On August 1, a number of amendments to the Delaware General Corporation Law (DGCL) went into effect. Notably, several of the amendments modified sections of the DGCL pertaining to (1) two-step mergers effected under Section 251(h) of the DGCL, and (2) appraisal rights and proceedings.
Section 251(h) Mergers
DGCL Section 251(h) provides a mechanism for a buyer to effectuate the negotiated acquisition of a Delaware-domiciled publicly-traded corporation by a tender offer to purchase at least a majority of outstanding shares of the target, followed by a short-form merger to acquire any shares not tendered in such offer. This back-end merger does not require stockholder approval, thereby saving the buyer the time and expense involved in preparing and filing a proxy statement and holding a stockholders’ meeting if Delaware’s standard short-form merger threshold (90%) is not satisfied. The 2016 amendments to the DGCL clarified certain Section 251(h) requirements and increased the availability of such short-form mergers to potential buyers. Most notably, the 2016 amendments to the DGCL provide for the following:
- Clarification of which corporations are eligible to utilize Section 251(h). Prior to the 2016 amendments, Section 251(h) provided that the target corporation shares needed to be listed on a national exchange or held of record by more than 2,000 holders immediately prior to the execution of the merger agreement. The 2016 amendments clarify that the Delaware corporation will qualify for Section 251(h) so long as at least one class or series of stock is listed on a national securities exchange.
- Calculation of statutory minimum tender condition. Section 251(h) requires the purchaser in the offer to acquire a number of shares in such offer that would be sufficient to adopt the agreement of merger in the absence of Section 251(h). Mechanically, rollover shares were not included in such calculation. The 2016 amendments permit the inclusion of the following shares in calculating whether that requisite threshold has been satisfied: (1) “rollover stock” (i.e., shares of the target’s stock subject to written contract requiring such shares to be delivered to the buyer in exchange for equity in the buyer or one of its affiliates, and (2) shares of the target’s stock held by any direct or indirect subsidiary of the target or by such buyer (collectively, the “Excluded Stock”).
- Clarification and streamlining of certain minimum conditions. The 2016 amendments provide that (1) the offer in connection with a Section 251(h) merger must be for “all” of the shares of the target corporation entitled to vote on the merger but may (A) be conditioned on the tender of a minimum amount of such shares and (B) exclude the Excluded Stock, and (2) such offer may be effectuated through one or more separate offers for separate classes or series of stock.
- Simplifying exceptions to the equal treatment exception. Section 251(h) contains a requirement that all outstanding target shares be treated equally in that they must all be converted in the back-end merger into the same consideration paid for such shares in the offer, with the exception of shares that were held in the target’s treasury or by the target’s direct or indirect subsidiaries, the ultimate parent buyer of the surviving corporation or any of their respective direct or indirect subsidiaries. Before the 2016 amendments, such shares additionally needed to be excluded from the front-end offer in order to be excluded from the “equal treatment” requirement. Now, such shares—as well as rollover shares—may be excluded, even if they were not excluded from the front-end offer.
The 2016 amendments also provided for several additional technical changes, clarifying the definition of shares “received” for purposes of determining whether the minimum number of shares have been “received” to meet the offer condition.
Appraisal Rights and Proceedings
Section 262 of the DGCL, which provides for appraisal rights, was amended most notably to:
- Create a de minimis exception to dismiss an appraisal proceeding with respect to shares listed on a national securities exchange prior to the merger unless (1) the total number of shares seeking appraisal exceeds 1% of the outstanding shares of the class or series eligible for appraisal, (2) the value of the consideration provided in the merger or consolidation for such shares seeking appraisal exceeds $1 million or (3) the merger was effected pursuant to DGCL Section 253, which provides for a short-form merger of a parent corporation and its substantially (at least 90%) or wholly owned subsidiary, or DGCL Section 267, which provides for the merger of a non-corporate parent entity and its substantially (at least 90%) or wholly owned subsidiary; and
- Permit the tolling of the accrual of statutory interest prior to the entry of judgment in an appraisal proceeding by cash payment made by the corporation. If the surviving corporation makes such early payment, interest accrues only upon (1) any amount by which the fair value of the shares as determined by the Delaware court exceeds the amount paid by such surviving corporation, and (2) previously accrued interest, unless also paid early.
Other DGCL Amendments
Other recent amendments to the DGCL include: (1) the addition of procedures to revive a corporation whose existence has expired pursuant to a limitation in its charter, (2) the addition of default quorum and voting requirements for board committees and subcommittees of a board of directors, and (3) the simplification of requirements regarding which officers are required to sign a corporation’s stock certificates.