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Glossary of Legal Terms

Capitalized terms within quotations found in a definition have the meaning given to them in this glossary.

A

Accounts Payable Money which a company owes to vendors for products and services purchased on credit. This item appears on the company's balance sheet as a current liability, since the expectation is that the liability will be fulfilled in less than a year.

Accounts Receivable The right to receive payment for property sold, leased, licensed or services provided. Also referred to as an “account” or a “receivable”.

Accrued (a) Earned or accumulated but not yet received or receivable.(b) Vested (having an immediately secured right of present or future

enjoyment).

Accrued Liability The amount owing on a given day in respect of salaries, periodic payments, interest and similar items.

Acquisition A transaction in which all or a controlling portion of the equity, or substantially all of the assets, of a business are acquired.

Acquisition Agreement

An agreement pursuant to which an acquisition is effected, either in the form of a stock purchase agreement or an asset purchase agreement.

Affiliate In the case of a corporation, intercompany relationships, however indirect, where the parent-subsidiary relationship does not apply.

Agent (vs Principal) A person who is authorized to act on behalf of another (called the “principal”) in a way that affects the principal’s legal position in relation to third parties.

Agreement in Principle

See “Letter of Intent”.

Amortization (a) The scheduled repayment of the principal amount of a loan. (b) Under “GAAP”, a periodic reduction of earnings representing the

diminution in value of intangible assets. Compare “Depreciation”.

Arbitration A form of alternative dispute resolution. Submitting a controversy to an impartial person (the “arbitrator”) chosen by the parties in the dispute to determine an equitable settlement. It is regulated by the Arbitration Act, 1965

Arbitration Agreement

A written agreement providing for the reference to arbitration of any existing dispute or any future dispute relating to a matter specified in the agreement, whether an arbitrator is named or designated therein or not.

Arm’s Length Used to describe a transaction that is at least as favourable as one that would have been entered into with a person that is not an affiliate.

Articles of Association Often simply referred to as the “articles”, this document will generally regulate a company’s internal affairs and management. Articles of association typically govern the issuing of shares, the different voting and dividend rights attached to different classes of share, restrictions on the transfer of shares, the rules of

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board meetings and shareholder meetings, and other similar issues.The articles of association are a requirement for the establishment of a corporation under the Companies Act, 1973. Together with the memorandum of association, they form the constitution of a company. Under the Companies Act, 2008, the articles of association and the “Memorandum of Association” will be replaced by the “Memorandum of Incorporation”.

Asset Purchase Agreement

An agreement to acquire assets, typically all or substantially all of the assets, or all the assets comprising a separate business unit, of another entity.

Assignment The transfer by one party (an “assignor”) to another party (an “assignee”) of rights under a contract between the assignor and a third party. Compare “Novation” and “Participation Agreement”.

Audit The examination of - 

(a) financial statements with the objective of expressing an opinion as to their fairness or compliance with an identified financial reporting framework and any applicable statutory requirements; or

 (b) financial and other information, prepared in accordance with

suitable criteria, with the objective of expressing an opinion on the financial and other information;

Auditor An individual qualified (in the relevant jurisdiction) to conduct audits. An auditor may be an internal auditor (an individual whose primary job function is to audit his or her own company) or an external auditor (an individual from outside the company, who typically is employed by an auditing firm who handles many different clients).

Authorized Share Capital

The maximum amount of share capital that a company is authorized by its constitutional documents to issue to shareholders. Part of the authorized capital can (and frequently does) remain unissued. The part of the authorized capital which has been issued to shareholders is referred to as the issued share capital of the company.

B

Balance Sheet A financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. The balance sheet must follow the following formula: Assets = Liabilities + Shareholders’ Equity

Basis Point One one-hundredth of one percent (0.1%).

BEE A program launched by the government of South Africa to promote the achievement of the constitutional right to equality, increase broad-based and effective participation of black people in the economy and promote a higher growth rate, increased employment and more equitable income distribution. It is also aimed at establishing a national policy on broad-based black economic empowerment so as to promote the economic unity of the nation, protect the common market, and promote equal opportunity and equal access to government services.

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In 2007 the BEE Codes of Good Practice were released by South African government. This newest release is also known as Broad-Based Black Economic Empowerment (B-BBEE), in response to criticism of the narrow-based programs instituted previously.

Belt and Suspenders Descriptive of a contract provision that is unnecessary because its subject matter has already been covered in another provision or document.

Beneficial Interest Right to enjoy and use a property, and to otherwise benefit from its possession. Beneficial interest usually accrues to the legal owner but may be vested in some other party, such as the beneficiary of a trust.

Beneficial Ownership Descriptive of an indirect interest in property. For example, an agent may be the “record owner” of property on behalf of its principal, who is the “beneficial owner”. The concept of beneficial ownership is also applicable to the relationship of a parent company and a second-tier subsidiary: the parent is considered the beneficial owner of the shares of the second-tier subsidiary. Also known as “Equitable Ownership”.

Blacklining The marking of a document to illustrate changes made from a previous version. Also referred to as “redlining”.

