Proposed Amendment To Section 251 Of The DGCL: Rendering Top-Up Options Obsolete And Increasing The Appeal Of Tender Offers

The Delaware State Bar Association recently proposed an amendment to the Delaware General Corporation Law ("DGCL") that would increase the appeal of utilizing a tender offer structure by eliminating the need to obtain stockholder approval for a long-form second-step merger following a public tender offer. Tender offers have important advantages over one-step mergers, including a shorter time frame between signing and closing and more focused SEC review of disclosure materials. If this amendment is approved by the Delaware legislature, as expected, it would, effective as of August 1, 2013, further increase the certainty of closing tender offers in a timely manner and help to solidify the tender offer as the acquisition structure of choice for acquirers, including financial sponsors.

Background

A "two-step" transaction begins with the tender or exchange offer, subject to a minimum condition that the acquirer obtain more than 50 percent of the outstanding voting stock of the target, followed by a "back-end" merger that squeezes out the remaining target stockholders if 90 percent of the target's outstanding shares are tendered. However, if the 90 percent threshold is not achieved in the tender offer, the acquirer would need to complete the second step via a traditional long-form merger requiring SEC-compliant proxy statements and a stockholder vote. The proposed amendment would permit an acquirer to complete a two-step transaction without obtaining a stockholder vote as long as the acquirer were able to purchase a majority of the outstanding stock in the tender offer (or, if applicable, such higher percentage as may be specified in the target's charter).

The Requirements of Section 251(h)

Under proposed Section 251(h) (which would apply only to publicly traded targets and other widely held companies), a stockholder vote would not be required to complete a two-step merger if certain conditions are satisfied, including the following:

The merger agreement states that the merger is governed by Section 251(h) and requires that the acquirer complete the merger as soon as practicable following the offer; The acquirer consummates an offer for all of the target's outstanding voting stock; Following the offer, the acquirer owns enough target shares to adopt the merger agreement; At the time the target's board of directors approves the merger agreement, no party to the merger agreement is an "interested stockholder" (as defined in Section 203(c) of the...