Delaware Formally Adopts Proposed Statutory Amendments Governing Mergers Following the Completion of a Tender Offer

by Davis Wright Tremaine LLP
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The governor of Delaware recently signed into law previously proposed amendments to Section 251(h) of the Delaware General Corporation Law (“DGCL”), which make Section 251(h) more accessible to deal parties by:

  1. Eliminating the prohibition against “interested shareholders” from taking part in second-step mergers conducted in accordance with Section 251(h);
  2. Clarifying that a merger agreement may "permit or require" the merger to be effected under Section 251(h), rather than force the buyer to conclusively choose the Section 251(h) process in the merger agreement;
  3. Clarifying that the tender or exchange offer, which must be for “any or all of the outstanding stock” of the target company, may exclude certain target company stock;
  4. Clarifying which shares of stock tendered into a tender or exchange offer are “owned” by the acquiror for the purposes of determining the voting threshold required under Section 251(h); and
  5. Confirming that the requirement to proceed to a merger "as soon as practicable" following a tender offer will only apply to tender offers consummated under Section 251(h).

Adopted in 2013, Section 251(h) of the DGCL eliminated the requirement for a shareholder vote in a second-step merger following consummation of a tender or exchange offer if, among other things, the merger agreement contained a provision expressly stating that the merger will be governed by Section 251(h) of the DGCL, and that the target company’s shares were listed on a national securities exchange or held of record by more than 2,000 stockholders immediately prior to the execution of the merger agreement. The amendments help clarify the application and process of the existing statute, and offer a number of modifications intended to make the Section 251(h) process more flexible.

Prior to the adoption of these amendments, any party who is an “interested stockholder” (as defined in Section 203(c) of the DGCL) of the target company at the time the target’s board of directors approved the merger agreement was prohibited from utilizing Section 251(h). Since the definition of “interested stockholder” in Section 203(c) includes any person who “has the right to acquire” 15 percent or more of the target’s voting stock, the availability of Section 251(h) prior to these amendments was potentially jeopardized in a deal where shareholders owning 15 percent or more of the target’s voting stock signed tender and support agreements with the acquiror. By eliminating the “interested stockholder” restrictions, it is now clear that tender and support agreements with significant shareholders can be utilized by an acquiror without affecting the availability of a Section 251(h) second-step merger.

The amendments to Section 251(h) also clarified that a merger agreement may "permit or require" the merger to be effected under Section 251(h), rather than force the buyer to conclusively choose the Section 251(h) process in the merger agreement. This clarification is important as parties to a merger are now clearly permitted to change course after the execution of the merger agreement and effect the merger under a different statutory provision.

The amendments to Section 251(h) also clarified that although in order to take advantage of the Section 251(h) process, the tender or exchange offer  must be for “any or all of the outstanding stock” of the target company, the offer may exclude all shares of stock owned by:  (1) the target company, (2) the acquiror, (3) any person that directly or indirectly owns all outstanding stock of the acquiror (generally the acquiror’s parent company, if wholly-owned), and (4) any direct or indirect wholly-owned subsidiary of any of the foregoing.

The amendments also clarified which shares of stock tendered into a tender or exchange offer are “owned” by the acquiror for the purposes of determining the voting threshold required under Section 251(h). Currently, Section 251(h) requires that as a condition to the completion of a second-step merger the acquiror must “own” at least the percentage of stock that would be required to adopt the merger agreement under the DGCL and the target’s governing documents. The amendments to Section 251(h) clarified that shares of stock counted toward this threshold would include both (1) the shares irrevocably accepted for purchase or exchange pursuant to the offer and “received” by the depository prior to the expiration of the offer, and (2) all shares otherwise owned by the acquiring corporation. Shares of stock are deemed to be “received” by the depository when stock certificates have been physically received or, for uncertificated shares, when such shares are transferred into the depository’s account, or an agent’s message has been received by the depository. Accordingly, the amendments to Section 251(h) confirm that:

  1. The consummation of a tender or exchange offer for Section 251(h) purposes occurs when the shares are accepted for payment, not when payment is actually made;
  2. Ownership of the necessary amount of stock to proceed to a second-step merger under Section 251(h) is determined on the basis of the outstanding shares of the target company, not the fully diluted shares; and
  3. Shares delivered with a notice of guaranteed delivery are not deemed "owned" by the buyer for Section 251(h) purposes until either their physical receipt by the depository or the receipt of an agent's message.

Finally, the revised statute confirmed that the requirement to proceed to a merger "as soon as practicable" following a tender offer will only apply to tender offers consummated under Section 251(h).

It is important to note that the amendments to Section 251(h) do not change the fiduciary duties of directors in connection with mergers conducted pursuant to Section 251(h) or the level of judicial scrutiny that will apply to the decision to enter into a merger agreement.

The amendments to Section 251(h) will become effective on Aug. 1, 2014 and apply to all merger transactions after that date.

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