Death of the Top-Up Option in Two-Step Transactions

James Matarese and Danielle Lauzon are M&A partners at Goodwin Procter LLP whose practices focus on technology and life sciences companies. Their recent representations include Onyx Pharmaceuticals in its merger with Amgen in a transaction valued at $10.4 billion.  

On October 1, 2013, Amgen Inc. (“Amgen”) announced the completion of its acquisition of Onyx Pharmaceuticals, Inc. (“Onyx”).  The transaction was structured as a two-step acquisition – a tender offer by Arena Acquisition Company (the “Purchaser”), a Delaware corporation and wholly-owned subsidiary of Amgen, for all outstanding shares of Onyx, followed by a “back-end” merger of the Purchaser with and into Onyx.  At the time of expiration of the offer, approximately 78.5% of the outstanding Onyx shares were validly tendered and not withdrawn from the offer.  This satisfied the minimum condition for the offer (a typical majority of the fully-diluted shares), and as a result, the Purchaser accepted for payment all of the tendered shares and Amgen completed the merger of the Purchaser with and into Onyx on the same day.  Amgen and Onyx were able to become one of the first to take advantage of new Section 251(h) of the Delaware General Corporation Law (the “DGCL”) that became effective on August 1, 2013, which allows for the consummation of two-step acquisitions without stockholder approval following a tender or exchange offer if certain conditions are satisfied.

Prior to August 1, 2013, an acquiror had, in most circumstances, a higher threshold to satisfy in order to utilize the “short form” merger provisions under Delaware law.  Pursuant to Section 253 of the DGCL, an acquiror can consummate a “short-form” merger without stockholder approval only if the acquiror owns 90% of the target’s outstanding voting stock after the first step tender or exchange offer.  Prior to August 1, 2013, an acquiror utilizing a two-step structure was required to reach the 90% threshold, or prepare, file and mail to stockholders a proxy or information statement relating to stockholder approval of the back-end merger.  Although obtaining such approval is a fait accompli, having to undertake the back-end stockholder approval mechanics delays acquisition of 100% of the target equity, delays payment of the merger price to the non-tendering stockholders and adds to transaction expenses.  In addition, the risk of a back-end merger generally made the two-step transaction structure unappealing to acquirors who required debt financing in order to fund the aggregate merger price as a result of both SEC rules applicable to debt-financed tender offers and margin rules of the Federal Reserve Board.  Acquirors used subsequent offering periods, “top-up” options and dual-track structures to provide greater certainty that the 90% threshold could be reached and a short-form merger utilized, but these mechanics did not provide a guaranteed outcome.  It is worthwhile to note that the more complex the mechanics, the more likely those mechanics become subject to challenge by the plaintiffs’ class action bar. To that end, “top-up” options have been challenged in the courts under fiduciary duty, appraisal rights and invalid stock issuance theories (sometimes successfully, such as in Olson v. ev3 (Del. Ch. 2011)).

Recognizing the blunt (some might say creative) instruments available to seek achievement of the 90% threshold of Section 253 of the DGCL in the tender offer context and the lack of a substantive rationale for delaying what is an inevitable outcome, the Delaware legislature with a stroke of the pen cured the problem for Delaware corporations. Section 251(h) allows parties to a business combination to “opt in” by including a provision in the merger agreement that specifies the parties’ intent to have the provision apply, provided, among other requirements, the target company has shares listed on a national securities exchange or held of record by more than 2,000 holders.  The operative provision of 251(h) requires that the number of shares tendered in the offer must be sufficient to satisfy the voting threshold under the DGCL and the company’s certificate of incorporation if the parties were not relying on 251(h).  The other principal requirement of Section 251(h) is that the back-end merger must be completed as soon as practicable following expiration of the tender offer.

The merger agreement by and among Amgen, Onyx and the Purchaser was entered into on August 24, 2013, and consequently, the parties expressly elected for 251(h) to apply, thus eliminating the need for the merger agreement to include terms for a “top-up” option and alleviating any concerns that the process and added expense associated with a “long-form” merger would be required. The use of 251(h) in this acquisition achieved the statute’s objectives of allowing parties to consummate a transaction on a timely basis where there are minimal regulatory considerations that could delay the closing and making the merger consideration available to non-tendering stockholders immediately once the tender offer has closed – in the Amgen-Onyx deal, the tender offer expired on October 1, 2013 and Amgen completed the back-end merger the same day.

At the time Section 251(h) was added, Section 262 of the DGCL, the appraisal statute, was also amended to provide that appraisal rights are available for all Section 251(h) mergers, including back-end mergers.  However, the notice of appraisal rights can be provided through the tender or exchange offer documents.  The appraisal rights notice requirement was satisfied in the Amgen-Onyx transaction by the inclusion of the statutory provisions in Onyx’s Schedule 14D-9 filed with the Securities and Exchange Commission and mailed to all Onyx stockholders.

The use of Section 251(h) in the Amgen-Onyx transaction allowed the parties to immediately consummate the two-step acquisition following the accumulation of a sufficient number of Onyx shares in the tender offer.  It provided a cost-effective manner to consummate the back-end merger, thereby enabling Onyx’s non-tendering stockholders to receive the merger consideration on a faster basis that previously available to parties.  Undoubtedly, 251(h) has sounded the death knell for the “top-up” option.