A Glossary Of Terms Relating To Corporate Law

This article provides an introduction to a few of the key terms and areas of activity in corporate or company law

. Corporate lawyers will be required to assist with the complexities of all sorts of reorganisations of business operations, mergers and acquisitions and tax issues and the snippets below are only an introduction to these topics.

Mergers

A merger is to some extent self explanatory. It is process of two companies choosing to join together to form one new company, pooling their assets and liabilities to create efficiencies and increase market share. A merger is distinct from an acquisition (see below) because the companies join forces on a more-or-less equal footing with control of the newly formed entity being shared, rather than one company taking control of the other.

Where two companies that operate in the same market, and are therefore competitors (providing the same service or function), join forces it is known as a horizontal merger. Vertical mergers on the other hand involve companies at different steps in the supply chain, for example a tractor manufacturer and a supplier of components merging.

The opposite of a merger is, logically, a demerger and describes a scenario whereby a company splits in two or a part of a company splinters away to form a new smaller company.

Acquisitions

An acquisition involves the process of one company taking control of another company, often referred to as the target. In relation to publicly listed companies, the process is otherwise known as a takeover, and would be achieved by buying up at least 51% of the target companys shares. Takeovers can be described as being hostile or friendly. Hostile takeovers occur when the purchasing company do not agree the takeover with the board of the target company, whereas friendly takeovers usually involve offers being made by the purchaser, terms being negotiated and both parties ultimately reaching an agreement.

Subsequently, the two companies can be consolidated to form a single entity in what is commonly referred to as a merger, or, as is often the case, they are maintained as separate corporate entities with the control of the target company passing to its new owners. The collective term Mergers and Acquisitions is used to refer to all such deals because in practice the lines can get blurred between mergers and acquisitions, frequently because acquisitions will be referred to as mergers for PR reasons.

Joint Ventures

This term describes scenarios in which two or more companies partner to form a new company by contributing assets and resources rather than merging the entirety of each company. JVs are usually established to run for a set term and often with a specific strategic aim, for example, to complete a construction project or break into a particular market. The individual companies will share the spoils of the enterprise as well as the liabilities.

Reorganisations

A company can undergo a reorganisation in a number of ways. They can reorganise the structure of shares issued by the company, for example issuing each shareholder with one share priced at 2 for every two they had previously priced at 1. This is otherwise known as a corporate action. Secondly, they can reorganise the companys structure to, for example, sell off or shut down operations which are less successful and concentrate on those that are. Thirdly they can again reorganise the companys structure but this time by merging areas of operation within the company.

Corporation Tax

Otherwise known as company tax, it is the tax levied by the HMRC (Her Majestys Revenue and Customs) on the money that corporations make, in other words their income and any capital gains (known as chargeable gains) they generate. It is roughly equivalent to the income tax and capital gains taxes that individuals are liable to pay.

by: Stuart Mitchell

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