Arm’s Length Transaction

An arm’s length transaction is a business deal where the buyers and sellers act independently. Neither party influences the other. Normally, the parties will have no pre-existing relationship, and both parties will have equal access to information relating to the deal.

This glossary provides an overview of some key legal terms for startups. It's essential to consult with a legal professional to ensure a comprehensive understanding of these terms and their implications for your specific situation.

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Asset Deal

During mergers and acquisitions (M&As), buyers may choose to purchase a company’s underlying assets instead of its stock (shares). These transactions are called asset deals.

Liquidation Preference

A term in preferred stock that specifies the order in which proceeds are distributed to shareholders in the event of a liquidation, dissolution, or sale of the company.

Mergers And Acquisitions

Mergers are like marriages in that both companies agree to the union, and both give up a certain amount of control and independence to become a new institution. After a merger, the newly combined entity takes on a new name and issues new stock in that name. Typically, mergers occur between companies of roughly equal size. Acquisitions, as the name suggests, are an outright purchase of one company by another, usually a larger company. Even the language surrounding acquisitions is more aggressive — the company being purchased is referred to as the “target company.” If the acquiring company buys 51% or more of the target company’s stock, it can assume control whether the target company likes it or not, in which case the acquisition is called a “hostile takeover.”