December 9, 2021

Effective Time: When Do Target Stockholders Stop Being Stockholders?

In Swift v. Houston Wire & Cable, (Del. Ch; 12/21), the Chancery Court addressed the question of whether a plaintiff in a Section 220 books & records lawsuit had standing despite filing the lawsuit after the effective time of the merger.  In arguing that he continued to have standing, the plaintiff pointed to the language of the merger agreement that provided that the closing of the transaction would not occur until the day following the effective time of the merger. The plaintiff argued that the closing date should be determinative with respect to the standing issue.

Vice Chancellor Will rejected the plaintiff’s argument. The transaction was a cash merger, and Section 2.01 of the merger agreement provided that all outstanding shares of the company’s common stock would be cancelled and converted into the right to receive $5.30 in cash at the “Effective Time” of the merger.  In turn, Section 1.03 of the agreement addressed the Effective Time and said that “the Merger will become effective at such time as the Certificate of Merger has been duly filed with the Secretary of State of the State of Delaware or at such later date or time as may be agreed by the Company and Parent in writing and specified in the Certificate of Merger in accordance with the DGCL.”

The Vice Chancellor noted that as a result of this provision, the merger became effective upon filing with the Secretary of State on the day prior to the closing, and that under the terms of the merger agreement, the target’s stockholders no longer held stock, but merely the right to receive the merger consideration:

Delaware law required that the Merger Agreement state “[t]he manner . . . of cancelling some or all of such shares.” The Merger Agreement set the Effective Time as the point when stockholders ceased to own stock in Houston Wire. Under Section 251 of the DGCL, the Merger Agreement “bec[a]me effective, in accordance with [Section 103]” when Houston Wire filed the Certificate of Merger with the Delaware Secretary of State.

When an instrument (such as a certificate of merger) is filed in accordance with Section 103, the Delaware Secretary of State certifies it “by endorsing upon the signed instrument the word ‘Filed’ and the date and time of its filing. This endorsement is the ‘filing date’ of the instrument and is conclusive of the date and time of its filing in the absence of actual fraud.” An instrument filed in accordance with Section 103 “shall be effective upon its filing date.” The Delaware Secretary of State endorsed the Houston Wire Certificate of Merger with the word “FILED” and a time stamp of June 15, 2021 at 12:19 p.m.

Houston Wire shares continued to trade in the hours following the Effective
Time because Nasdaq did not suspend trading in Houston Wire shares until the close of business. That period of continued trading does not change the reality that, under the Merger Agreement, the instruments being traded represented “only the right to receive the Merger Consideration payable in respect thereof.” Beyond that, the shares were “cancelled.”

As a result, the Vice Chancellor concluded that the plaintiff’s was a former stockholder at the time he filed the Section 220 lawsuit, and granted the company’s motion to dismiss due to lack of standing.

John Jenkins