Board of Directors Group of individuals elected, usually at an annual meeting, by the shareholders of a corporation to oversee the management of the corporation. The members of a board of directors hold ultimate decision-making authority and, in general, are empowered to: set the company’s policy, objectives, and overall direction; adopt bylaws; name members of the advisory, executive, finance, and other committees; hire, monitor, evaluate, and fire the managing director and senior executives; determine and pay the dividend; and issue additional shares. Members are paid for their services (in cash and/or shares), meet several times each year, and assume legal responsibility for corporate activities.

Boilerplate Contract provisions that are standard and in most cases not heavily negotiated.

Bond A debt security in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a prescribed interest rate. Bonds are used by companies, municipalities, domestic and foreign governments to finance a variety of projects and activities.

Breach Failure by a party to perform a contractual obligation, or the making of a false representation.

Bring Down (a) The repetition of a representation subsequent to the date it was originally made.

(b) A supplemental search of public records (for example, offices where financing statements are filed and secretary of state corporate records) to determine whether any changes have occurred since a previous search.

Business Trust/Trading Trust

A Trust that carries on business; a legal organization set up for the control and management of assets and property. A business trust is managed by appointed trustees who hold the title to the business’ property for the benefit of one or more beneficiaries.

Buy/sell Provision A provision in an agreement between co-owners of a business that governs what happens if a co-owner dies, is forced to leave the business or chooses to leave the business. The provision generally controls what events trigger a

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buyout, who can buy the interests of a deceased or departing owner and at what price.

By-Laws The official rules and regulations which govern a company or corporation’s management, contained in a corporation’s “Constitutional Documents”. By-laws are self-imposed rules that constitute an agreement between a corporation and its members to conduct the corporate business in a particular way.

C

Call (vs Put) A right to purchase a specified asset in the future at a set price. Compare “Put”.

Capital In general, it refers to financial resources available for use. Its specific definition depends on the context in which it is used. For example, it can include (i) financial assets or the financial value of assets, such as cash, or (ii) the factories, machinery and equipment owned by a business.

Carveout A specific exception to a restrictive covenant. An example of a carveout to a covenant restricting liens would be an exception permitting mechanics’ liens.

Cash Collateral Cash or cash equivalents that are deposited to secure an obligation.

Cash Flow Incomings and outgoings of cash over a given period of time, representing the operating (trading) activities of a company. Cash inflows usually arise from one of three activities: financing, operations or investing. Cash outflows result from expenses or investments.

Certificate of Incorporation

A legal document relating to the formation of a corporation, issued by the relevant government registry as confirmation of the due incorporation and valid existence of the company.

Change of Control Provision

A provision pursuant to which a change in the voting control of a party (usually by reference to a change in the ownership of a stated percentage of voting shares or a significant change in the composition of the board of directors or other governing body) gives rise to a remedy such as termination of the contract or acceleration of indebtedness.

Close Corporation A corporation in which shares are held by one or a very small number of shareholders. In South Africa, close companies are defined in and governed by the Close Corporations Act, 1984.

Closing The satisfaction of the conditions precedent to either (i) the effectiveness of an agreement or (ii) some action to be taken under an agreement or agreements (for example, the funding of a loan or the transfer of title to real estate).

Closing Checklist A list of closing documents used to keep track of the status and satisfaction of conditions precedent.

Commitment Letter An agreement to enter into a transaction, based on a summary of terms, and subject to completion of documentation and satisfaction of other conditions. Most often provided by Lenders committing to a debt financing transaction. Compare “Proposal Letter” and “Letter of Intent”.

Companies Act, 2008 (future) and Companies Act, 1973 (current)

Legislation that sets out the statutory requirements for forming and maintaining a registered Company in South Africa. The Companies Act, 2008 will replace the current Companies Act, 1973 (as amended by the Corporate Laws Amendment Act) and amend the Close Corporation Act, 1984.

Company An association of people formed to carry on some business or undertaking in

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the association’s name. A company may be organized in various ways for tax and financial liability purposes. There are several types of companies, such as a sole proprietorships, limited partnerships, and corporations.

Competition Act, 1998 Legislation that sets out a framework to promote and maintain competition in South Africa. Three institutions are created under the Competition Act, 1998 to further its purpose: (i) the Competition Commission; (ii) the Competition Tribunal and the (iii) the Competition Appeal Court.

Competition Commission

A statutory body constituted under the Competition Act, 1998 by the government of South Africa empowered to investigate, control and evaluate restrictive business practices, abuse of dominant positions and business mergers. The goal of the Competition Commission is to achieve equity and efficiency in the South African economy.

Compounding A method of interest accrual on a debt obligation, in which the accrued amount of interest is periodically added to the principal amount of the obligation instead of being paid in cash.

Condition Precedent A requirement that some action be taken before a contractual obligation is performed or is enforceable. Also referred to as a “condition”.

Consent An agreement by a party to permit a contractually prohibited action.

Constitutional Documents (Constitution of a company)

In relation to artificial persons, the constitutional documents (sometimes referred to as the charter documents) of the entity are the documents which define the existence of the entity and regulate the structure and control of the entity and its members. The precise form of the constitutional documents depends on the type of entity and its jurisdiction.

