George Bason is the global head of the mergers and acquisitions practice at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum by Mr. Bason, William M. Kelly, Phillip R. Mills, Justine Lee and Scott B. Luftglass.
As the percentage of tender offers in friendly transactions has risen in recent years, so too has use of so-called “top-up options.” Yet, despite their prevalence, the validity of top-up options has not been addressed squarely by the Delaware courts and continues to be challenged by the plaintiffs’ bar. However, two separate rulings from the Delaware Court of Chancery this week suggest that the use of top-up options is likely to present little litigation risk.
A top-up option gives the acquiror the right, upon successful completion of a tender offer at or above the minimum condition level (usually 50%), to purchase newly issued shares of the target so as to increase its ownership in the target to greater than 90%. Under Delaware law, once an acquiror crosses the 90% ownership threshold, it may complete the back-end squeeze out through a simple short-form merger. The purpose of the top-up option is to expedite the closing of the merger (and thus the receipt of the consideration by the target’s stockholders) once a majority (but less than 90%) of the target’s stockholders have endorsed the transaction by tendering their shares.
