A two-step merger is a common acquisition structure for public company sale transactions. Under this structure, the buyer commences a tender or exchange offer to obtain over 50% of the target’s voting shares, followed by a second-step merger to acquire the remaining voting shares. In many cases, unless the buyer obtains 90% or more of the target’s voting shares in the first-step tender or exchange offer, the target’s stockholders must vote to approve the second-step merger. This stockholder vote requires a proxy statement or an information statement to be delivered to the target’s stockholders, which can be onerous.
A proposal to the Delaware General Corporation Law would eliminate the stockholder vote required under that law to effect the second-step merger. The proposal only applies to targets whose shares are listed on a national securities exchange or held of record by more than 2,000 holders. In addition, among other things, the proposal would (1) require the parties to include specific language in the merger agreement to opt-in to the proposed law, (2) require the parties to effect the second-step merger as soon as practicable following the completion of the tender or exchange offer and (3) would prohibit any “interested stockholders” (generally, stockholders owning more than 15% or more of the target’s voting shares) from being party to the merger agreement.
The proposal would not alter the fiduciary duties owed by directors to stockholders in connection with the transaction, or the judicial scrutiny applicable to the decision to enter into the transaction. If desired, the proposal would permit a company to amend its certificate of incorporation to require the second-step stockholder vote.
The proposal would be effective for merger agreements entered into on or after August 1, 2013.
OUR TAKE: The proposal, if adopted, would be a major development under Delaware law, because it may shorten significantly the time and effort needed to effect most two-step mergers in Delaware. As such, buyers who previously favored other transaction structures (to avoid, for example, the risk of prolonged proxy statement preparation and/or SEC review) may be more willing to give the two-step a try.
The proposal also would mostly eviscerate the need for “top-up options” afforded to some buyers in merger agreements. These provisions require the target, once the number of tendered or exchanged shares reaches a specified percentage, to issue to the buyer the number of shares of capital stock required to get the buyer over the 90% threshold, so that the buyer can effect a short-form merger without a target stockholder vote.