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Proposed Amendments Clarify DGCL Section 251(h)May 2, 2014
The Delaware legislature recently proposed amendments to Section 251(h) of the Delaware General Corporation Law (DGCL). Section 251(h) permits an acquirer in a two-step M&A transaction to consummate the second-step merger without a stockholder vote, so long as the acquirer purchased 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 merger vote.
The proposed amendments, which are scheduled to take effect on, and will be applicable to merger agreements entered into on or after, August 1, 2014, will eliminate several ambiguities identified by deal lawyers as limiting the flexibility of Section 251(h), and will continue to modernize two-step M&A transactions in Delaware. The most significant clarifications are highlighted below.
“Interested Stockholder” Restriction Removed
As originally adopted, Section 251(h) is not available where a party to the merger agreement was an “interested stockholder” under Section 203 (the business combination statute) of the DGCL. This potentially jeopardized the availability of Section 251(h) in a deal where stockholders owning 15% or more of the target’s voting stock signed tender and support agreements with the acquirer, which may have resulted in the acquirer being deemed an “interested stockholder”. The proposed amendments delete the “interested stockholder” restriction to the use of Section 251(h), and therefore, eliminate this concern.
Ability to “Include” Shares Otherwise Owned or Irrevocably Accepted
Section 251(h) requires that the offeror shall have purchased in the tender offer at least such percentage of the target’s stock necessary to deliver the requisite stockholder approval of a merger. Read literally, this only permits shares purchased in the tender offer to be counted for that merger vote percentage, and necessarily excludes any target shares otherwise owned by the acquirer, including shares acquired through a “roll over”, as is typical in a private equity sponsor transaction. A related timing-of-funding issue resulted from the requirement that shares be “owned” prior to the occurrence of the second-step merger. The proposed amendments clarify that shares “irrevocably accepted” or “otherwise owned” by the offeror, including, presumably, shares acquired through a “roll over”, may be included for purposes of determining whether the requisite number of shares to deliver stockholder approval of a merger is owned following completion of the tender offer for purposes of Section 251(h).
No Requirement to Convert Shares Held at Commencement into Same Consideration
The proposed amendments would clarify that shares held at the commencement of the tender offer by parties to the merger agreement and related persons need not be converted in the second-step merger into the same consideration as is payable in the tender offer for the same class or series of the target’s shares. This change would permit shares owned at commencement to be treated differently, including apparently by way of a “roll over” in a private equity sponsor transaction that relies on Section 251(h) in a manner that is compliant with Rule 14d-10 (the “all holders/best price” rule) under the Securities Exchange Act of 1934.
Non-Compulsory Use of Section 251(h)
The proposed amendments also clarify that the parties to a two-step transaction may permit Section 251(h) to apply to the transaction, thereby not foreclosing the possibility of consummating the transaction by another means, such as the use of a top-up option and short form merger.
To date, no other state other than Delaware has adopted a statute similar to Section 251(h) that would facilitate two-step M&A transactions In fact, there continue to be many states with corporate statutes that actively interfere with two-step transactions, such as Washington which only permits a “forward” subsidiary short-form merger of target into a merger sub, and California, which mandates the payment of non-redeemable common shares as consideration in a merger if more than 50% but less than 90% of the target’s shares were acquired in the first-step tender offer. It appears that, for the time being, Delaware will continue to be the leading jurisdiction with a state-of-the-art corporate statute.
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 New York and California, 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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