Construction Loan Agreement

An agreement to make loans used to finance the construction of a building or other project. It provides for multiple drawdowns, each of which is subject to the satisfaction of conditions relation to the construction process (“Milestones”).

Contingent Liability The possibility of an obligation to pay certain sums dependent on future events.

Convertible Share A share which can be exchanged for a specified amount of another, related security, at the option of the issuer and/or the holder.

Corporate Governance

The modern definition calls it the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationship with its all stakeholders (financiers, customers, management, employees, government, and the community).

Corporation The most common form of business organization that is given legal rights separate from its owners under statute. A corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. This form of business is characterized by the issuance of shares, the limited liability of its owners (shareholders are not held personally liable for the corporation’s debt) and its existence as a going concern (perpetual existence).

Counterparty Another party to a contract, used primarily in the context of hedging agreements.

Covenant A provision that obligates a party to either take (an “affirmative covenant”) or

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refrain from taking (a “negative covenant”) an action, or which requires the maintenance of some defined measure of financial performance (a “financial covenant”).

Covenant not to Compete

An agreement not to engage in, or acquire an entity that engages in, activities that compete with the business of the recipient of the covenant.

Credit Agreement An agreement under which one or more parties (the “lenders”) provide credit facilities (such as revolving loans, term loans and letter of credit facilities) to another party (the “borrower”). Compare “Debt Security”.

Creditor A party that is owed money by another party (the “debtor”).

Cross-Acceleration A provision in an agreement (usually a debt agreement) providing that it is a default by a party if its other debt has been accelerated.

Cross-Default A provision in an agreement (usually a debt agreement) providing that it is a default by a party if its other debt has been accelerated.

Cross-Reference A reference in one provision of an agreement to another provision. Example: “Proceeds of sales permitted under this section 2(a) shall be applied in the manner set forth in section 3(b).”

D

Debenture A debenture is defined as a certificate of agreement of loans which is given under a company's stamp and carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of interest rates) and the principal amount whenever the debenture matures.See "Debt Security".

Debt See “Indebtedness”.

Debt Security A security representing a debt of the issuer, and is not secured by a physical asset or collateral. A debt security is functionally similar to a bank loan, but the nomenclature is different: A lender makes loans to a borrower under a credit agreement. An issuer sells debt securities to an investor or note purchaser pursuant to an indenture or a note purchase agreement. Compare “Credit Agreement”.

Debtor A party that owes money to another party (the “creditor”).

Deed An agreement pursuant to which an interest in real property is conveyed.

Default Failure to make required debt payments on a timely basis or to comply with other conditions of an obligation or agreement.

Deficit A situation in which liabilities exceed assets, expenditures exceed income, imports exceed exports, or losses exceed profits.

Delivery Delivery of an executed contract by one party to the other parties in a manner demonstrating such party’s intent to be bound.

Depreciation (a) In accounting, an expense recorded to allocate a tangible asset’s cost over its useful life. Under “GAAP”, the charge to earnings over time representing the diminution in value of fixed assets.

(b) A decrease in the value of a particular currency relative to other currencies.

Compare “Amortization”.

Derivative Short for derivative instrument, a contract between two or more parties whose

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value is based on the performance of an underlying financial asset, index or other investment. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and various domestic and foreign indices.

Director Generally, any member of a board of directors of a company or corporation who shares with the other directors the legal responsibility of control over the offices and affairs of the company or corporation. Under the Companies Act, 1973 and 2008, the definition of director includes any person occupying the position of director or alternate director of a company.

Discounted Cash Flow (DCF)

Value of the anticipated revenue stream from an investment as at today or on any given date. Because money can grow by itself (when placed in an interest earning account) a dollar received today is less valuable than a dollar received in the future. This quality (the “time value of money”) makes choosing among investment opportunities (requiring different sums, and having different maturity periods and rates of return) a difficult process. Discounted cash flow techniques are applied to “bring-back” (discount) the anticipated returns to a common ground their present value.

Distribution (a) The payment of a dividend, capital gain, principal or interest by the issuer of a security to the securityholders.

(b) A company’s allocation of income and expenses among its various accounts.

(c) The sale of a large amount of stock in such a manner that the price is not adversely affected.

Dividend Any amount distributed by a company to its shareholders such as any profits distributed, including an amount equal to the nominal value, at the time of issue thereof, of any capitalization shares awarded to shareholders and the nominal value of any bonus debentures or securities awarded to shareholders.

Domicilium(Domicilium Citandi Et Executandi)

The address at which a party chooses to receive all communication and be served if necessary, which must be supplied by a party who is applying for credit or entering into a contract.

Drag Along Right A right granted by one securityholder (“Holder A”) to another (“Holder B”) to include Holder A’s securities in a sale by Holder B of its securities.

Drop Dead Date A date specified in an agreement on which one party has the right to terminate the agreement if the other party has not satisfied or waived certain conditions by such date.

Due Diligence An examination of a business or a portion thereof in connection with a proposed transaction.

Due Diligence Out A condition giving a party the right to terminate an agreement if it is not satisfied with the results of its due diligence.

