Gibson Dunn Discusses Proposed Amendments to DGCL Section 251 Increasing Attractiveness of Tender Offer Structure

The Delaware State bar recently proposed an amendment to Section 251 of the Delaware General Corporation Law (DGCL) to add new subparagraph (h) that would greatly enhance the appeal of the tender offer over a one-step merger structure.

Currently, bidders can usually consummate an acquisition more quickly as a tender offer compared to a one-step merger.  If, however, the bidder is unable to reach the 90% threshold necessary to effect a short form merger, the bidder must prepare, file and mail to stockholders an information statement on Schedule 14C (which is subject to SEC review and comment) before a back-end merger can be consummated.  In that case, the tender followed by a back-end merger can take much longer than a one-step merger.  As a result, parties to a business combination must carefully evaluate a number of factors before deciding how to structure their acquisition transactions.

Assuming Section 251(h) is adopted by August 1,2013, as currently expected, the new provision will present parties to a business combination with another significant factor to consider when structuring their acquisition transactions.  The new provision will basically provide a means to avoid the need to circulate a Schedule 14C information statement and hold a stockholder vote should the tender offer fall short of reaching the 90% threshold specified in DGCL Section 253.

The proposed amendment to streamline the acquisition process would be available on an “opt-in” basis to target companies whose shares are either listed on a national securities exchange or held of record by more than 2,000 holders.  In addition, Section 251(h) would be available only if the following requirements are satisfied:

  • the merger agreement is entered into on or after August 1, 2013 and expressly provides that the merger is governed by Section 251(h) and shall be effected as soon as practicable following consummation of the tender offer;
  • the acquiror consummates a tender or exchange offer for any and all of the outstanding stock of the target company, on the terms provided for in the merger agreement, that would have otherwise been entitled to vote on the adoption or rejection of the merger;
  • following the consummation of the offer, the acquiror owns at least the required amount of target company stock necessary to adopt the merger, as specified in the merger agreement;
  • at the time such target company’s board approves the transaction, no party to the merger agreement is an “interested stockholder” (as defined by DGCL Section 203(c)) of the target company;
  • the acquiror follows through and merges with or into the target company pursuant to the terms of the merger agreement; and
  • shares of the target company that remain outstanding and which were not cancelled by the merger are then converted into, or into the right to receive, the same amount and kind of cash, property, rights or securities paid for shares of the target company upon consummation of the offer.

New Section 251(h) would allow parties to a business combination to avoid the DGCL provisions that necessitate a stockholder vote when less than 90% of the target company’s shares are acquired in a tender offer and thereby avoid the cost and delay that buyers find particularly unattractive in two-step transactions.  To date, the method used most frequently to avoid this additional cost and delay is the “top-up” option (enabling a bidder to reach the 90% ownership threshold by purchasing the additional shares from the target company after the tender offer is completed).  But such options are not always viable, especially when the target company lacks sufficient authorized and unissued capital stock to allow the potential acquiror to reach the requisite 90% ownership threshold.

In addition, Section 251(h) would substantially reduce the desirability of and need for a “subsequent offering period” under Rule 14d-11 and the “dual-track” structure (where the acquiror files a preliminary proxy statement for a proposed merger with the target during the pendency of its tender offer for target shares) which has gained in popularity recently.

On Friday, April 5, 2013, Section 251(h) was discussed at length during a breakout session at the American Bar Association’s Spring Meeting.  The Chair of the Subcommittee on Public Company Acquisitions, Jim Griffin, moderated a panel with Michele Anderson, Chief of the SEC’s Office of Mergers & Acquisitions, along with several other OM&A staff members.  Ms. Anderson asked the audience several questions regarding the potential impact the amendments would have on disclosures made in tender offers.

Several members of the bar noted that Section 251(h) would likely result in certain changes to the disclosure found in Schedule TO and Schedule 14D-9 statements.  In particular, target companies utilizing Section 251(h) will likely include a discussion of appraisal rights in their Schedule 14D-9 filings, given that there will not be an opportunity to make such disclosures after the tender offer expires.  In addition, bidders will likely expand their disclosure to highlight the fact that stockholders who do not tender in the offer will not face the lengthy delays typically associated with back-end mergers, assuming the tender is successfully consummated.

It was also observed that acquisitions utilizing Section 251(h) would not be deemed a short-form merger where stockholders’ only remedy is to seek appraisal rights.  But rather, stockholders who are forced to give up their target shares in exchange for the merger consideration would have the same rights and remedies that they would have in a long-form merger—that is, the right to bring an action challenging the fairness of the transaction as well as the adequacy of the attendant disclosures.  

Some practitioners have posited that Section 251(h) may give rise to an “apathy factor” among stockholders confronted with a tender offer, prompting them to take a “wait-and-see” approach.  We believe this should not affect the behavior of most institutional investors who are faced with a tender offer.  When Rule 14d-11 (relating to subsequent offering periods) was first proposed, and later adopted, in Regulation M-A, some commentators speculated that it would cause stockholders to hold out and not tender in the initial offering period.  Experience since that time has shown the critics were wrong in their concerns. We believe the potential risk of any meaningful hold-out factor as a result of Section 251(h) is highly speculative and unlikely.

Of course, it remains to be seen how M&A market practices develop and evolve following the adoption of Section 251(h), should it occur later this year as expected.  It is possible this new provision will cause tender offers to displace traditional one-step mergers as the method of choice for consummating business combinations.  If Section 251(h) becomes effective, as expected, then one thing is certain: the simplified and streamlined acquisition process will present yet another reason for companies to incorporate in Delaware.

Special thanks to our corporate m&a partners Eduardo Gallardo and Michele Hodges for their helpful insights on proposed Section 251(h).