The Delaware bar has recently proposed an amendment to add a new Section 251(h) to the Delaware General Corporation Law (the “DGCL”). This new section is expected to facilitate the use of tender-offer structures by eliminating the need, under certain circumstances, for obtaining stockholder approval of a second-step merger following a tender offer.
Under current law, if a buyer acquires more than 90% of the target’s shares under the first-step tender offer, the buyer can close the merger through the Delaware short-form merger statute. However, if less than 90% of the target’s shares are acquired during the first-step tender offer, then stockholder approval of the merger is required. Due to the challenges and potential delays inherent in closing a tender offer, many merger agreements provide for a “top-up option,” which allows the target to issue shares in order to assist the acquirer in reaching the 90% threshold. The proposed amendment would eliminate the need for a shareholder vote, or “top-up option,” by permitting the merger if the buyer acquires a sufficient percentage of the target’s shares in the initial tender offer, to approve the merger under Delaware law (i.e., 50%), or as otherwise required by the target’s charter.
The proposed amendment would only apply to target companies listed on a national securities exchange, or held by more than 2,000 shareholders of record. In addition, in order to use the new subsection 251(h), the merger agreement must expressly “opt in” to the provision, provide the same terms under the merger agreement to all outstanding stock remaining after the initial tender offer and meet other specific criteria called for in subsection 251(h).
The new legislation also proposes a change to Section 262 of the DGCL to make appraisal rights available to shareholders in a merger effected pursuant to subsection 251(h). Practitioners should be aware that the proposed changes would not alter the fiduciary duties of directors, or the level of judicial scrutiny applied to the decision by the target to enter into the merger agreement.