Recent amendments to the Delaware General Corporation Law (“DGCL”), which came into effect on August 1, 2013, created a new Section 251(h) that permits an acquirer to complete a second-step merger following a tender offer without a vote of the target company’s stockholders, provided that certain conditions have been satisfied. While the new Section 251(h) may not be a solution to avoid stockholder approval in all two-step mergers, it has already seen use in the first three months since becoming effective.
In total, there have been at least eleven public tender offers incorporating Section 251(h) as part of the deal structure, of which ten exceeded $100 million in deal value. This article examines the merger agreements of these transactions to highlight potential issues and drafting points in connection with the use of Section 251(h).
Background of DGCL Section 251(h)
An acquirer conducting a two-step merger typically conducts a first-step tender offer and almost immediately thereafter seeks to consummate a second-step merger. Prior to the adoption of Section 251(h), an acquirer that could not acquire 90% or more of the outstanding shares of each class of target company’s voting stock during the tender offer process was unable to take advantage of Delaware’s short-form merger procedures for the second-step merger. Instead, such acquirer was required to conduct a long-form merger, which is more costly and time consuming as it requires calling and holding a stockholders’ meeting to obtain their approval (or solicit consents) for the merger.
In order to facilitate and expedite the second-step merger process and in order to avoid conducting a long-form merger, parties contemplating a two-step merger have typically included a “top-up” option in their merger agreements. The “top-up” option grants the acquirer an option to purchase additional shares from the target company that are necessary to reach such 90% threshold in case it is unable to acquire 90% or more of the outstanding shares of each class of target company’s voting stock required for a short-form merger during the first-step tender offer.
However, such “top-up” option may not always be available, especially in situations where the target company does not have enough authorized but unissued shares to be issued under the “top-up” option because of the substantial number of shares required to reach the 90% threshold. Under such circumstances, acquirers have occasionally adopted a “dual-track” structure, which involves simultaneously pursuing a tender offer and a long-form merger in order to expedite the merger process. The “dual-track” structure is more complex and expensive since the acquirer must file a preliminary proxy statement that is required for the long-form merger during the pendency of the tender offer process.
Section 251(h) eliminates the requirement to obtain the approval of the target company’s stockholders even in situations where the acquirer failed to reach the 90% threshold during the first-step tender offer process. In order to take advantage of this new rule, the following requirements must be met:
- The target company must be listed on a national securities exchange or have more than 2,000 holders of record immediately before the execution of the merger agreement.
- The merger agreement must expressly state that it is governed by Section 251(h) and the merger must be effected as soon as practicable following the completion of the tender offer.
- The tender offer must be for any and all of the outstanding shares of stock of the target company that would otherwise be entitled to vote on the adoption of the merger agreement.
- Following consummation of the tender offer, the acquirer must own at least such percentage of each class and series of the target company’s stock that, absent Section 251(h), would have been required to adopt the merger under the DGCL and the target company’s certificate of incorporation.
- At the time when the target company’s board approves the merger agreement, no other party to the merger agreement must be an “interested stockholder” (as defined in DGCL Section 203(c)) of the target company.
- The acquirer must merge with or into the target pursuant to the relevant merger agreement.
- The outstanding shares of each class or series of stock of the target company that are not being cancelled in the merger must be converted into, or into the rights to receive, the same amount and kind of consideration (e.g., cash, property, rights or securities) paid for shares of such class or series of stock of such target company upon consummation of the tender offer.
If the merger is adopted without the vote of stockholders of the target corporation pursuant to Section 251(h), then the secretary or assistant secretary of the surviving corporation must certify on the merger agreement that the merger agreement has been adopted pursuant to Section 251(h) and that the conditions specified therein have been satisfied. Alternatively, a certificate of merger may be filed in lieu of filing the agreement with the Secretary of State of the State of Delaware.
Section 252 of the DGCL was also amended to extend the provisions of Section 251(h) to mergers between Delaware and non-Delaware corporations.
Survey of Tender Offers since August 1, 2013
Section 251(h) has already seen use in the three months since becoming effective. At least eleven public tender offers have opted to use Section 251(h) since it became effective on August 1, 2013 (see Table on next page for the list of these eleven transactions). These transactions range in deal value from approximately $63.9 million to almost $2 billion and predominantly involve strategic buyers.
As of November 5, 2013, the mergers of the first eight transactions have been successfully closed pursuant to Section 251(h).
Standard “Opt In” Language
DGCL requires that all parties choosing to “opt in” to Section 251(h) specifically state in the merger agreement that the merger will be governed by Section 251(h). As a result, all of the merger agreements in the above eleven transactions have included a statement to such effect. The standard language largely traces the requirements in Section 251(h) and typically states that the merger is governed by Section 251(h) of the DGCL and shall be consummated as soon as practicable following the completion of the tender offer. While such statement is most often included in the section of the merger agreement that discusses and/or describes the merger, corresponding language is also often included in the recitals.
