Friday, October 29, 2010
BHP Billiton's hostile bid for Potash Corporation of Saskatchewan continues to provide interesting lessons for M&A buffs. You can’t underestimate the power of a hostile deal, especially a cross-border one with regulatory uncertainty, to raise enormous amounts of risks for both sides.
For Potash Corp this week has brought both good and bad news. The good news is, potash (the mineral) is in high demand, with Potash Corp reporting stellar quarterly profits. The bad news is that, in a weird twist not often seen in hostile deals, the stock of Potash Corp may not be trading as high as it should be (i.e. the fundamental value isn’t reflected in the current stock price) because of the uncertainty surrounding the BHP bid. In fact, Potash’s Q3 investor presentation spends much time driving home this point, providing a “hypothetical unaffected stock prince analysis” and honing in on the inadequacy of BHP’s offer.
Potash Corp investors that are hoping that as a result of the company's strong earnings BHP would raise its offer may not see that happening anytime soon. Recent reports indicate that, in addition to Saskatchewan, the Canadian federal and other provincial governments may get in the way of any possible takeover by a non-Canadian buyer. Despite the fact that BHP’s offer is likely too low at the moment in light of the improving trends in fertilizer prices, based on statements (“I think we're going to get screwed” ) by a source allegedly close to BHP, it appears raising the offer is not likely at the top of their list given the tense negotiations with the Canadian government. Of course, BHP issued a statement trying to distance itself from this comment, stating that "We have absolute confidence in the integrity of the Investment Canada process. We continue to have ongoing negotiations with the Investment Review Division, but we do not comment on these discussions in the media.” We will see on November 3rd when the Canadian authorities complete their review of the bid.
BHP and its management are under a lot of presssure with this deal. In addition to the problems they are encountering with the Canadan government, if they lose this deal, it will be the second big hostile deal that they have failed to complete in the last two years. Furthermore, losing out on the Potash deal will be painful and costly given the amount of resources they have devoted to it over the past several months.
In the meantime, Potash Corp’s CEO is also trying to calm things down, indicating that the company is looking for a white knight and has engaged in “very active conversations about alternatives to BHP’s hostile offer.” Given the way the things are going in Canada with the BHP bid, it will be interesting to see whether these other options involve foreign buyers.
Wednesday, October 27, 2010
WSJ explains an swaps strategy for M&A arbs. The long and short of it: use credit derivatives - and not equity - to bet on an acquisition:
Take the acquisition of packaging manufacturer Pactiv, which is being funded mostly with debt. Pactiv's shares have risen 38% since news of a deal broke in May. But the company's credit-default swaps have more than tripled: Five-year insurance on $10 million of debt costs $425,000 a year, compared with $140,000 in May, according to Markit.
What I think is interesting about this strategy is that when you start buying CDS' you'll continue to have equity-like exposure to the company after it goes private. Of course, one motivation for going private is that managers is that once you're private you no longer have to worry about the public markets and the short-term activist investors. Well, if you are relying the debt markets to fund business or your acquisition, going private may not be quite the quiet have you expected.
According to Reuters, firms are still hoarding nearly $1 trillion in cash with no plans to spend it:
Nonfinancial U.S. companies are sitting on $943 billion of cash and short-term investments, as of mid-year 2010, compared with $775 billion at the end of 2008, Moody's said. This would be enough to cover a year's worth of capital spending and dividends and still have $121 billion left over, it said. ...
Meanwhile only 20 companies hold a large portion of corporate cash balances, with $346 billion on their balance sheets, or 37 percent of the total, Moody's said.
Cisco Systems (CSCO.O) has the largest cash balance, at $39.86 billion, while Microsoft (MSFT.O) is second with $36.79 billion, Moody's said. Google (GOOG.O) has the third-largest balance with $30.06 billion, followed by Oracle (ORCL.O) with $23.64 billion and Ford Motor Co (F.N) at $21.89 billion.
Technology companies held the most cash as a sector, at $207 billion, followed by pharmaceuticals with $124 billion, energy at $105 billion, and consumer products with $101 billion, Moody's said.
What's preventing the spigot from turning on this potential private sector stimulus? Lack of confidence.
