On August 1, 2013, the amendments to the Delaware General Corporation Law ("DGCL") came into effect, which among other things, created a new Section 251(h) that is intended to facilitate the use of tender offers in acquisitions of publicly traded corporations. Specifically, the new Section 251(h) 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 and prerequisites have been satisfied.
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 requires calling and holding a stockholders’ meeting to obtain their approval (or solicit consents) for the merger, which is more costly and may cause extensive delays.
In order to facilitate and expedite the second-step merger process, parties contemplating a twostep merger have typically included a "top-up" option in their merger agreements. The "top-up" option grants the acquirer that 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 tender offer an option to purchase additional shares from the target company that are necessary to reach such 90% threshold.
However such "top-up" option may not always be available, especially in situations where the target 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 in that the acquirer must file a preliminary proxy statement during the pendency of the tender offer process.
New DGCL Section 251(h)
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 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 or rejection 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 is not being cancelled in the merger must be converted into, or into the rights to receive, the same amount and kind of consideration (, 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 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.
DGCL Section 252 was also amended to extend the provisions of Section 251(h) to mergers between Delaware and non-Delaware corporations.
The adoption of Section 251(h) is expected to replace the use of "top-up" options and eliminate the need for stockholder approvals for the second-step merger in many circumstances. However, given the requirements of Section 251(h), it may not be a solution to avoiding stockholder approval in all two-step mergers and "top-up" options and "dual-track" structures may still need to be considered as possible alternatives.