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Proposed Amendments Further Improve DGCL Section 251(h)

March 29, 2016


Recently proposed amendments to Section 251(h) of the General Corporation Law of the State of Delaware (“DGCL”) will serve to clarify and further improve Section 251(h), which has had a significant impact on two-step acquisitions for Delaware corporations.

Section 251(h) permits an acquirer in a two-step acquisition to consummate the second-step merger without a stockholder vote, so long as the acquirer purchased, together with shares already owned, the requisite percentage (typically a majority) of the outstanding shares of the target necessary in the first-step tender offer to deliver stockholder approval in a second-step merger vote (the “Requisite Threshold”). 

If approved, the proposed amendments would take effect on, and would be applicable to merger agreements entered into on or after, August 1, 2016.

Rolling Target Shares under Section 251(h)

The most significant of the proposed amendments would clarify the interaction between the “roll over” of target company shares and Section 251(h).  The proposed amendments would provide that shares of the target company that are required by written agreement to be transferred, contributed or delivered to the offeror (or an affiliate thereof) in exchange for stock (or other equity interests) of the offeror (or an affiliate thereof) may be counted for purposes of determining whether the Requisite Threshold has been achieved.  In addition, the proposed amendments would clarify that rolled shares, and other shares of the target company held in treasury by any subsidiary of the target, are not required to be converted in the second-step merger into the right to receive the same consideration as paid in the offer.

These proposed amendments to Section 251(h) provide additional comfort that the “roll over” of target company shares would not undermine the availability of Section 251(h), which would be of particular benefit for private equity acquirers who seek to have the target’s management “roll over” their shares in an acquisition.

Clarification on Multiple Classes or Series of Stock

Under Section 251(h), it is unclear whether a target company with multiple classes or series of capital stock outstanding, but not all such classes or series of capital stock listed on a national securities exchange or held by more than 2,000 holders immediately prior to the execution of the merger agreement, could utilize Section 251(h).  The proposed amendments clarify that Section 251(h) would apply to any target company that has any class or series (as opposed to all classes and series) of capital stock listed on a national securities exchange or held by more than 2,000 holders immediately prior to the execution of the merger agreement.  This clarification would be a welcome change for those publicly-traded Delaware target companies with dual class structures or preferred stock outstanding, in particular those who may have completed a PIPE (private investment in public equity) in which unlisted preferred stock was issued.

Ability to “Include” Shares Otherwise Owned by Parent of Acquirer

Section 251(h) requires that the stock acquired in the tender offer, together with the stock otherwise owned by the offeror, be a sufficient number of shares necessary to satisfy the Requisite Threshold.  Read literally, this only permits shares purchased in the tender offer, and shares owned directly by the offeror, to be counted for this purpose.

The proposed amendments to Section 251(h) would clarify that shares of the target company owned by (i) the parent company of the offeror (assuming the offeror is a wholly owned (direct or indirect) subsidiary of such parent company), and (ii) all wholly owned (direct or indirect) subsidiaries of such parent company would count towards the determination of whether the Requisite Threshold has been achieved.  This clarification would avoid the unnecessary complication of a parent company of the offeror (or such parent company’s wholly owned subsidiaries) having to transfer target company shares to the offeror for purposes of complying with Section 251(h).

Section 251(h) Does Not Yet Extend to Merger Subsidiaries that are not Corporations

To date, the Delaware legislature has not expanded the applicability of Section 251(h) to a merger subsidiary (making the tender offer) that is a limited liability company or other non-corporate entity.  To the contrary, Section 264(e) of the DGCL does not state that Section 251(h) applies to mergers or consolidations between corporations and limited liability companies.  However, other jurisdictions that have adopted Section 251(h)-like statutes have addressed this point.  Each of Maryland, Texas and Virginia, all of which have adopted Section 251(h)-like statutes, have provided that the offeror can be a non-corporate entity, such as a limited liability company.


This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Paul Scrivano, an O'Melveny partner licensed to practice law in California and New York, and Noah Kornblith, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted. 

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