Tuesday, October 26, 2010
Andrew Ross Sorkin flags this recent insider trading prosecution. It's of a breed of cases where the SEC is pursuing its "level playing field" theory of insider trading. Traditionally, there has to be a breech of a fiduciary duty tied to the trading in order to lead to liability of the insider trading laws. The SEC, obviously, hates that. They have pushed for years to get the court to adopt a level playing field theory that would permit prosecutions even in the absence of a fiduciary obligation. Such was the case last year in SEC v Dorozhko. That was the case of a hacker who stole inside information and was then prosecuted for trading on it. Clearly, hacking is a bad act. But, was it insider trading? The Second Circuit thought so.
Now comes the SEC's prosecution of this group of 5 railway engineers, railyard workers, and their families. Their crime? According to Sorkin, they were a little too observant for their own good.
(a) in early March 2007, FECR’s Chief Financial Officer requested that Gary Griffiths prepare a comprehensive list of all of the locomotives, freight cars, trailers and containers owned by FECR, along with their corresponding valuations, which she had never requested before;
b) Gary Griffiths became aware of the unusual number of Hialeah yard tours, which began on March 15, and he believed that the tours were being provided to investment bankers who were considering buying or investing in FECI; and
(c) shortly after the tours began, yard employees began asking Gary Griffiths whether FECI was being sold and whether their jobs would be affected by any such sale.
I don't know. It strikes me as a bridge too far. Although, this group did have the sense to go big - scoring $1.6 million in profits. Anyway, I don't imagine the SEC has exhausted its supply of inside-trading investment bankers to go after. It's a little odd that they would focus on this crew.
Monday, October 25, 2010
As devoted readers know, we’ve spent a lot of time covering BHP Billiton’s hostile bid for Potash (see for example this, this, and this). The deal is a classic example of cultural issues in cross-border transactions and the risks that arise in deals where government approval plays an important role. Not only are the parties dropping cash on the people of Saskatchewan, but the provincial government, as Brian noted last week, is wading deeply into this deal. In addition to last week’s shenanigans, the Saskatchewan Premier Brad Wall is playing the nationalist card in today’s press release urging the Canadian federal government to block the deal, stating that BHP’s former Chair views Canada as a “Branch Office” and that
"[I]t's up to our federal government to ensure we retain Canadian control of our natural resources and that we don't become a ‘branch office,' like BHP apparently sees us," Wall said. "Mr. Argus' words and BHP Billiton's apparent view of Canada should give the federal government plenty of pause as it considers its response to the largest foreign takeover in Canadian history. If Australian business leaders like Mr. Argus are concerned about ceding too much control of Australia's natural resources to foreign control, shouldn't our government feel that same concern about Canada's resources?"
Some conservatives in Canada are now accusing Saskatchewan of becoming the next Venezuela (going a bit overboard, no??) for allegedly asking BHP to pay a billion dollars of potential lost taxes up front…Let the fun continue.
Sunday, October 24, 2010
George Geis has posted his new paper, An Appraisal Puzzle, on SSRN. It's forthcoming in the NW. L. Rev. It deals with the issue of how the problem of identity ambiguity means that almost anyone can seek appraisal. Since appraisal statutes only deal with record holders, beneficial holders can still get appraisal, even if they voted in favor the transaction in question. This is a sticky issue!
The division of power between majority and minority shareholders raises a fundamental tension for corporate law scholars. Awarding minority owners too much say can hinder effective decision making and introduce holdout problems. But naked majority rule only breeds a different malady by handing controlling shareholders the power to steal from minority owners. This governance conflict plays out in a variety of contexts but presents itself most explicitly during freezeout mergers.
Appraisal rights are a statutory attempt to deal with this problem. These laws do not directly prevent freezeouts; rather, they impose a liability rule where minority holders can demand fair value for their shares when they object to a deal. Unfortunately, this remedy functions rather poorly, and legal scholars have mostly scoffed at appraisal rights for the last half-century.
