December 19, 2016

Tender Offers: Changes to Section 251(h) Aid Private Equity “Rollovers”

This Cleary blog notes that recent amendments to Section 251(h) of the DGCL – which provides a streamlined process for second-step mergers following tender offers that satisfy its conditions – may increase the attractiveness of tender offers to private equity buyers.  This excerpt summarizes the key changes to the statute:

Section 251(h) now expressly exempts “rollover stock”, which is broadly defined to include shares transferred to the acquiror or its affiliates pursuant to a written agreement in exchange for equity in the acquiror or its affiliates, from the requirement in Section 251(h) that all shares not purchased in the tender offer be converted in the second-step merger into the same consideration as was offered to tendering stockholders.

Additionally, the amendments make clear that all shares of rollover stock contributed to the acquiror and its affiliates prior to the effectiveness of the merger, including shares contributed after the tendered shares are accepted for purchase, will count for purposes of determining whether the acquiror owns the minimum number of shares necessary to allow the second-step merger to proceed without a vote.

Private equity buyers often want the target’s senior executives to roll over their equity as part of a deal. These amendments allow the Section 251(h) requirements to be satisfied through a rollover that takes place after the tender offer. This facilitates a management equity rollover by eliminating the need to work around the SEC’s “best price rule” – which requires that the same consideration per share be paid in tender offers.

John Jenkins