Certain acquisitions using tender or exchange offers followed by a merger just got easier to complete. The newly added Section 251(h) of the Delaware General Corporation Law (DGCL) allows parties to complete a second-step merger without stockholder approval under certain circumstances. As a result, transaction structures used to reduce the potential stockholder approval requirements in two-step transactions (such as “top-up” options and dual track acquisitions) are no longer necessary for qualifying 251(h) mergers. In addition, the certainty of a combined closing of the two-step acquisition facilitates leveraged acquisitions and other acquisition-related financing. Lenders can now gain access to a target company’s assets for collateral at the combined closing, avoiding the need for bridge financing to cover the period between closing the tender/exchange offer and completing the second-step merger.
Two-Step Merger Process
In the two-step acquisition process, the buyer first launches a tender or exchange offer for any and all of the outstanding shares of the target corporation. Then, in a second step occurring after the close of the tender or exchange offer, the buyer acquires any shares not tendered in the offer by way of a merger.
If the buyer owns 90 percent or more after the tender or exchange offer, the second-step merger can be accomplished without stockholder vote through a short-form merger pursuant to Section 253 of the DGCL. If the buyer owns less than 90 percent after the tender or exchange offer, the second-step merger is more cumbersome, because a “long-form” merger is necessary, requiring the approval of the merger agreement by the board, followed by stockholder approval. To obtain stockholder approval, the target corporation must incur the additional costs and delay of undergoing the U.S. Securities and Exchange Commission proxy review process, distributing a proxy statement to its stockholders and holding a stockholder meeting to vote on the second-step merger. Adding to the frustration, the stockholder vote is a fait accompli, as the buyer through the first step typically acquires enough shares in the tender/exchange offer to approve the second-step merger.
To attempt to avoid this stockholder vote in the second step of the transaction, the buyer often is granted a “top-up” option. In the top-up option, the target grants the buyer the option to purchase target stock after completion of the first-step tender/exchange offer so that the buyer satisfies the 90 percent ownership requirement for the “short-form” merger. However, the top-up option is available only to the extent the target corporation has enough authorized and unissued shares to get the buyer’s ownership to the requisite percentage. As a result, a top-up option may not give significant relief to a buyer if the target corporation does not have sufficient authorized and unissued shares.
Dual-track acquisition structures also have been used to reduce the potential delay caused by the two-step merger process. On one track of the dual track acquisition structure, the buyer starts the tender or exchange offer in the hope that it will obtain the necessary ownership to complete a short-form merger. Simultaneously, on another track, the target corporation files a preliminary proxy statement with respect to a long-form merger. If the buyer fails to get the necessary ownership for the short-form merger in the tender or exchange offer, the buyer abandons the tender offer and files the definitive proxy statement to complete the long-form merger in a single step. Having the acquisition proceed with a tender offer and a preliminary proxy statement at the same time reduces the delay caused if the buyer doesn’t get the necessary ownership for the short-form merger, because the target’s proxy process is already underway.
Section 251(h): Eligibility and Conditions
The new Section 251(h) of the DGCL allows a merger agreement that is entered into on or after August 1, 2013, regarding an eligible target corporation to “opt in” under the new law and eliminate the need for a stockholder vote for the second-step merger under certain conditions. Only target corporations with shares listed on a national securities exchange or held of record by more than 2,000 stockholders immediately prior to the execution of the merger agreement are eligible to take advantage of Section 251(h). In addition, Section 251(h) may not be used if a company’s certificate of incorporation expressly requires stockholders to vote on a merger.
In addition, there are a number of other conditions and limitations under the new law:
- The merger agreement must contain a provision explicitly opting in to be governed by Section 251(h).
- The acquisition must be in connection with third-party acquisitions only; no party to the merger can be an “interested stockholder” (defined in DGCL Section 203) at the time the target corporation’s board of directors approves the merger agreement.
- The merger agreement must require that the merger be effected as soon as practicable after the closing of the tender or exchange offer.
- The first-step tender or exchange offer must be for any and all of the outstanding shares of the target corporation that would otherwise be entitled to vote on the merger agreement.
- The corporation consummating the tender or exchange offer must merge with or into the target corporation on the terms of the merger agreement.
- The tender or exchange offer must be made on the terms provided for in the merger agreement.
- The consideration paid in the merger must be the same amount and kind as the consideration paid in the tender or exchange offer.
- Following the tender or exchange offer, the buyer must own at least such percentage of the stock of the target corporation that would be required, absent Section 251(h), to adopt the merger agreement under the DGCL and the target corporation’s governing documents.
Section 251(h) provides a streamlined merger process that removes the uncertainty of timing and cost associated with stockholder approval for the second-step merger. However, even for qualifying mergers, a streamlined process with respect to stockholder approval may not actually result in a quicker closing if the merger is otherwise subject to regulatory review or other closing conditions that require additional time.
Adequate Vote Still Needed
As noted above, even with the streamlined merger process for the second-step merger, the buyer still must obtain enough shares in the tender or exchange offer to satisfy the voting requirements to approve the merger that would otherwise apply under the DGCL if Section 251(h) didn’t apply to the acquisition. This voting threshold includes the impact of any high-vote provisions in the target corporation’s governing documents and any requirement for a separate class or series vote.
Section 251(h) Appraisal Rights
All mergers using Section 251(h) must provide for appraisal rights under Section 262 of the DGCL. While Section 262 generally exempts consideration of publicly traded stock from appraisal rights, the amendments to the DGCL make clear that appraisal rights are available for all Section 251(h) mergers, even those that use publicly traded stock as the form of consideration.
While Section 251(h) streamlines the acquisition process, the amendment doesn’t change the applicable fiduciary duties. The fiduciary duties with respect to the merger remain unchanged.
Recent Section 251(h) Activity
The newly added Section 251(h) streamlines the acquisition process for qualifying mergers. Since becoming effective August 1, 2013, Section 251(h) mergers are being used regularly, demonstrating that the new Section 251(h) is becoming an important tool for dealmakers.