The Delaware Chancery Court has approved the use of the top-up option in connection with "two-step" acquisitions and provided guidance as to the features that should be included by companies when using top-up options in acquisitions. Top-up options in two-step acquisitions (which generally involve a tender offer followed by a back-end merger) allow an acquiror to purchase from the target an amount of shares that, when added to the shares already owned by the acquiror immediately following the tender offer, equals at least 90% of the target's outstanding stock on a fully diluted basis, thereby allowing the acquiror to consummate a short-form merger.
The court has advised that top-up options should include the following features: (i) specific authorization from the target's board of directors with respect to the top-up option; (ii) the specific option terms set forth in the agreement evidencing the top-up option; (iii) cash consideration upon the exercise of the top-up option in an amount equal to the aggregate par value of the stock to be issued; (iv) a maximum cap on the number of shares that may be issued pursuant to the top-up option equal to the number of authorized but unissued shares of the target; and (v) an exclusion of the shares issued pursuant to the top-up option, as well as the consideration to be received upon exercise, from the appraisal conducted in connection with the acquisition.
This case is the latest in a series of recent opinions approving the use of the top-up option, which will likely lead to an increase in their use in connection with tender offers.
Olson v. ev3 et. al. C.A. No. 5583-VCL (Del. Ch. Feb. 21, 2011)