The Corporation Law Section of the Delaware State Bar Association has proposed legislation that will amend the General Corporation Law (DGCL) to allow public companies to opt out of the current requirement to obtain stockholder approval of the back-end merger following a successful tender offer in which the buyer has obtained a majority of the target company’s voting stock. Traditionally, an accelerated back-end merger was only available if the buyer first obtained 90 percent ownership following a successful tender offer. In situations where the buyer was unable to achieve this 90 percent threshold, the buyer was required to proceed with the formality of obtaining stockholder approval of the back-end merger, which required the preparation of a proxy statement that would be filed with, and subject to the comments of, the Securities Exchange Commission (SEC) before it could be mailed to the target company’s stockholders in advance of the stockholder meeting to approve the back-end merger. In addition, if the buyer was using debt financing to acquire the target company’s stock, then this delay between the closing of the tender offer and the stockholder vote approving the back-end merger frequently required the buyer to obtain bridge financing.
Avoiding the cost and delay of such “long form” back-end mergers (and avoiding the need for bridge financing) caused buyers of public companies either (a) to shun the tender offer process entirely or (b) to utilize various tools in an attempt to avoid financing constraints or ensure a faster timetable, such as the use of top-op options, subsequent offer periods under Rule 14d-11, the “Burger King” dual track tender offer/proxy statement structure, stockholder action by written consent, and other creative alternatives. However, if Delaware adopts proposed Section 251(h) to the DGCL as expected in August 2013, then buyers will be able to acquire Delaware public companies through a tender offer without the need for a “long form” back-end merger or top-up options, subsequent offer periods or other alternatives. Specifically, under proposed Section 251(h), a buyer would be able to acquire a Delaware public company (defined as a corporation whose shares are listed on a national securities exchange or held by more than 2,000 stockholders) through a tender offer without stockholder approval of the back-end merger, if the following requirements are satisfied:
- the merger agreement must expressly state that the back-end merger is governed by Section 251(h) and will be consummated “as soon as practicable” following completion of the tender offer;
- the buyer must initiate and consummate the tender offer for the target company’s shares otherwise entitled to approve the back-end merger;
- after the consummation of the tender offer, the buyer must own at least the number of shares of the target company otherwise necessary under the DGCL to approve the back-end merger;
- at the time the target company’s board approves the merger agreement, no party to the merger agreement is an “interested stockholder” of the target company pursuant to Section 203(c) of the DGCL;
- the buyer must merge with or into the target company pursuant to the terms of the merger agreement; and
- the buyer must pay the same consideration at the consummation of the back-end merger as it paid upon consummation of the tender offer.
We believe that this new Section 251(h) will allow buyers to realize the timetable and other benefits of tender offers and will significantly increase the frequency with which tender offers are used to acquire Delaware public companies.