Since their emergence about ten years ago, “top-up” options have become a common feature in tender offers forming the first stage in a “two-step” cash acquisition. A recent decision of the Delaware Court of Chancery confirms that properly structured top-up options will withstand legal challenge and effectively facilitate prompt completion of a back-end merger. Olson v. EV3, Inc., et al., C.A. No. 5583-VCL (Del. Ch. Feb. 21, 2011).

A top-up option granted by an issuer to the acquirer enables the acquirer, once it has obtained control of the target company in the tender offer, to immediately increase its ownership to the threshold required (90 percent in Delaware) to effect a short-form merger and secure full ownership of the target without having to hold a shareholder meeting. As Vice Chancellor Laster recognized in his recent opinion, this approach offers advantages to all parties. By avoiding the cost and delay of having to hold a special meeting whose outcome is a foregone conclusion, the buyer is able to close the back-end merger sooner, thus reducing transaction risk, facilitating efficient financing, and speeding integration of the acquired company. Target shareholders, for their part, also benefit from a reduction in transaction risk, and, importantly, receive their merger consideration months earlier than they otherwise would.

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