Recently, amendments to the Delaware General Corporation Law (DGCL) have been introduced by the Delaware State Bar Association (Section on Corporation Law) which, if adopted as proposed, should have a meaningful impact on, and lead to the increased use of, two‐step public company acquisition structures (i.e., acquisitions effected by means of a first‐step tender offer followed by a second‐step, or “back‐end”, merger). It is expected that these amendments will be signed into law by Governor Markell effective August 1, 2013.
The proposed amendments (which would apply purely on a permissive basis to target companies listed on a national securities exchange or whose voting stock is held by more than 2,000 holders) would add a new subsection (h) to Section 251 of the DGCL to permit the consummation of a second‐step merger following completion of the front‐end tender offer without the need to obtain stockholder approval of the merger, but only if certain structural and contractual conditions are satisfied. Accordingly, this would eliminate the need for the purchaser to convene a special stockholders’ meeting and obtain stockholder approval for a longform, second‐step merger where the purchaser fails to acquire (whether directly in the initial tender offer period, as extended, or subsequently by means of exercising a “top‐up” option or through the use of a Rule 14d‐11 “subsequent offer period”) the 90% or more of the target’s outstanding voting stock necessary to complete a “short‐form” merger under Section 253 of the DGCL.
Specifically, if new Section 251(h) of the DGCL is enacted as expected, the constituents to a negotiated merger agreement providing for a first‐step tender offer could agree that stockholder approval of the back‐end merger is not required, so long as:
- the merger agreement expressly states that the merger will be effected under Section 251(h) and that the merger will be completed promptly after consummation of the tender offer;
- the purchaser commences and completes, in accordance with the terms of the merger agreement, an “any and all” tender offer for such number of outstanding target shares that otherwise would be entitled to vote to adopt the merger agreement (i.e., a majority of the outstanding shares or such higher percentage as may be required by the target’s certificate of incorporation) and the purchaser, in fact, owns such requisite percentage of stock following consummation of the tender offer;
- the consideration paid in the second‐step merger for shares is the same (both in amount and type) as the consideration paid to tendering stockholders whose shares were accepted for payment and paid for in the front‐end tender offer (excluding shares cancelled in the merger or qualifying for dissenters’ rights);
- following completion of the tender offer the purchaser, in fact, merges with the target; and
- at the time the target’s directors approve the merger agreement, no party to the agreement is an “interested stockholder” (i.e., a holder of 15% or more of the target’s outstanding stock) within the meaning of Section 203 of the DGCL (i.e., Delaware’s three‐year business combination/moratorium statute).
The proposed legislation reflects the recognition that, over the past decade, the use of top‐up options to achieve the 90% ownership threshold for a short‐form merger under Section 253 of the DGCL has become de rigueur (except where the target lacks sufficient authorized and unissued capital stock “headroom” to effect the top‐up grant and exercise). This is especially now the case in the wake of the Olson v. EV3, Inc., In re Cogent and other recent decisions of the Delaware Court of Chancery which have validated the use of top‐ups.1
Moreover, where the tender offer is completed (and the purchaser becomes a majority parent of the target company, but is unable to effect a short‐form merger because it does not own at least 90% of the target’s stock), the need to prepare a merger proxy statement and convene a special stockholders’ meeting to solicit stockholder votes to adopt the merger agreement, is a costly and often protracted formality, often allowing more time for strike‐suit plaintiffs to attack the transaction price, process and disclosure.2
Although merger agreements for two‐step acquisitions require that, following consummation of the tender offer but prior to the effective time of the second‐step merger, a formula‐percentage of the target’s directors (i.e., those who are unaffiliated and not associated with the purchaser) must continue on the target’s board as a “special committee” to enforce on behalf of minority stockholders the purchaser’s compliance with the merger agreement, the stockholder vote on the merger is, nevertheless, a “done deal” because the parent will simply vote its shares “for” adoption.
Proposed Section 251(h) of the DGCL is an “opt‐in” provision. If not elected to be used by the parties, the constituents to the merger agreement can simply continue to use top‐up options (if available), “subsequent offer periods” under Rule 14d‐11, so‐called “dual track” tender offer/long‐form merger structures used in several recent strategic acquisitions (including this firm’s representation in 2011 of Terremark Worldwide, Inc. in the sale of Terremark to Verizon Communications), and other methods that seek to expedite completion of the second‐step merger to acquire the minority shares not tendered and obtain 100% voting and economic control of the target.
“Entire fairness” judicial review does not apply to a parent’s squeeze‐out merger effected pursuant to Section 253 of the DGCL. In contrast, the decision of target company directors to enter into a merger agreement that utilizes new Section 251(h) and to declare it “advisable” and recommend it for adoption, will remain subject to fulfillment of all relevant fiduciary duties (i.e., care, loyalty and candor). Such duties will not be altered in any way by the enactment of the proposed amendments.
One inadvertent consequence of new Section 251(h) could be an increase in the percentage of tender offer “holdouts” (due to stockholder apathy) and/or an increase in stockholders seeking to exercise (back‐end merger) appraisal rights under Section 262 of the DGCL. Also, the no “interested stockholder” requirement (as it may relate to the bidder at the time the merger agreement is entered into) could give rise to interpretive issues under Section 203 and Section 251(h) of the DGCL to the extent a voting/tender support agreement, arrangement or understanding is deemed to have been reached between the bidder and the stockholder prior to the actual signing thereof. However, this result can be avoided by synchronizing the signing of the support agreement and the merger agreement and, with respect to all pre‐signing correspondences and discussions, by paying careful attention to Regulation 13D concepts of acquiring “beneficial ownership”.
The enactment of new Section 251(h) should make permanent (i.e., non‐bridge) financing of two‐step acquisitions easier to obtain because of the increased assurance that the purchaser will acquire 100% economic and voting control of the target immediately following completion of the tender offer and gain direct access to all of the target’s assets for collateral.
That said, because the satisfaction of a financing condition (including, under certain circumstances, the funding of a financing commitment) could necessitate an extension of the tender offer period (to the extent less than five business days remain before the stated expiration date), new Section 251(h) could result in changes to the traditional structure, terms and timing of funding of financing commitment letters and the use (and even phraseology) of certain tender offer financing conditions. This would likely have more impact on non‐strategic buyers (especially in large cap deals) who rely on external debt financing (in addition to limited partner capital commitments and management equity rollovers) and who may need to expedite the marketing and sale of debt securities to help fund the acquisition. As with any new legislation, the benefits and consequences thereof will evolve and, therefore, may not be 100% apparent until after enactment.
Overall, this is a very positive and significant legislative development (much like the adoption of Regulation M‐A in 2000 and the SEC’s amendment and clarification of the “all‐holders/best‐price” rules in 2006). The enactment of new Section 251(h) of the DGCL should lead to an increase in the use of the tender offer structure for negotiated mergers and acquisitions of Delaware public companies. By eliminating the purchaser’s need to conduct a long���form, second‐step merger to take out minority stockholders who did not participate in the front‐end tender offer (where “top‐up” options, Rule 14d‐11 “subsequent offer periods” and other methods to achieve 90% ownership either are unavailable or do not mathematically work), 100% voting and economic control can be purchased and sold quickly, which is in the best interests of the target’s stockholders and all constituent parties to the merger agreement.