April 3, 2013

Proposed Delaware Law Amendments May Impact Deal Structures

Here’s news from Greenberg Traurig’s Cliff Neimeth: Legislative amendments have been introduced to the Delaware State Bar Association (Section on Corporation Laws) which, if adopted, could have a meaningful structural impact on two-step transactions (i.e., acquisitions effected pursuant to a first-step tender or exchange offer followed by a back end merger).

The proposed amendments (which would apply, on an opt-in basis only to target’s listed on a national securities exchange or whose voting stock is held by more than 2,000 holders) would add a new provision to Section 251 of the Delaware General Corporation Law (i.e., subsection (h) ) to permit the consummation of a second-step merger (following completion of the front-end tender or exchange offer) if certain structural and disclosure conditions are satisfied. In other words, the need to seek and obtain stockholder approval for the merger would be eliminated even though the purchaser did not (whether directly in the initial tender offer period, as extended, or subsequently by means of exercising a “top up” option or using a Rule 14d-11 “subsequent offer period”) acquire the 90% or more of the target’s outstanding voting stock necessary to effect a “short-form” merger under Section 253 of the DGCL.

Specifically, a stockholder vote on the back end merger no longer would be necessary, so long as (i) the merger agreement expressly states that the second-step merger is being effected under (new) Section 251(h) of the DGCL and that the merger will be completed as promptly as practicable after consummation of the tender or exchange offer; (ii) the purchaser commences and completes, in accordance with the terms of the merger agreement, an “any and all” tender or exchange offer for such number of outstanding target shares that otherwise would be entitled to vote to approve the merger agreement and, in fact, owns such requisite percentage after consummation of the tender or exchange offer; (iii) the second-step merger consideration to be paid and paid for shares not cancelled in the merger or qualifying for dissenters’ rights is the same as the front-end tender or exchange offer consideration; (iv) the corporation completing the tender offer, in fact, merges with the target, and (v) at the time the target’s directors approve the merger agreement, no constituent party (aggregated with its affiliates and associates) is an “interested stockholder” (i.e., a holder of 15% or more of the target’s outstanding stock) within the meaning of Section 203 of the DGCL (i.e., Delaware’s three-year moratorium/business combination statute).

The proposed legislation, in part, reflects the recognition that over the past 10 years or so top-up options to reach the 90% ownership (short-form merger) threshhold are routine (except, of course, where the target lacks sufficient authorized and unissued capital stock “headroom” to effect the top-up exercise) – especially after the recent Olson v. EV3, In re Cogent and other decisions of the Delaware Court of Chancery completely validating the use of top-ups.

Proposed (new) Section 251 (h) of the DGCL would, if adopted, be an “opt-in” provision. If not used the parties, constituents to the merger agreement will simply continue to use top-up options (if available), “subsequent offer periods” under Rule 14d-11, the so-called Terremark-Verizon and Burger King dual track tender offer-merger proxy structures and other mechanisms that seek to expedite completion of a second-step statutory merger to take out minority holdouts (where a short-form merger is not otherwise available).

As you know, “entire fairness” review does not apply to a short-form merger effected pursuant to Section 253 of the DGCL. The decision to enter into a merger agreement (including one invoking, if adopted, new Section 251(h) and to declare it “advisable” and all other relevant common law fiduciary duties (care, loyalty, candor . . . ), considerations and determinations by the target’s directors would not altered in any way by the proposed amendments.

This legislative development (much like the adoption of Regulation M-A back in 2000 and the SEC’s amendment of the “all-holders/same price” Rules last decade) should lead to an increase in the use of the tender offer structure for negotiated acquisitions. This benefits both the target and the purchaser who share a common interest in selling and purchasing not just legal control, but 100% of the target’s voting equity as quickly as possible. That said this also could put more heat on the tender offer disclosures and perhaps inadvertently incentivize strike suit plaintiffs’ to more closely scrutinize the overall tender offer deal structure, conditions, compliance and disclosure because they won’t have a back-end bite at the apple on a second-step transaction.

Appraisal rights under Section 262 of the DGCL will remain available for shares to be cashed out in the second-step merger and the timing of requisite notices, actions to perfect and the like, could be accelerated under certain circumstances.