E

Earn-Out Consideration for an acquisition that is paid to the seller after the closing only if certain financial performance goals are satisfied by the target.

EBITDA Earnings before the deduction of interest, tax expense, depreciation and amortization. EBITDA is considered a key indicator of a company’s

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profitability and is used in many financial covenants.

Encumbrance Any right to, interest in, or legal liability upon real property that does not prohibit passing title to the land but that diminishes its value. Property is said to be “encumbered” if restricted in such a way.

Enforceability A contract is enforceable if a court would enforce it either by granting monetary damages or equitable relief.

Engagement Letter An agreement under which a professional or professional firm (e.g., an accounting firm, an investment bank or a financial advisory firm) is retained.

Entity An organization that is recognized as a legal person, including a corporation, a general partnership, a limited partnership, a limited liability company, and a trust.

Equitable Ownership See “Beneficial Ownership”.

Equity An investment in an entity, such as common stock, entitling the investor to a share of the entity’s profits and enterprise value after satisfaction of creditors’ claims.

Escrow An arrangement in which two or more parties deliver documents, money or property to a third party (the “escrow agent”), which agrees to deliver such documents, money or property in a specified manner upon the satisfaction of certain conditions.

Event of Default An event, act or condition that allows a party to exercise remedies under a contract, such as acceleration of debt under a credit agreement.

Execution The signing of a contract.

Execution Copy The final draft of an agreement, without draft lines, and often marked “Execution Copy” on the front page to identify it as such.

Execution Page See “Signature Pages”.

Exhibit An attachment to a contract which is usually a form of another agreement or document. Compare “Schedule”.

F

FFE (Furniture, fixtures and equipment)

Movable furniture, fixtures or other equipment that are have no permanent connection to the structure of a building or utilities. These items are considered personal property unless they are affixed to the real property. See also “Fixtures”.

Fiduciary A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.

Fiduciary Duty The legal duty (responsibility) to act in the best interests of another individual (including persons, companies and organizations). Certain relationships give rise to this type of duty: trustee and beneficiary, guardian and ward, principal and agent.

Financial Statements Tables showing a person or entity’s financial condition as at a particular time and the results of its operations for a specified period. The different types of financial statements include a balance sheet, an income statement (also called a statement of profits and losses), a statement of changes in equity and a

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statement of cash flows.

Fixture In real estate, a part of a piece of property that is permanently attached so that to move or remove it would damage the property. The fixture is considered a part of the property if it shares the same useful life as the rest of the property.

Force Majeure Clause A provision that excuses a failure to perform resulting from “acts of God” and other circumstances outside the non-performing party’s control.

Foreclosure A sale by a secured party of collateral, the proceeds of which are used to satisfy the secured obligations. See “Security Interest”.

Franchise A form of business organization in which a firm which already has a successful product or service (the “franchisor”) enters into a continuing contractual relationship with other businesses (“franchisees”) operating under the franchisor's trade name and usually with the franchisor’s guidance, in exchange for a fee.

Further Assurances Clause

A provision requiring the parties to take such further actions as may be necessary to achieve the results contemplated by the contract.

G

GAAP See “Generally Accepted Accounting Principles”.

Generally Accepted Accounting Principles

Term used to refer to the rules of accounting employed by certified public accountants used in any given jurisdiction. Also referred to as “GAAP”.

General Meeting Gathering of the directors and shareholders of corporation. The main purpose of a general meeting is to comply with legal requirements, such as the presentation and approval of the audited accounts, election of directors, and appointment of auditors for the new accounting term. Other items that may also be discussed include compensation of officers, confirmation of proposed dividend, and issues raised by the shareholders.Under the Companies Act, 2008, an “annual general meeting” is required to be held each calendar year. Under the Companies Act, 1973, a general meeting is required to be held not more than nine months after the end of every ensuing financial year of that company and within not more than fifteen months after the date of the last preceding such meeting of that company.

Governing Law Provision

A contract provision specifying which jurisdiction’s law governs the interpretation and enforcement of the contract.

Grace Period A period of time during which a party can cure a breach before it gives rise to a remedy. Also referred to as a “cure period”.

Gross Income The amount of income before any deduction is the “gross” income. Compare “Net Income”.

Gross Turnover/Operating Income

Income from property or business after operating expenses have been deducted, but before deducting income taxes and financing expenses (interest and principal payments)

Guarantee (also spelled guaranty)

(c) An agreement under which a party (the “guarantor”) agrees to be liable for the payment or performance of the obligations of another person.

(d) The act of providing such a guarantee.

Guarantor See “Guarantee”.

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H

Hedge Agreement A derivative agreement that protects against financial risks.

Hedge/Hedging A risk management strategy used to offset business losses or investment risk. There are many specific financial vehicles to accomplish this, including insurance policies, forward contracts, swaps, options, derivative products and futures contracts. For example, in order to reduce the risk of price fluctuations in a security, hedging would involve the taking of an offsetting position (investing) in a related security.

Holding Company An entity organized to own only equity interests in other entities. Compare “Operating Company”.

