The State of Delaware recently adopted amendments, which will be effective on August 1, 2016, to an oft-used statute that streamlines the acquisition of a public Delaware corporation (the “Target”) structured as a tender offer followed by a back-end merger. The statute eliminates the requirement of a stockholder vote for the merger if a number of shares are tendered sufficient to approve the merger under Delaware law and the Target’s governing documents. The amendments clarify certain details and broaden the scope of what types of parties and tender offers qualify to use the statute.
Since its initial adoption, this statute has been a welcome development for buyers, Targets and their stockholders, as well as the lawyers who work to complete these transactions on behalf of their clients.
The upcoming effectiveness of the amendment to the Delaware statute presents an opportunity to highlight the fact that the State of Texas adopted in its last legislative session a statute that allows for the same transaction structure and carries many of the same advantages (the “New Texas Merger Statute”).
To understand the approach taken under the New Texas Merger Statute, it is helpful to understand the historic approach for acquisitions of public companies, the Delaware statute as initially adopted in 2013, and the amendments made to the Delaware statute in 2014 and 2016.
The Old Two Step
Before the adoption of the New Texas Merger Statute, there were generally two ways to structure an acquisition of a publicly traded Texas corporation. The transaction could be structured as a long-form merger under which a vote of the Target’s shareholders is required to approve the transaction. Alternatively, parties that wanted to avoid the expense and delay of a shareholder vote to approve a long-form merger could structure the transaction as a two-step tender offer.1 In the first step, the buyer commences a tender offer, subject to a minimum condition that the buyer obtain more than 50% of the outstanding voting stock of the Target.2 This initial step is followed by a statutorily permitted short-form (or second-step) merger without a vote of the target shareholders if the buyer obtains the statutorily required minimum of 90% of the Target’s shares in the tender offer.
But what if the buyer pursues a tender offer and obtains more than 50% -- but less than 90% -- of Target’s shares? Buyers can use subsequent offering periods to attempt to acquire a sufficient number of additional shares to reach the 90% ownership threshold or, if negotiated into the merger agreement, take advantage of a “top-up” option under which the Target will issue additional shares to reach this threshold.3 If the 90% threshold is not achieved, the buyer must complete the acquisition by means of a traditional long-form merger. This structure involves filing a proxy statement and waiting for a vote of the Target’s shareholders to approve the transaction. At this point, the parties find themselves in the unattractive situation where (i) the buyer has acquired a majority of the Target’s shares in the tender offer (which will be sufficient for the shareholder approval of the merger whenever the shareholder meeting can occur); (ii) additional time, expense and resources are required to complete an SEC compliant proxy statement and hold the shareholder meeting; (iii) the Target’s shareholders must wait for this extended period to receive the merger proceeds; (iv) the remaining public shareholders complicate the ability of the buyer to refinance the Target’s debt and access the Target’s balance sheet; and (v) a new and delayed appraisal valuation point is triggered for dissenting shareholders.4
Delaware: A Pioneering Approach
In response to this unattractive situation, the State of Delaware adopted Section 251(h) of the Delaware General Corporation Law, as amended (DGCL). Section 251(h) permits a buyer to effect a second-step merger without a vote of the Target’s stockholders if, after consummation of a tender offer, it owns a sufficient percentage of the shares of the Target as would be necessary to approve the merger agreement under Delaware law and the Target’s certificate of incorporation. Upon its initial adoption in 2013, the requirements to use Section 251(h) included the following:
Immediately upon its effectiveness in August 2013, Section 251(h) was popular as a means to structure acquisitions in which the target was a publicly traded Delaware corporation. In fact, only a small number of Delaware governed tender offers since the August 1, 2013 effective date of Section 251(h) have not elected to use this transaction structure. <
Furthermore, a recent decision by the Delaware Chancery Court has enhanced the attractiveness of this transaction structure. The Delaware Supreme Court has held in recent decisions that the approval of a long-form merger by a majority of a corporation’s outstanding shares pursuant to a statutorily required vote of the corporation’s fully informed, uncoerced, disinterested stockholders renders the business judgment rule irrebuttable. In June 2016, the Delaware Chancery Court ruled in In re Volcano Stockholder Litigation6 that stockholder approval of a merger under Section 251(h) by accepting a tender offer has the same cleansing effect as a vote in favor of a merger under Section 251(c) of the DGCL. In doing so, the Court noted that Section 251(h) incorporates protections for stockholders, including required involvement of the board of directors, that justify equating a tender with an approving vote.
Amendments to the Delaware Statute
The immediate and widespread use of Section 251(h) quickly highlighted matters in the statute that called for clarification. A number of these matters were addressed in an amendment to Section 251(h) adopted in 2014 (the 2014 DGCL Amendments). In addition, on June 16, 2016, House Bill 371 was signed into law, further amending Section 251(h) (the 2016 DGCL Amendments), effective with respect to merger agreements entered into on or after August 1, 2016. Together, these amendments were adopted to address the following issues:
Similar to the Delaware statute, the Target must be a corporation whose shares are either listed on a national securities exchange or held of record by at least 2,000 shareholders.10 However, in contrast to the Delaware statute, in which the buyer must be a corporation, under the New Texas Merger Statute the buyer may be any type of organization. Like Section 251(h) following the 2014 DGCL Amendment, the New Texas Merger Statute has no limitation on its use by “interested shareholders.”