Interestingly, however, several recent developments in the back offices of Wall Street and the courthouses of Delaware have created a new appraisal puzzle. The problem relates to identity ambiguity. Appraisal statutes are written to cover record holders (the direct owners listed on a firm’s books). Yet under modern securities settlement practices the identity of these clearinghouse owners no longer changes during the sale of stock. And recent precedent now permits beneficial owners (the real investors) to obtain appraisal even if they purchase shares after voting rights on the merger have been severed from the stock. This introduces what I will call amplified appraisal claims, where a large number of investors can seek appraisal - each insisting that they have claim to a smaller pool of “qualified” shares. Such a development has the potential to turn the dynamics of a freeze-out merger on its head. This Article describes the appraisal identity puzzle, analyzes the theoretical implications for majority and minority shareholders, and proposes a normative response.
Friday, October 22, 2010
Thursday, October 21, 2010
My local paper, The Boston Globe, is for sale ... again. How to solve the problem of the profitless newspaper business? Maybe run it as a non-profit community-focused enterprise? Like public radio? If one has deep enough pockets, that might work.
In the world of takeovers there is only one big ideological divide (and some smaller ones, but I'll ignore them for the timebeing). On the one side, there are those who believe that when it comes to questions about mergers or other corporate transactions the board should have the last word with respect to whether or not shareholders should be permitted to accept, or consider, an offer. The US approach to corporate law has generally taken this approach. On the other side there are those who believe that with respect to mergers or other corporate transactions that the shareholders should be permitted to decide questions about offers on their own without the interference of management, who may, after all, have divergent interests. The UK and its Takeover Panel have generally stood for that proposition.
Last Spring's acquisition of Cadbury by Kraft has changed some of that - moving the divide closer to the US position. The political backlash following the acquisition was the impetus for a review of the current takeover rules. Following a lengthy consultation, the Takeover Panel appears to have changed its mind - it has just issued its consultation report. The Takeover Panel now believes that hostile offers are bad:
After considering these concerns, and the views of respondents, the Code Committee has concluded that hostile offerors have, in recent times, been able to obtain a tactical advantage over the offeree company to the detriment of the offeree company and its shareholders.
In view of this conclusion, the Code Committee intends to bring forward proposals to amend the Code with a view to reducing this tactical advantage and redressing the balance in favour of the offeree company. In addition, the Code Committee has concluded that a number of changes should be proposed to the Code to improve the offer process and to take more account of the position of persons who are affected by takeovers in addition to offeree company shareholders.
In general, it looks like they will be considering adopting rules designed to slow down arbs who move in quickly after a target goes into play and require super majority tender conditions:
i) amending rules which were designed to reflect the provisions of company law (in the case of raising the minimum acceptance condition threshold for offers above the current level of ‘50% plus one’ of the voting rights of the offeree company);
(ii) overriding basic economic rights (in the case of ‘disenfranchising’ shares acquired during the offer period); and
(iii) extending the Code to apply to matters that are currently the responsibility of other regulatory bodies (in the case of providing protection to shareholders in offeror companies).
US-styled deal protections and takeover defenses are still off limits. I suppose that's good news for those of us who like the variation in takeover regulation across jurisdictions. On the other hand, it looks like the Takeover Panel intends to adopt a UK version of constituency statutes that will permit the board to consider many variables, not just offer price, when deciding whether or not recommend and offer. These amendments will provide employees with a greater voice in the decision process - though no veto.
Wednesday, October 20, 2010
Allen & Overy have a 28 page report on the current status of global M&A (current as of Q3, 2010) that includes data broken out by region. They are more optimistic about the direction of M&A trends. Among other tidbits, apparently the volume of hostile deals is at a 3 year high - though the absolute numbers are still quite low on that front.
Tuesday, October 19, 2010
Last week following the decision in In re Cogent, I moved on. I mean, why not, right? The court passed on the deal and it can now proceed to close. Well, not everybody is like me. Who is like a dog with a bone? Appraisal arbs, that's who. Take a look at this press release from Koyote Trading to Cogent shareholders. (The Deal Prof noticed this, too.) In it they write the following:
“We are pleased that 3M acquired a 52% stake in Cogent last week principally through the acquisition of a 38.8% stake owned by the CEO Mr. Ming Hsieh. However, as we and other owners of Cogent have been saying for some time, the $10.50 valuation is clearly inadequate by any number of metrics,” stated Zachary Prensky, co-manager of the Special Situations desk at Koyote. As stated by 3M in a press release dated Friday, October 8th, 2010, less than 15% of the outstanding publically-owned common stock of Cogent was tendered to 3M. ...