Hypothec From Greek for “pledge,” a generic term for using property to secure payment of a loan, which includes mortgages, pledges and putting up collateral, while the borrower retains possession.

I

In Advance See “In Arrears”.

In Arrears Payment accruing over a period of time that is paid at the end of such period. For example, interest that accrues during a month and that is paid at the end of the month is paid in arrears. Payment “in advance” is the opposite.

Income A company’s remaining revenues over a given period of time after all expenses and taxes have been paid. Also known as “earnings”.

Incorporation by Reference

Where a provision in Contract A deems a provision in Contract B to be part of Contract A.

Indebtedness A term appearing most often in debt covenants and financial covenants that describes certain long-term liabilities. This term is usually defined to include borrowings, purchase money debt, capitalized leases, reimbursement obligations in respect of letters of credit, and sometimes guarantees and hedge agreements. Also referred to as “debt”.

Indemnity/Indemnification

A promise by one party (the “indemnitor”) to reimburse another party (the “indemnitee”) for certain costs, damages or losses, or to pay them directly.

Indenture An agreement governing the issuance of debt securities. The parties to an indenture are the issuer of the debt securities and a representative for the holders of the securities (an “indenture trustee”).

Intellectual Property Any creation of the mind that is capable of being protected by law from use by any other person, whether in terms of South African law or foreign intellectual property law, and includes any rights in such creation, but excludes copyrighted works such as a thesis, dissertation, article, handbook or any other publication which, in the ordinary course of business, is associated with conventional academic work;

Interest (vs principal) Cost of using credit or another’s money, expressed as a rate per period of time, usually one year, in which case it is called an “annual rate of interest”.

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Interest Rate The rate of interest required to be paid on the outstanding principle amount of a debt obligation. Interest rates are either “fixed rates,” which are set out when the debt is first incurred and don’t change over the term of the debt, or “floating rates” which are based on benchmarks that change from time to time, such as LIBOR or the prime rate. Floating interest rates usually include an additional percentage (called the “spread” or “margin”) that is added to the applicable benchmark.

Inventory/Stock in Trade

A business’s raw materials, work in progress, supplies used in operations and finished goods which have not yet been sold.

Issuer A party that issues debt or equity securities. See “Debt Security.”

J

Joint and Several Liability

A contractual arrangement whereby two or more parties are each responsible for the full amount of the same obligation.

Joint Venture The agreement by two or more parties to work together on a specific project or enterprise, each agreeing to share profit, loss and control.

Judgment Creditor A party entitled to payment of money from another party pursuant to a judgment decree.

K

King Report of Corporate Governance (King 1, II, III)

Reports released by the King Committee on Corporate Governance that provide principles and recommendations for best practices in corporate governance in South Africa. The King III code came into effect and replaced the King II code on March 1, 2010. The principles and recommendations may reflect legislative requirements (such as those contained the Companies Act, 2008), evidenced in the terminology used in King III where “must” indicates a legal requirement and “should” indicates where application of King III will result in good governance. King III applies to all entities incorporated in and resident in South Africa, irrespective of their manner or form of incorporation or establishment

L

Lease An agreement pursuant to which an owner of real or personal property (the “lessor”) grants the right to use and/or possession of such property to another party (the “lessee”), in exchange for the payment of rent.

Leasehold Interest Claim or right to enjoy the exclusive possession and use of an asset or property for a stated definite period, on the basis of a lease contract.

Legal Description A detailed description of the boundaries of a parcel of real estate that conforms with local law requirements relating to the recording of real estate interests.

Lender A party that makes a loan. See “Credit Agreement” and “Debt Security.”

Lessee/Tenant See “Lease.”

Lessor See “Lease.”

Lessor/Landlord The person (usually the owner of the property), leasing, letting or renting the property to the lessee or tenant.

Letter Agreement An agreement in the form of a letter from one party to another.

Letter of Intent A written expression of interest or intention to enter into a transaction. A letter

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of intent typically does not create a binding obligation to consummate the transaction, but the letter may have enforceable provisions relating to the confidentiality, disclosure, exclusivity and other features of the parties’ actions relating to the proposed transaction. Also called an “agreement in principle,” Compare “Commitment Letter” and “Proposal Letter.”

Liability (a) Money owed.(b) Obligation to do or refrain from doing something.(c) Duty that eventually must be performed.

Licence Agreement An agreement pursuant to which an owner of intellectual property (the “licensor”) permits another party (the “licensee”) to use such intellectual property in a specified manner.

Licensee See “Licence Agreement.”

Licensor See “Licence Agreement.”

Lien A charge against property making it security for the payment of a debt, judgment, mortgage, or taxes. It is a type of encumbrance. A specific lien is against certain property only. A general lien is against all the property owned by a debtor

Limited Liability Company

A company in which an investor (shareholder) cannot lose more than the amount he or she invested. Two types of limited liability companies are possible in South Africa: public companies and private companies. Both are created in terms of and are governed by the provisions of the Companies Act, 1973 and 2008.

M

MAC See “Material Adverse Change Clause.”

Market An adjective used to indicate that a term is in keeping with market standards, as in “it isn’t market for a party to be indemnified against its own gross negligence.”

