Buyout Nomenclature

Joseph W. Bartlett, Special Counsel, McCarter & English, LLP

The typical "buyout" is a noncontroversial device to descend the ownership of certain assets (held in corporate form) from one set of proprietors to another - a "plain vanilla" deal in today's jargon. The more celebrated transactions are denominated "trophy deals," honoring the heroic risks that the heroically egoed promoters take (albeit with other people's money).  Buyouts used to be called "leveraged buyouts" (or "LBOs") because, typically, the transaction involves the use of debt by the buyer to leverage the purchase price. When some LBOs failed because the debt burden was insupportable, the industry reacted by ratcheting down typical ratios of debt to equity and euphemistically relabeling LBOs to BOs, i.e., buyouts.

When a buyout involves the creation of a new corporate party, that party is universally known as "Newco." If one of the parties to the transaction includes a parent and one or more subsidiary corporations, each subsidiary is ranked by its distance in the hierarchy from the parent—first-tier subsidiary, second-tier subsidiary, and so forth.

A buyout led by existing management (sometimes entailing the recapitalization of a single corporate entity, with management coming out on top in terms of their share of the postclosing equity) is referred to as an "MBO."

The various types of tax-free reorganizations are often referred to by the last letter of the section describing the transaction in question in § 368(a)(1) of the Internal Revenue Code. A statutory merger is an "A" type, a sale of assets a "C" type, etc.

The firm being acquired is ordinarily referred to as the "Target." The acquiring firm is not so easily labeled since the buying entity may be an existing business corporation, a newly organized subsidiary, or, as a legal matter, the same corporate shell the target formerly occupied (as in a reverse merger). Hence, the term acquiring entity will be used to denominate the entity ultimately controlling the assets in question once the transaction has closed.

When, as is almost always the case, various categories of debt make up the package,[1] senior debt ranks in preference to subordinated debt, the latter labeled, variously, "subdebt," "mezzanine," and/or "junk."

[1] Whether senior or subordinated, the categories are described as "strips".

Joseph W. Bartlett, Special Counsel,

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