Recently, the Delaware legislature and governor enacted into law new Section 251(h) of the Delaware General Corporation Law (DGCL), which could provide significant benefits to acquirers looking to make acquisitions of Delaware public companies in a cost-efficient and timely manner. Section 251(h) will eliminate the need in many “two-step” acquisitions to obtain stockholder approval of a back-end merger following a successful first-step tender offer, where the back-end merger was not otherwise able to be effected as a “short-form” merger under the DGCL.
A “two-step” acquisition begins with a first-step tender or exchange offer, subject to a minimum condition that the acquirer obtain more than 50 percent of the outstanding voting stock of the target, followed by a back-end merger that squeezes out the remaining target stockholders if 90 percent of the target’s outstanding shares are tendered in the first-step tender offer. “Top-up” options are stock options designed to help buyers using a “two-step” structure reach the 90 percent ownership threshold needed to effect a short-form merger, and thereby avoid the timing issue otherwise associated with a back-end merger following a first-step tender offer that falls short of achieving 90 percent ownership. Without a “top-up” option, if the buyer holds less than 90 percent of the target company’s shares after the first-step tender offer, the target company must hold a stockholders’ meeting with the accompanying time and expense associated with preparing and filing proxy materials to approve the back-end merger, even though stockholder approval is a certainty (as a result of the buyer having acquired a majority of the voting shares through the tender offer). However, the “top-up” option is not always a practical fix, especially where the target does not have sufficient authorized shares to enable the “top-up” option to be exercised.
Section 251(h) eliminates the requirement for a stockholder vote in a back-end merger for a target company whose shares are listed on a national securities exchange or are held by more than 2,000 record holders if:
(1) the merger agreement expressly states that the merger is governed by Section 251(h) and requires the buyer to complete the merger as soon as practicable following the tender offer;
(2) the buyer completes a tender offer for all of the target company’s outstanding voting stock;
(3) following the closing of the first-step tender offer, the buyer owns at least the percentage of the target company’s stock that would otherwise be required to adopt the merger agreement and approve the back-end merger (i.e., a majority, or higher threshold if required by the target’s organizational documents);
(4) at the time the target company’s board of directors approves the merger agreement, no party to the merger agreement is an interested stockholder (as defined in Section 203(c) of the DGCL) of the target;
(5) the buyer entity that consummated the offer merges with the target pursuant to the merger agreement; and
(6) the target company’s remaining outstanding shares are converted in the back-end merger into the same consideration paid to stockholders in the offer.
Section 251(h) of the DGCL should lead to an increase in the use of the “two-step” acquisition structure for mergers and acquisitions of Delaware public companies.