Material Adverse Change Clause

A representation, condition precedent or event of default that is based on whether a part’s condition has deteriorated to a material extent.

Material Adverse Effect

A term used to modify contract provisions on the basis of whether a particular event, act or circumstance results in a change that is both material and adverse to a party or a party’s position.

Maturity The date on which a debt obligation becomes due.

Mediation A process where parties in dispute involve the services of an acceptable, impartial and neutral third party to assist them in negotiating a resolution to their dispute, by way of settlement agreement. Mediators do not make formal recommendations about resolution of the dispute.

Memorandum (Memorandum of Association)

Document that regulates a company’s external activities and must be drawn up on the formation of a registered or incorporated company. As the company’s charter it (together with the “Articles of Association”) forms the company’s constitution. Often simply called the memorandum, the document that governs the relationship between the company and the outside world.Under the Companies Act, 2008, the memorandum of association and “Articles of Association” will be replaced by the “Memorandum of Incorporation”.

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Memorandum of Incorporation

As defined in the Companies Act, 2008, means the document, as amended from time to time, that: (i) that sets out rights, duties and responsibilities of shareholders, directors and others within and in relation to a company, and other matters as contemplated in the Act; and by which (ii) the company was incorporated in terms of the Act (or by which a pre-existing company was structured and governed).

Milestones Required levels of performance contained in a contract. See “Construction Loan Agreement.”

Mutatis Mutandis A phrase used when a provision from another contract is being incorporated by reference, indicating that such other provision is deemed to be modified as necessary to fit the context.

N

Natural Person An individual, as opposed to a legal entity.

Negative Covenant See “Covenant”.

Net After deduction of other amounts. An amount before any such deduction is the “gross” amount.

Net Asset Value A term used to describe the value of an entity’s assets less the value of its liabilities.

Net Income The amount of income after the deduction of other amounts. Compare “Gross Income”.

No Shop Clause In an acquisition agreement or a letter of intent, a provision under which a publicly-held target is prohibited from soliciting or negotiating a competing offer. There is usually a “fiduciary out,” which permits the target to engage in the prohibited actions if failure to do so would result in the breach of the fiduciary duties of the target’s board of directors or similar governing body.

Novation An assignment by Party A of its rights and delegation of its obligations under an agreement to Party B, such that Party B becomes a party to the agreement and Party A ceases to be a party.

O

Obligee See “Obligor”.

Obligor A party that owes payment or performance to another party (the “obligee”).

Offering The issue or sale of a security by a company.

Officer Person appointed by the board of directors of a company (such as a president, chief executive officer, vice president, etc.), to manage the day-to-day business of the firm and to carry out the policies set down by the board. Officers share legal liability for the actions of their company.

Operating Company An entity that owns operating assets. Compare “Holding Company.”

Opinion A written statement of legal conclusions as to elements of a transaction, provided by one party’s lawyer to the other party. An opinion is often required as a condition precedent to the closing of a transaction. Also referred to as a “legal opinion.”

Option An offer made to a person (the offeree), coupled with an undertaking by the person making the offer (the offeror) not to revoke the offer for a period of

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time

Ordinary Resolution A resolution passed by the shareholders of a company by a simple majority (generally more than 50% of the votes) either at a convened meeting of shareholders or by circulating a resolution for signature. A “Special Resolution” by comparison requires a greater vote threshold, which varies in different jurisdictions.

Ordinary Share The most common class of share representing the owners’ interest in a company. An ordinary share gives the right to its owner to share in the profits of the company (dividends) and to vote at general meetings of the company.

P

Pari Passu A term that indicates that two or more claims against a single obligor have the same level of priority. Compare “Priority.”

Partnership A type of business entity in which two or more persons pool some or all of their money, abilities, and skill into a business and divide profit or loss in predetermined proportions. Partners are individually responsible for debts of the partnership. Other individuals called limited partners may invest but not be directly involved in management and are liable only to the extent of their investments.Partnerships are useful for tax planning purposes and are frequently used to create a joint venture between two corporate entities. They may be constituted by contract or by implication from the conduct of the partners. They are not regulated by statute in South Africa.

Per Annum Per year. Used in the designation of interest rates, as in “8% per annum.”

Performance The discharging of contractual obligations.

Person Usually defined in contracts to include both natural persons and entities. References to “person” in this glossary have this meaning.

Personal Property Possessions other than real estate or buildings. Personal property is movable and includes tangible (appliances, car, furniture, jewellery) and intangible (bonds, right to a benefit, shares or stocks) items whose ownership belongs to the individual. Also called “chattels”.

Pledge Delivery of goods or personal property as security for a debt or obligation, or the contract by which such delivery is made.

Precedent A form or existing agreement which is used as the starting point for drafting a new agreement.

Pre-emptive Right/Right of First Refusal

A contractual right to make the first offer to purchase.

Preference Share A class of ownership in a corporation that has a higher claim on the assets and earnings than ordinary shares. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

Present Value The value of a future payment, reduced by an amount (expressed as a percentage, the “discount”) that reflects the time value of money.

Prima facie At first glance; on the surface.

