The New Delaware One-Step: DGCL Section 251(h) Revolutionizes Delaware Merger Practice

Section 251(h) of the Delaware General Corporation Law (the “DGCL”) became effective on August 1, 2013 and is quickly becoming a staple of mergers and acquisitions practice.  In certain circumstances, Section 251(h) expedites friendly acquisitions by eliminating the need for a stockholder vote on a second-step merger following consummation of a tender or exchange offer for a publicly listed Delaware corporation.

According to FactSet MergerMetrics, twenty-one friendly tender offers for the shares of Delaware corporations were launched between August 1, 2013 and January 8, 2014.  The merger agreements for twenty of those deals contain Section 251(h) provisions, and two were signed and filed with the SEC within two weeks of Section 251(h) becoming effective.

Why is Section 251(h) becoming so popular, so quickly?

Friendly acquisitions often employ a two-step structure in which the acquiror first launches a tender or exchange offer for any and all outstanding shares of the target’s common stock.  If the acquiror acquires 90% of the target’s outstanding shares in the offer, it can promptly consummate the acquisition via a short-form merger without a stockholder vote under DGCL Section 253.  Ideally, a two-step process allows parties to sign and close the deal faster than they could with a one-step merger process, which requires the target to file a proxy statement and hold a stockholders’ meeting to approve the merger.

Before Section 251(h), however, a stockholder vote was required if the acquiror failed to reach the 90% threshold in the tender offer. As a result, there was a risk that a two-step process would not be any quicker than a one-step process, due to the delay of filing preliminary and definitive proxy statements and holding a stockholders’ meeting following the tender offer process.  Worse, the delay and related expense were unnecessary if the acquiror owned between 50% and 90% of the voting shares after the offer, in which case approval of the merger was guaranteed.

Parties have developed three imperfect solutions to minimize the effects of failing to reach the 90% threshold in the offer.  First, subsequent offering periods give the acquiror a second chance to reach the 90% threshold following the close of the initial offering period.  But there are no guarantees that it will, and each subsequent offering period adds delay (albeit less delay than filing a proxy statement and holding a stockholders’ meeting).  Second, if included in the merger agreement, a top-up option allows the acquiror to purchase from the target enough authorized and unissued and/or treasury shares to reach the 90% threshold.  However, the availability of a top-up option depends on the target having a large number of authorized shares available (and authorizing additional shares requires the target to hold a stockholders’ meeting).  Third, a dual-track structure, in which the proxy statement is prepared and filed before the offer closes, may be faster but it does not avoid the expense of running concurrent processes for the offer and stockholders’ meeting.

New Section 251(h) solves these problems by allowing a friendly acquiror to consummate a short-form merger without a stockholder vote upon the acceptance of shares for purchase in the tender or exchange offer if it obtains sufficient shares to approve a long-form merger at a stockholders’ meeting (typically a majority unless the charter requires a higher vote) and certain other requirements are satisfied.  Given the prospect of substantially reduced transaction costs and the ability to get consideration into the hands of selling stockholders more quickly, it is not surprising that Section 251(h) is rapidly becoming a staple of mergers and acquisitions practice.  In appropriate cases, it can be used to replace two or more steps in the merger dance with one.

The views expressed in this article are not necessarily those of Skadden, Arps or its clients.

1 thought on “The New Delaware One-Step: DGCL Section 251(h) Revolutionizes Delaware Merger Practice”

  1. What happens to the stockholders of the Target that do not accept the Purchaser’s offer to purchase by the deadline?

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