Continued Use of the “Top-Up” Option, Subsequent Offering and Stockholder Vote Provisions
The adoption of Section 251(h) was initially expected to replace the use of “top-up” options since Section 251(h) eliminates the need for stockholder approval for the second-step merger. However, nearly half of the transactions listed above also included a “top-up” option provision in their merger agreements as a safety measure in case the transaction is determined not to qualify under Section 251(h). Such “top-up” option allows parties facing uncertainties as to whether their transaction qualifies under Section 251(h) (e.g., whether the acquirer, upon the consummation of the first-step tender offer, owns at least the percentage of each class and series of the target company’s stock that would have been required to adopt the merger under the DGCL and the target company’s certificate of incorporation) to avoid the risk of having to restructure the transaction at a later date in case it is determined that Section 251(h) is inapplicable to the transaction.
The “top-up” option provision was also often paired with a subsequent offering provision to further protect against such risk. The majority of these transactions included some form of subsequent offering provision that allows the acquirer to, either unilaterally or with the consent of the target company, provide for a “subsequent offering period” within the meaning of Rule 14d-11 of the Securities Exchange Act of 1934, as amended. The actual language of such provisions vary depending on the transaction and range from language simply reserving the right to extend the tender offer period to language that contemplates using the subsequent offering as a protective measure in case the transaction does not qualify under Section 251(h)(3) and the “top-up” option cannot be exercised or the acquirer cannot obtain 90% of the outstanding stock of the target company even after exercising the top-up option. Parties that are not contemplating the use of the “top-up” option may still find it useful to include a subsequent offering provision because Section 251(h) requires the acquirer to own a percentage of the target company’s stock that, absent Section 251(h), would have been required to adopt the merger under the DGCL and the target company’s certificate of incorporation. While this requirement typically involves the acquirer obtaining a majority of the outstanding shares, the rules are not clear as to whether such majority should be determined on a fully diluted basis. Nevertheless, nearly half of the transactions have adopted the fully diluted basis approach.
In addition, over half of the transactions also included a specific provision regarding stockholder approval for the second-step merger in case Section 251(h) is determined to be inapplicable. In essence, this provision (which is included in the merger agreements in the form of a covenant) requires all of the parties to take “all necessary and appropriate action” to consummate the merger without a stockholder vote through a short-form merger. The language is typically bifurcated and provides that the parties shall consummate the merger as soon as possible either under Section 251(h) or, if Section 251(h) is inapplicable, pursuant to Section 253 of the DGCL. Therefore the performance of such latter covenant is conditioned on whether the acquirer has acquired at least 90% of the outstanding stock of the target company, including through the use of the “top-up” option. In addition to such provision, some of the transactions also included a catch-all covenant that requires the target company to file proxy statements and convene a stockholders meeting if stockholder approval for the merger is required under any “applicable law.” While these provisions may seem excessive given that the purpose of Section 251(h) was to streamline the tender offer process by eliminating the stockholder approval requirement, it nonetheless provides an additional level of security for parties facing a high level of uncertainties.
It is not yet clear as to whether the incorporation of the multiple protective measures described above will become standard practice or is merely a reflection of the anxiety with regard to the use of a new legal provision. However, given the small volume of precedent transactions, parties seeking to “opt in” to Section 251(h) may wish to minimize their risks by adopting all or some of such measures.
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Representations and Warranties
Relating to Section 251(h)
The implementation of Section 251(h) also requires parties to re-examine representations and warranties in their merger agreements, especially in light of the multiple requirements under Section 251(h). The most common representation made by an acquirer was with regard to the requirement that no party to the merger agreement is an “interested stockholder” of the target company (as defined in DGCL Section 203(c)) at the time the merger agreement is approved by the target company’s board of directors. All eleven transactions included this representation in their respective merger agreements. Although the statute only requires that the parties not be an “interested party” at the time the merger agreement is approved by the target company’s board, the standard language in the vast majority of these transactions provided that the acquirer (including its parent entity) is not and has not been for the past three years an “interested stockholder” of the target company as defined in Section 203 of the DGCL.
The most common representation made by the target company in connection with Section 251(h) is a representation stating that a stockholder vote is not necessary to consummate the second-step merger. The typical language of such representation indicates that no stockholder votes are necessary to consummate the transaction in accordance with Section 251(h). This representation can be made as a stand-alone representation, incorporated into existing representations regarding the authority and/or corporate power of the target company, or incorporated into both provisions.
Another target company representation is with regard to the target company board’s approval of the merger. The typical language of such representation indicates that the board of directors of the target company adopted a resolution approving, among other things, the merger and specified in such resolution that the merger is governed by Section 251(h). However, the requirement to pass such resolution may instead be incorporated into the merger agreement as part of the conditions to the tender offer depending on the structure of the transaction.
In conjunction with such target company representation, about a third of the transactions also required, as a condition to the tender offer, the target company to indicate in its Schedule 14D-9 that the merger is governed by Section 251(h) and will be consummated as soon as practicable following the completion of the tender offer.
Although Section 251(h) does not require that the resolutions of the board of directors of the target company or the target company’s Schedule 14D-9 specifically indicate that the merger is to be governed by Section 251(h), it appears that acquirers are demanding representations and/or pre-conditions that require such actions to be taken. Accordingly, parties seeking to take advantage of Section 251(h) should examine the particular circumstances of their transaction (e.g., level of uncertainty as to whether Section 251(h) is applicable to the transaction) and consider whether to incorporate the representations and warranties discussed above.