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Principal (vs agent) Person who designates another (the agent) to act on his or her behalf.

Principal (vs interest) The amount borrowed, or the part of the amount borrowed which remains unpaid (excluding interest).

Priority (a) The status of one security interest having a claim to collateral that is superior to another security interest in the same collateral.

(b) The status of one creditor having a claim against a common obligor that is superior to another creditor’s claim.

In each case, the superior security interest or claim is referred to as “senior,” the other as “subordinated” or “junior.” Compare “Pari Passu.

Private Company A company whose ownership is private, and therefore whose shares are not traded on the open market, unlike a public company. As defined in the Companies Act, 2008, a company is a private company if: (i) it is not a state-owned company, and (ii) its “Memorandum of Incorporation” prohibits it from offering any of its securities to the public and restricts the transferability of its securities.As defined in the Companies Act, 1973, a private company means a company having share capital and whose articles of association (i) restrict the right to transfer its shares; (ii) limit the number of its members to fifty; and (iii) prohibit any offer to the public for the subscription of any shares or debentures of the company.

Pro Forma (e) The adjustment of existing financial statements or levels of financial performance to reflect an event or transaction not otherwise taken into account.

(f) A financial statement as so adjusted.

Pro Rata Apportioned based on relative amounts. For example, lenders in a syndicated loan facility are required to lend their pro rata share of each loan - that is, the lender that has committed to 50% of the facility must advance an amount equal to one-half of the loan. “Ratably” and “ratable” express the same concept.

Profit The positive financial gain from an investment or business operation that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity.

Profit Company A company incorporated for the purpose of financial gain for its shareholders.

Promissory Note An instrument executed by one party (the “payor”) pursuant to which the payor promises to pay to the holder (the “payee”) a specific principal amount at a specified time or times, together with interest computed at a specified rate. Also referred to as a “note.”

Proposal Letter A letter outlining the terms of a proposed transaction that is not a commitment. Compare “Commitment Letter” and “Letter of Intent”.

Prospectus A formal legal document that provides details about an investment offering for sale to the public. A prospectus should contain the facts that an investor needs to make an informed investment decision.

Proviso A clause commencing with the words “provided” or “provided, however” that contains an exception to the concept it follows.

Parent Company An entity (the “parent”) who owns the majority of the voting equity of another entity (the “subsidiary”).

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Public Company A company which has issued securities through an offering, and which are now traded on the open market. Companies Act, 2008 defines it as a incorporated that is not a state-owned company, a private company oe a personal liability company.

Purchase Price Adjustment

A provision in an acquisition agreement pursuant to which the purchase price is adjusted after closing, usually by comparing the target’s financial condition at closing with its financial condition as of the date of its financial statements delivered to the acquiror prior to closing.

Put (vs Call) A right to sell a specified asset in the future at a set price. Compare “Call.”

R

Real Property Land and all property attached to the land, such as houses, trees, fences and improvements.

Recitals The prefatory paragraphs of an agreement that described the parties and the circumstances of the transaction. Also known as “whereas clauses” or the “preamble.”

Redeemable Share Shares that may be redeemed at the option of the issuer and/or the shareholder.

Redemption Purchase by an issuer of its debt or equity securities from the holder thereof.

Release An agreement by a party to terminate a claim against another party or portion of a lien on another party’s assets (if a lien on all collateral is released, it is referred to as a “termination”).

Rent A payment made by a lessee under a lease to an owner (lessor) in exchange for use of some property, facility, equipment or service.

Representation An provision in which one party makes a statement of fact regarding the subject matter of a contract as of a particular point in time to be relied on by another party. Compare “Warranty”.

Resolution of the Board/Shareholders

A meeting’s declaration of intention or opinion. Codified in an official document detailing the action authorized by the board of directors or shareholders of a corporation.

Resolutive Condition A clause in an agreement whereby the agreement will terminate on the happening of a stipulated event. Also known as a condition subsequent in some jurisdictions. Same as “Suspensive Condition”.

S

Schedule An attachment to a contract which usually sets forth factual material. Compare “Exhibit.”

Section 53(b) Company

The Companies Act, 1973 allows any private company to provide in its memorandum of association that the directors together with the company are jointly and severally liable for all debts and liabilities of the company incurred during their term of office. Certain professional persons, such as attorneys and accountants, who are statutorily prevented from forming private companies may incorporate a section 53(b) company to regulate their affairs. These companies are identified by the word “Incorporated” or “Inc.” after the name of the company.Under the Companies Act, 2008, this is termed a “personal liability company”.

Secured Transaction A transaction (usually a debt financing) in which obligations are secured by the

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grant of a security interest.

Security (a) An instrument that signifies an ownership position in a corporation, a creditor relationship with a corporation or governmental body (a bond), or other ownership rights.

(b) Collateral offered by a debtor to a lender to secure a loan, called “collateral security”.

Security Agreement An agreement pursuant to which a security interest is granted.

Security Interest A conditional interest in personal property granted by an obligor (the “debtor”) to its creditor (the “secured party”) to secure the payment of the debtor’s obligations. After default by the debtor, the secured party has the right to sell the property (a “foreclosure”) and apply the proceeds in satisfaction of the secured obligations.

