise finance for itself (a capital raising), and/or shareholders may wish to sell Securities (invariably shares), to new investors. The underwriter is typically an investment bank or broker which agrees with the issuing company and/or the selling shareholders that, for a fee, it will subscribe for the shares or buy the shares if they are not acquired by new investors. Similar underwriting arrangements will apply for Listed Companies (and, less commonly, other companies) seeking to raise further finance through a capital raising.
Warrant A warrant is an instrument (an agreement) that gives the holder the right to subscribe for a share in a company (or other asset) at a fixed price at a stated future date or dates. A warrant is similar to an Option.
Warranties These are representations about a company and the underlying business and assets and will appear in the SPA. If a seller cannot make those statements without qualification, it will qualify them by providing a Disclosure Letter to the buyer. If a warranty is incorrect the buyer may have an action for damages (and, in some instances, a right of rescission) against the seller.
White Knight Where a target company has received a Hostile Bid , or becomes aware that a Hostile Bid may be made, it may seek an alternative bidder for the target company. This alternative bidder is known as a White Knight.
Whitewash This has two meanings: it is the procedure under the Code whereby shareholders in the target company waive the need for a Mandatory Offer. It is also a procedure under the Companies Act 1985 which permits private companies, in certain circumstances, to "whitewash" (i.e. approve) an action which would amount to unlawful financial assistance.
Winding up See Liquidation.
In this glossary we have sought to explain in fairly simple words some rather complex terms. You will appreciate that in many instances the law or regulatory background is more complex than we have explained. Accordingly this glossary should not be relied upon as a comprehensive and accurate summary of the subject area or concept described.