Publications - Corporate
Glossary of Corporate Finance Terms
This is intended as a useful ready reckoner of some of the most commonly used corporate finance terms. It is not intended to provide an exhaustive corporate finance glossary, nor do the definitions provide the last word in the subject.
Angel
A private investor (usually an individual) in a company who generally invests mostly Equity; often a consortium of angel investors invests alongside Institutional Investors; very common in relation to technology companies; an angel investor will not usually have the same extent of Investor Protections that an Institutional Investor enjoys.
Bad Leaver Provisions
Provisions built into the Articles of Association of a company which stipulate that if an employee (or a director who is also a shareholder) resigns his position to work for a competitor, resigns within so many years after an investment or is validly dismissed, then he must sell his shares as directed by the company at the lower of fair market value or par/nominal value.
Bimbo
An acronym for a "Buy In Management Buy Out" used to describe the buyout of a company when there is a combination of incumbent and new management in the buy out team.
Come Along Rights
See "Tag Along Rights".
Cumulative Preference Shares
A type of Preference Share on which the dividend payable is cumulative so that if for any reason dividends are not paid or are deferred, the shareholder is entitled to receive the missing dividend payments when the company is able again to pay dividends.
Drag Along Rights
A bundle of rights granted to investors in a company which entitle the investor to force an Exit through listing, flotation or sale of the entire issued share capital of the company. Also known as "Pull Along Rights".
Due Diligence
An investigation carried out by lawyers and accountants on behalf of a potential investor in or purchaser of a company into the financial and commercial affairs of that company.
Equity
The share capital of a company; sometimes limited to only ordinary voting shares.
Exit
An investor's realisation of its investment in a company through the listing, flotation or sale of the company.
Gearing
The ratio between a company's debt and equity; the more borrowing, the higher the gearing.
Good Leaver Provisions
Provisions built into the Articles of Association of a company which stipulate that if an employee (or director who is also a shareholder) resigns his position in certain limited circumstances, or retires, or is constructively, unfairly or wrongfully dismissed or dies, then he (or his estate) must sell his shares as directed by the company at fair market value.
Institutional Investor
A professional investment house; may be a company in its own right or a quasi-government agency; examples include 3i plc and Scottish Enterprise.
Internal Rate of Return (IRR)
The annual gain realised on an investment expressed as a percentage of capital invested; institutional investors will set a target IRR for every investment made in order to predetermine the potential value of an investment.
Investment Agreement
See "Subscription/Shareholders Agreement".
Investor Director
A non-executive director appointed by an institutional investor in a company to protect the investor's interests and to give the company guidance and expertise; this director is not subject to the usual rules about rotation and retirement and usually is entitled to a fee for his services; investment documents may require the investor director to be present for a board meeting to be valid.
Investor Protections
A bundle of rights in favour of the investor built into the Subscription/Shareholders Agreement and the Articles of Association to allow the investor to protect its investment; for example, the right to receive monthly management accounts and other financial information from the company, restrictions on borrowing without consent of the investor and restrictions on changing accountants without the consent of the investor. These rights are in addition to and take precedence over normal shareholder rights.
Leveraged Buy Out
The buy out of a company where the buy out team uses mostly funds borrowed for the purpose (i.e. debt) and little of its own capital.
Loan Notes/Loan Stock
A hybrid form of debt and equity in that they rank as unsecured obligations by the company and carry no right to vote in general meetings of the company but are created by the company, issued by the directors and may be transferred as if they were shares; they may carry a right to interest which will be fixed; they may be redeemable or convertible or both; they may be guaranteed by a bank or even be secured through a debenture or Floating Charge.
Mezzanine Debt
A layer of finance between Senior Debt and Equity which ranks behind Senior Debt in the event of the insolvency or liquidation of the company; often the interest rate on this layer of debt is higher than that paid on Senior Debt but the long term return is lower than that on Equity. This may be accompanied by share warrants to provide the lender some "equity upside" in compensation for the higher risk profile.
Option
The right, but not the obligation, to purchase or subscribe for shares (call option) or to sell shares (put option) at a certain price during a specified time period.
Preference Shares
A class of share which carries a dividend (usually fixed) and which ranks ahead of ordinary shares but behind Loan Stock in terms of payment of the dividend and return on capital on liquidation; they may or may not carry a right to vote at general meetings; sometimes they only carry a right to vote in the event of default in payment of the dividend; they may also be redeemable, cumulative, convertible or any combination of these.
Pull Along Rights
See "Drag Along Rights".
Ranking Agreement
An agreement among lenders and the company which sets out the order in which the various lenders will be repaid in the event of liquidation of the company.
Ratchet
An incentive arrangement whereby the management of a company will receive more shares if the company performs well; can also be used by an institutional investor to increase its shareholding immediately prior to an exit.
Redeemable Preference Shares
A type of Preference Share which is a hybrid of debt and equity in that the nominal value (and sometimes a premium as well) of the shares must be repaid to the shareholder (i.e. redeemed) at set dates.
Senior Debt
A term loan facility made available for a fixed purpose which is secured such that repayment of the loan in the event of the debtor company's insolvency or liquidation, ranks first before repayment of any of the company's other secured debts.
Subscription/Shareholders Agreement
An agreement entered into by all the shareholders of a company setting out how the company is to be run and granting additional rights and controls to the institutional shareholders. Also sometimes known as an "Investment Agreement".
Tag Along Rights
A bundle of rights granted to institutional investors in a company (usually within the Subscription/Shareholders Agreement) which allow the investor to participate in and benefit from any flotation, listing, sale or other exit initiated by the non-institutional shareholders. Also sometimes known as "Come Along Rights".
Working Capital
The capital available for the day to day running of the company; often provided by an overdraft facility rather than Senior Debt or Equity.
Written July 2001. Reviewed January 2002.
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