Setoff Provision A provision permitting Party A to satisfy a claim owed to it by Party B by cancelling an obligation owed to Party B by Party A. The most typical example is a bank that is owed money by a borrower applying amounts in a deposit account of the borrower in satisfaction of such obligations.

Share Unit of equity ownership in a corporation.

Side Letter An agreement intended to modify or supplement another agreement that is entered into at the same time. If the agreement being modified or supplemented has an integration clause, the side letter may not be enforceable.

Signature Pages The pages at the end of a contract where the parties sign to make an agreement or other document legally valid. Also called the “Execution Page”.

Signing Authority Legal power delegated by an authoritative body (such as a board of directors) to organizational positions (such as president, managing director) appointing them as agents of the organization for general or specific purposes and giving them the authority to bind the organization , approve, or execute a contract on that organization’s behalf.

Sole Proprietor Sole owner of a business. He or she directs the affairs of the enterprise, bears its risks and losses, and takes the profits and benefits.

Sole Proprietorship A business structure in which an individual and his/her company are considered a single entity for tax and liability purposes. The owner does not pay income tax separately for the company, but he/she reports business income or losses on his/her individual income tax return. The owner is inseparable from the sole proprietorship, so he/she is liable for any business debts.

Special Resolution A resolution passed by the shareholders of a company by a greater majority than is required to pass an ordinary resolution. Special resolutions are generally only required by statute in certain specific situations, such as for altering the terms of the articles of association or the memorandum of association, or making some other major or fundamental changes in an organization.

Stock Ownership of a corporation represented by shares that are a claim on the corporations earnings and assets. See also “Share”.

Stock Purchase Agreement

An acquisition agreement providing for the sale of all or a portion of the stock of a corporation. If the target is not an equity that issues stock (e.g., a limited partnership or a limited liability company), the agreement will be named

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accordingly.

Subsidiary An entity, the majority of the voting equity of which is owned by another entity (the “parent”).

Surety A promise by one party (the guarantor or also the surety) to assume responsibility for the debt obligation of a borrower if that borrower defaults. A surety who pays the debt of a borrower-in-default, in general, automatically acquires an assignment of a creditor's legal right to recover the amount paid from the borrower.

Suspensive Condition A clause in an agreement whereby the agreement will terminate or become unenforceable if the event stipulated in the clause occurs. Also known as a condition precedent in some jurisdictions. Same as “Resolutive Condition”.

Syndication The process by which a loan or investment is divided up among a group of lenders or investors (the “syndicate”). A syndicated loan agreement is one in which the total loan amount is provided by a number of lenders, each of which is responsible to fund its pro rata share of the loans.

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T

Tag Along Right A right of one securityholder to have its securities included in a sale of the same securities by another securityholder.

Term Sheet A summary of terms outlining a proposed transaction. Term sheets are often attached to commitment letters or letters of intent.

Time is of the Essence Provision often included in construction, supply, transport, and other types of contracts to stress the punctual completion of the job (or repayment of a loan) as a vital element of the performance of the contract. Any failure to complete the work (or to pay the sums) within stated time limits may constitute breach of the contract.

Title The right to the ownership and possession of any item that may be legally recognized as belonging to someone or something. In its most basic sense, title is the recognition of ownership. Evidenced by a legal document, such as a bill of sale or title deed.

Title Search A search of the real estate records determining whether there are any recorded encumbrances or adverse claims to real estate.

Trade Secret A formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers.

Trust The arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed –

(a) to another person, the trustee, in whole or in part, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument; or

 (b) to the beneficiaries designated in the trust instrument, which

property is placed under the control of another person, the trustee, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument,

 but does not include the case where the property of another is to be administered by any person as executor, tutor or curator.

 

U

Underwriter A financial institution that agrees to purchase debt or equity securities in order to resell them in a public offering.

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V

Vested Having an immediately secured right of present or future enjoyment

Voetstoots “As is”, with all faults, taken as it stands

W

Waiver An agreement to give up or delay the time for performance of a contractual right.

Warranty A warranty is a promise or assurance given in contract by a party to the other party to the contract. Compare “Representation”. A warranty is a promise extending into the future, whereas a representation is a statement of fact as to the state or condition of something at the time the representation is made. A representation normally amounts to a material inducement for someone to enter into the contract. Warranties are lesser obligations that do not go to the root of the contract, and a breach of warranty is usually not a valid reason for voiding a contract but it entitles the aggrieved party to damages.

Without Prejudice Legal term signifying that something is being done, proposed, or said without abandoning a claim, privilege, or right, and without implying an admission of liability. When used in a document, letter or during settlement negotiations, these words mean that what follows is, generally speaking, protected from being used against the issuing party in future dealings or litigation.

Work in Process Work or task currently being processed; the task is currently being performed.

Working Capital A company’s current assets (receivables, inventory and cash) less its current liabilities.

Working Capital Adjustment

In a purchase agreement, an adjustment made to the purchase price if the target’s working capital at closing is greater or less than a projected level.