Proposed Amendment to Delaware Law May Lead to Increased Use of Tender Offer Structure in M&A Transactions
The Delaware State Bar Association has proposed an amendment to the Delaware General Corporation Law (DGCL) that is intended to streamline the process for completing tender offers and could lead to an increase in the use of the tender offer structure over long-form mergers. If adopted as proposed, the amendment will apply to merger agreements entered into on or after August 1, 2013.
The two main acquisition structures in M&A deals involving public Delaware target companies are the long-form merger and the two-step tender offer, which consists of a tender offer followed by a back-end merger. Assuming no other timing issues, tender offers can typically be completed more quickly than long-form mergers, but require the second step in order to obtain 100 percent ownership of the target. If at least 90 percent of the outstanding shares of each class of voting stock are purchased in the tender offer, a short-form back-end merger under DGCL Section 253 can be completed promptly after closing the tender offer. However, if a 90 percent tender is not achieved, a long-form back-end merger will be required. Given that most public companies do not permit action by written consent, the long-form back-end merger will require a stockholder vote and take considerably longer to complete than a short-form back-end merger, even though the result of this stockholder vote is predetermined (assuming a majority tender).
Until now, the market has come up with two imperfect workarounds to the potential timing issues associated with back-end mergers. In the late 1990s/early 2000s (just before tender offers fell out of favor due to problems under the SEC's all-holders rule), parties began to use top-up options. These give the acquiror in a successful tender offer an option to purchase a number of target company shares that will result upon exercise in the acquiror owning in excess of the 90 percent shares necessary to complete a short-form merger. However, targets frequently do not have enough authorized but unissued shares to permit a top up option for more than a few percent, and therefore, use of top-up options is often not a viable solution. Another more recent workaround is the "Burger King" structure, where an acquiror commences a dual track one-step merger at the same time as the tender offer, so that it can flip to the one-step merger process if the 90 percent tender is not obtained. However, the Burger King dual track structure is more costly than undertaking a two-step tender offer and short-form back-end merger and cannot be completed as quickly.
Proposed Section 251(h) would be a more complete solution. It would permit a short-form back-end merger for merger agreements entered into on or after August 1, 2013 so long as the merger consideration is the same as the consideration under the tender offer, the tender offer results in ownership of at least such percentage of each class and series of target stock as would be required to adopt the merger agreement and the transaction otherwise satisfies the requirements of the proposed rule. Section 251(h) may prove particularly useful in a number of situations. For example, where there are no regulatory or other conditions that present timing issues, Section 251(h) may emerge as the preferred structuring alternative because its timing advantages increase deal certainty. Section 251(h) is also likely to be useful for private equity sponsors, because it will give them access to the assets of the target company more quickly for purposes of obtaining secured financing. However, there will remain deals for which a long-form merger remains the appropriate structure; for example where a lengthy closing period is envisioned due to regulatory or other conditions and a prompt stockholder meeting is sought in order to cut-off the target board's fiduciary out. Nonetheless, for appropriate deals, if adopted, Section 251(h) is likely to quickly become a favored tool in deal lawyers' structuring tool bag.
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