The Delaware State Bar Association recently proposed an
amendment to the Delaware General Corporation Law
("DGCL") that would increase the appeal of utilizing a
tender offer structure by eliminating the need to obtain
stockholder approval for a long-form second-step merger following a
public tender offer. Tender offers have important advantages over
one-step mergers, including a shorter time frame between signing
and closing and more focused SEC review of disclosure materials. If
this amendment is approved by the Delaware legislature, as
expected, it would, effective as of August 1, 2013, further
increase the certainty of closing tender offers in a timely manner
and help to solidify the tender offer as the acquisition structure
of choice for acquirers, including financial sponsors.
Background
A "two-step" transaction begins with the 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. However, if the 90 percent
threshold is not achieved in the tender offer, the acquirer would
need to complete the second step via a traditional long-form merger
requiring SEC-compliant proxy statements and a stockholder vote.
The proposed amendment would permit an acquirer to complete a
two-step transaction without obtaining a stockholder vote as long
as the acquirer were able to purchase a majority of the outstanding
stock in the tender offer (or, if applicable, such higher
percentage as may be specified in the target's charter).
The Requirements of Section 251(h)
Under proposed Section 251(h) (which would apply only to
publicly traded targets and other widely held companies), a
stockholder vote would not be required to complete a two-step
merger if certain conditions are satisfied, including the
following:
- The merger agreement states that the merger is governed by Section 251(h) and requires that the acquirer complete the merger as soon as practicable following the offer;
- The acquirer consummates an offer for all of the target's outstanding voting stock;
- Following the offer, the acquirer owns enough target shares to adopt the merger agreement;
- At the time the target'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; and
- The acquirer merges with the target pursuant to the merger agreement, with the target's remaining outstanding shares converted into the same consideration paid to stockholders in the offer.
The Implications of Section 251(h)
If the minimum condition in an offer is satisfied, the outcome
of the stockholder vote in favor of a long-form merger is
essentially guaranteed because the acquirer will own a sufficient
number of the target's shares to approve the merger. However,
the long-form merger adds significant time and expense. In recent
years, acquirers have frequently used a "top-up" option
to avoid a long-form merger following a tender offer in which the
90 percent short-form merger threshold is not met. If the acquirer
does not obtain tenders of 90 percent of the target shares, the
top-up option enables the target to issue shares to the acquirer to
permit it to reach the 90 percent threshold. However, the top-up
option is not always viable because the target may not have
sufficient authorized and unissued capital stock to allow the
acquirer to reach the 90 percent threshold, which, given the math,
typically requires the target to have significant excess authorized
and unissued stock unless the number of shares tendered is very
close to 90 percent. Proposed Section 251(h) would essentially
eliminate the need for long-form mergers after a successful tender
offer and thereby render top-up options obsolete.
In some instances, margin rules have made financing an acquisition
through a tender offer difficult unless the merger closes
simultaneously with the tender offer. Given the disparity between
the 90 percent statutory short-form threshold and the typical
majority minimum tender condition, this could never be certain
under the current regime. The enactment of Section 251(h) would
solve this problem and, as a result, should increase the
utilization by private equity firms of tender offers as an
acquisition structure.
Conclusion
The enactment of proposed Section 251(h) could provide
significant benefits to acquirers looking to make acquisitions of
Delaware corporations in a cost-efficient and timely manner. The
use of tender offers for targets dropped off dramatically beginning
in the 1990s due to a number of questionable judicial
interpretations of the application of the "best price"
rule to typical management payments in takeovers,1 but
the SEC remedied that in 2006 with its amendments to Rule 14d-10.
Since then, tender offers have increasingly become the transaction
structure of choice for acquisitions.2 The proposed
Section 251(h) should facilitate the continuation of this
trend.
Dealmakers, of course, will need to consider how this latest
development will affect practice. In this regard, we note that
acquirers (including financial sponsors) who rely on transaction
financing may have to tweak their financing commitments to
accommodate the shortened time frame as they will not want to
appear to be disadvantaged in auction processes compared to
potential acquirers who do not need traditional transaction
financing.
Footnotes
1. See Gerber v. Computer Assocs. Int'l Inc., 303 F.3d 126 (2nd Cir. 2002).
2. Amendments to the Tender Offer Best-Price Rules, Exchange Act Release No. 34-54684 (Nov. 1, 2006).
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