November 17, 2010

VC Laster Blesses Top-Up Option in Carlisle/Hawk Merger Agreement

From Kevin Miller of Alston & Bird, a member of our Advisory Board:

At last Thursday’s M&A session of the PLI Securities Law Institute, VC Laster gave a shout out to the top-up option provision in the merger agreement pursuant to which Carlisle Companies is acquiring Hawk Corp. saying it had everything a properly drafted top up option should have and even an extra feature (i.e., requiring payment of the par value of the top up shares in cash) that, though not essential, created a nice optic.

A top-up option can allow a transaction structured as a two step acquisition (a first step tender offer followed by a second step merger) to close more quickly, getting the merger consideration into the hands of nontendering shareholders faster once the ultimate merger becomes a fait accompli.

A top-up option typically gives the acquiror, upon acceptance of tendered shares which, together with previously acquired shares, exceed the number of shares necessary to approve a long form merger but which, together with those previously acquired shares, is less than the minimum number of shares necessary to effect a short form merger, the right to purchase a number of newly issued shares of the target sufficient to increase the acquiror’s ownership in the target to the minimum number of shares necessary to effect a short form merger.

Though VC Laster doesn’t necessarily speak for other members of the Delaware Court of Chancery, this is as close to the blessing of a specific top up option provision as we have seen. See also VC Parsons’ recent decision addressing top up options, In re Cogent Litigation.

VC Laster highlighted key features of the Carlisle/Hawk top up provision from this SEC filing, including:

– terminates upon termination of the Merger Agreement
– can only purchase the number of additional shares necessary to get to 90% plus one share
– can only be exercised once and only during short window post acceptance
– can only be exercised if own more than 75% and less than 90% [note:
potentially exceeds amount permitted to be issued without shareholder approval under stock exchange listing rules]
– can’t exceed number of authorized and unissued and unreserved
– dilutive impact ignored for purposes of appraisal proceedings