This Shearman & Sterling memo notes that the proposed 2018 DGCL amendments would eliminate appraisal rights for 2-step stock-for-stock deals structured in conformity with Section 251(h). This excerpt explains that the amendment would accomplish this by extending Delaware’s “market out” to stock-for-stock exchange offers:
Delaware law does not provide dissenting shareholders with appraisal rights in transactions that are effected pursuant to a “long-form” merger (in which the target company calls a special meeting for purposes of obtaining shareholder approval), so long as the consideration paid to the target’s shareholders consists solely of stock that is listed on a national securities exchange or is held by more than 2,000 holders. This is the “market out” exception.
However, as currently written, Delaware law does not extend the “market out” exception to two-step mergers effected pursuant to §251(h), in which the target company is acquired without the need for a stockholder vote following a tender offer.
A proposed amendment to the DGCL on March 20, 2018 is designed to eliminate this inconsistency. Under the proposed amendments, the same “market out” exception that applies to long-form mergers would apply to short form mergers effected pursuant to §251(h) – i.e., in stock-for-stock deals.
It is very uncommon for stock-for-stock deals to be structured as 2-step transactions, and the memo speculates that the availability of appraisal rights may be one of the reasons. Plenty of impediments would nevertheless remain, including the need to register the shares to be issued & the delays associated with SEC review. Still, the memo suggests that the amendment could increase the utility of Section 251(h) in these transactions.
– John Jenkins