The New Texas Merger Statute states that a plan of merger is not required to be approved by the shareholders of the corporation if:
It is important to note that the New Texas Merger Statute, like the Delaware statute, leaves room for a Target’s certificate of formation to require shareholder approval of certain mergers following a tender offer. It also does not alter the fiduciary duties of directors that apply to these merger transactions.
Conclusion, including Potential Next Steps along the Trail
When considering acquisitions or sales of publicly traded Texas corporations, buyers and Targets, as well as the lawyers who work to complete these transactions on behalf of their clients, should remain aware of the advantages available under the New Texas Merger Statute, many of which can be seen by looking at Section 251(h) of the DGCL as initially adopted and as amended in 2014 and 2016.
Moving forward, the State of Texas may want to consider amendments to broaden the use of the New Texas Merger Statute. For instance, an amendment could be adopted to count either Affiliate-Owned Stock or Rollover Stock, or both, toward the applicable share ownership threshold.
More boldly, the State of Texas could consider expanding the New Texas Merger Statute so that it is available for Targets whether or not a class or series of its shares is listed on a national securities exchange or widely held. The ABA Corporate Laws Committee approved a provision in the 2016 Revision of the Model Business Corporation Act (the MBCA) that reflects this approach (the “MBCA Intermediate Merger Provision”).12 The official commentary in the 2016 Revision to this MBCA Intermediate Merger Provision explains that (i) the shareholder action in selling in response to the offer provides the necessary consent for the transaction, in lieu of a shareholder vote, if the other conditions for the merger are met, and (ii) the requirements for a merger under this provision, together with related provisions under the MBCA, are intended to ensure that shareholders are not disadvantaged by the absence of a vote, and that they receive the same protection in terms of timing, director duties, and appraisal rights that they would in a transaction approved by a shareholder vote. Given the protections that would be available to shareholders in the New Texas Merger Statute, the State of Texas could expand the scope of the New Texas Merger Statute to include Targets that are private Texas corporations.
A similar version of this article was published by Texas Lawbook. Click here for a PDF.
1 Tender offers have a number of important advantages over long-form mergers. Tender offers typically can be completed in a shorter time frame between signing and closing. They also have a more focused SEC review of disclosure materials. There was a period when two-step transactions were out-of-favor compared to long-form mergers. The SEC’s best price and all-holders rules, together with related court decisions, created uncertainty regarding the two-step transaction structure. Clarifying actions taken by the SEC revived the attractiveness of the two-step transaction structure.
2 This condition assumes that the Target’s certificate of formation requires the approval of a simple majority of the shares of capital stock to approve a merger. Even in such cases, different minimum conditions are sometimes specified, either involving a higher threshold or seeking a majority of the shares on a fully diluted basis.
3 A provision under which the Target is obligated to issue to the buyer the additional shares needed to reach the 90% threshold. This top-up option solution, however, depends on the Target having enough authorized and unissued shares to get the buyer to the 90% threshold, and can be of limited use if shares tendered in the offer are not reasonably close to 90% due to the effect of the option exercise on the total shares outstanding as well as shares owned by the buyer.
4 In an attempt to mitigate this unattractive situation, some parties pursue “dual track” structures to anticipate the possibility of a required stockholder vote and reduce the delay experienced when a first-step tender offer fails to reach the 90% share threshold. The “dual track” approach adds complication and expense to the transaction.
5 One question that has arisen is whether a merger under DGCL Section 251(h) can be accomplished if the Target’s listing on a national securities exchange has been suspended before the execution of the Merger Agreement, but the listing itself has not terminated. Experienced corporate practitioners have taken the position that the 251(h) listing requirement is a technical eligibility test which operates as a surrogate for a public company subject to the tender offer rules promulgated by the Securities and Exchange Commission. As such, they treat this requirement technically and conclude that the Target is listed on the national securities exchange until the Form 25 to terminate its status as a listed company is effective.
6 Consolidated C.A. No. 10485-VCMR, 2016 WL 3583704 (Del. Ch. June 30, 2016).
7 These certificated shares are deemed received under these circumstances so long as the certificate representing such shares is not cancelled prior to consummation of the offer.
8 An “agent’s message” is a message transmitted by the clearing corporation acting as nominee, received by the depository, and forming part of the book-entry confirmation, which states that such clearing corporation has received an express acknowledgment from a stockholder that such stockholder has received the offer and agrees to be bound by the terms of the offer, and that the buyer may enforce such agreement against such stockholder.
9 Regardless of how uncertificated shares are held, they will cease to be “received” to the extent such uncertificated shares have been reduced or eliminated due to any sale of such shares prior to the consummation of the offer.
10 Under the New Texas Merger Statute, this requirement must be met immediately before the date Target’s board of directors approves the plan of merger. Under Section 251(h) the relevant time is the signing of the merger agreement.
11 Similar to Section 251(h), this requirement may exclude certain shares. Under the New Texas Merger Statute, the offer may exclude shares of the Target owned at the time of the commencement of the offer by: (i) the Target; (ii) the buyer; (iii) any person who owns, directly or indirectly, all of the ownership interests in the buyer; or (iv) any direct or indirect wholly owned subsidiary of a person described in clauses (i), (ii) or (iii).
12 This provision is contained in Section 11.04(j) of the Exposure Draft of the 2016 Revision of the Model Business Corporation Act that has been posted for comment (http://www.americanbar.org/content/dam/aba/administrative/business_law/corplaws/draft_201606.authcheckdam.pdf).
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