The acquisition of a public company may be structured as a one-step merger, in which shareholders vote to approve the transaction and the target is then merged with the acquiring company or its subsidiary. Alternatively, the acquisition can be structured as a two-step transaction that begins with a tender offer for a majority of the target shares and concludes with a back-end merger in which shares of the non-tendering shareholders are acquired. A recent amendment to the Delaware General Corporation Law (“DGCL”) has made the two-step merger transaction for friendly acquisitions more attractive.
A two-step merger transaction that begins with a tender offer is advantageous because it provides a faster path to control over the target than a one-step merger. A tender offer can usually be completed in 30 days from the time it is launched. The SEC staff will review the offer materials, and typically the acquirer can clear all comments, during the pendency of the tender offer. In contrast, parties to a one-step merger transaction cannot mail proxy materials and solicit votes on the merger until after the materials have been filed with the SEC and all comments have been cleared. This could take 30 days or longer, so that the meeting to approve the merger, and the merger itself, typically do not take place until at least 60 days after the proxy materials are first filed with the SEC.1
The two-step transaction requires a back-end merger to acquire the non-tendered shares. If, following completion of the tender offer, the acquirer owns a sufficient percentage of the shares to effect a so-called “short-form” merger — 90% of each class of voting shares in Delaware — this is not a problem. A short form merger can be effected without a shareholder vote, often within a few days of completing the tender offer. However, if the acquirer does not have sufficient shares for a short-form merger, it must obtain a shareholder vote to approve the back-end merger. The vote is a foregone conclusion, but the acquirer must still cause the target to file proxy or information materials, clear the SEC comments and wait for a meeting, or the effectiveness of written consents, to approve the merger. The timing advantage of the two-step transaction is lost, and worse, until consummation of the merger, the acquirer cannot use the assets of the target to secure debt it has borrowed to finance the tender offer.
Recently, parties have been incorporating a so-called “top- up option” into merger agreements, allowing an acquirer that falls short of the short-form merger threshold to acquire from the target additional shares to reach the required threshold. However, the target must have sufficient authorized but unissued shares, and the acquirer may be required to have the cash to pay the option price.
DGCL § 251(h), which became effective August 1, 2013, offers a better solution. The new statute provides that, as long as certain conditions are satisfied, no vote of target shareholders is needed to approve a second-step merger following a tender offer if the acquirer owns at least the percentage of each class of target stock required to approve a merger.
There are various conditions to the availability of DGCL § 251(h). Principally —
- The tender offer must be conducted pursuant to the terms of a merger agreement between the acquirer and the target — i.e., the transaction must be friendly.
- The acquirer cannot be an “interested stockholder” (generally defined in DGCL § 203(c) as a 15% stockholder) at the time the target’s board approves the transaction.
- The target’s shares must be listed on a national securities exchange or held of record by more than 2,000 holders. DGCL § 251(h) will likely not be available for small over-the-counter issuers.
- The consideration in the back-end merger must be the same as in the tender offer.
Where these conditions are satisfied, absent special considerations, DGCL § 251(h) now makes the two-step merger transaction the structure of choice to accomplish a public company acquisition.