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E-MailThe following post comes to us from Abigail Pickering Bomba, partner in the corporate practice at Fried, Frank, Harris, Shriver & Jacobson LLP, and is based on a Fried Frank publication by Ms.Bomba, David N. Shine, John E. Sorkin, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.
The following amendments to Delaware General Corporation Law (“DGCL”) Section 251(h) have been passed by the Delaware legislature, clarifying a number of issues that have arisen since adoption of the law last year. If signed by the Governor (as is expected), the amendments will apply to merger agreements entered into on or after August 1, 2014. Under Section 251(h), a merger agreement can include a provision that eliminates the need for a target stockholder vote for a merger after a tender or exchange offer if, among other conditions, the acquiror then owns at least the number of shares that would be sufficient to approve the merger under the DGCL and the target’s charter. The amendments provide for the following:
- Elimination of “interested stockholder” exclusion. Section 251(h) until now has excluded any “interested stockholder” of the target company, as defined under DGCL Section 203(c), from utilizing Section 251(h). The Section 203(c) definition of “interested stockholder” includes a person who owns or “has the right to acquire” 15% or more of a company’s voting stock. Thus, a 15% or more stockholder has been precluded from utilizing Section 251(h); and there has been uncertainty as to whether an acquiror would become an “interested stockholder” if it entered into tender and support agreements with target stockholders that covered more than 15% of the target company’s shares. The amendment now eliminates the “interested stockholder” exclusion.
- Practical implication. With elimination of the “interested stockholder” exclusion, a stockholder with a large equity stake in the target company (including, obviously, a controlling stockholder) may utilize Section 251(h). In addition, it is now clear that tender and support agreements can be utilized in connection with a tender or exchange offer without affecting the availability of a Section 251(h) second-step merger.
- Clarification that shares tendered into an offer are not counted toward the acquiror’s ownership of shares unless physically received by the depositary. Under Section 251(h), an acquiror’s ownership of shares, for purposes of determining whether a sufficient number of shares are owned after the tender or exchange offer, includes those shares that are irrevocably accepted pursuant to the offer and “received” by the depositary prior to expiration of the offer (as well as all shares otherwise owned by the acquiror). The amendment clarifies that shares will be considered “received” by the depositary, in the case of certificated shares, only if the stock certificates have been physically received by the depositary, and, in the case of uncertificated shares, only if the shares have been transferred into the depositary’s account or an agent’s message has been received by the depositary.
- Practical implication. The amendment clarifies that shares tendered into an offer by guaranteed delivery must have been physically received by the depositary prior to expiration of the offer to be counted toward the acquiror’s ownership of target stock for purposes of Section 251(h).
- Confirmation that a merger agreement may permit or require a Section 251(h) merger. Section 251(h) has provided that it is applicable to any merger agreement that sets forth that the merger “shall be” effected under Section 251(h). As amended, Section 251(h) is applicable to any merger agreement that “permits or requires” the merger to be effected under Section 251(h). The amendment also clarifies that the current requirement that the merger be effected as soon as practicable after consummation of the offer applies only to a merger that is actually effected under Section 251(h).
- Practical implication. The amendment makes clear that, for a Section 251(h) merger to be available, the merger agreement need only permit (and does not have to require) that the merger will be effected under the Section. Thus, a Section 251(h) merger can be abandoned and consummated under a different statutory provision if, for example, all of the requirements for applicability of Section 251(h) have not been met.