We applaud 3M’s long term commitment to a business that we are excited about. But the price offered is inadequate to 48% of Cogent shareholders that declined to participate in 3M’s tender. With the senior management and Board of Cogent committed to the $10.50 valuation, we have no choice but to explore the possible formation of a committee of shareholders to negotiate directly with 3M for a fair and adequate price for our stake. If 3M works with us, we believe we can find a middle ground that rewards minority shareholders for their long-term support of Cogent’s business plan,” added Mr. Prensky.
So, do they really think that the Cogent board will sit down and negotiate a higher price when a court has already given its blessing to the merger agreement? I doubt it. No, what they are probably up it is organizing a committee to pursue appraisal. Meet the appraisal arbs. A memo from Latham & Watkins issued way back in 2007 outlines the strategy.
[T]he Delaware Chancery Court issued its opinion in the Transkaryotic appraisal proceedings. The issue was whether some 10 million Transkaryotic shares acquired afterthe record date largely by hedge funds and arbitragers were entitled to appraisal even though the beneficial owners could not demonstrate that the particular shares had, in fact, either been voted against the merger transaction or had not voted at all—a statutory prerequisite for assertingappraisal rights.
The effect is to create a post-deal announcement market for target shares. Arbs who believe that there might be some real value in an appraisal proceeding can bid the price up and pursue and action - the reasonable costs of which may be borne by the surviving company. Looks like Koyote is thinking of something along these lines with respect to Cogent. Of course, the thing about an appraisal proceeding - it's a battle of experts and in the end the court determines the fair value of the shares - excluding any value created by the announced transaction. That's a little like when a student comes back to me asking for their exam to be re-graded. If you're lucky, it might go up. Then again, it could go down.
On a related matter, there is an open issue with top-up options and appraisal that will receive more attention as deal-makers continue their push toward ever lower and lower triggers for the top-up option. That issue has to do with the dilutive effect of the top-up on shares that may seek appraisal. If Cede tells us anything, it's that a court will analyze the top-up as an integrated part of the entire transaction. That could be troublesome if a diluted appraisal arb challenges a top-up option as part of an appraisal action.
This issue was a live one in Cogent. The plaintiffs made the following argument:
The last argument Plaintiffs make regarding the Top-Up Option is that the appraisal rights of Cogent stockholders will be adversely affected by the potential issuance of 139 million additional shares. They claim that the value of current stockholder’s shares may be significantly reduced as a result of the dilutive effect of a substantial increase in shares outstanding and the “questionable value” of the promissory note. Plaintiffs argue that the Top-Up Option will result in the issuance of numerous shares at less than their fair value. As a result, when the Company’s assets are valued in a subsequent appraisal proceeding following the execution of the Top-Up Option, the resulting valuation will be less than it would have been before the Option’s exercise.
It looks like deal lawyers saw this coming, so the Cogent merger agreement included a protective provision as part of the top-up:
Plaintiffs admit that Defendants have attempted to mitigate any potential devaluation that might occur by agreeing, in § 2.2(c) of the Merger Agreement, that “the fair value of the Appraisal Shares shall be determined in accordance with DGCL § 262 without regard to the Top-Up Option, the Top-Up Option Shares or any promissory note delivered by the Merger Sub.” Plaintiffs question, however, the ability of this provision to protect the stockholders because, they argue, a private contract cannot alter the statutory fair value or limit what the Court of Chancery can consider in an appraisal.(66) Because DGCL § 262’s fair value standard requires that appraisal be based on all relevant factors, Plaintiffs contend the Merger Agreement cannot preclude a court from taking into account the total number of outstanding shares, including those distributed upon the exercise of the Top-Up Option. In addition, they argue that even if the parties contractually could provide such protection to the stockholders, § 2.2 of the Merger Agreement fails to accomplish that purpose because the Merger Agreement does not designate stockholders as third-party beneficiaries with enforceable rights.
While the issue of whether DGCL § 262 allows merger parties to define the conditions under which appraisal will take place has not been decided conclusively, there are indications from the Court of Chancery that it is permissible.(67) The analysis in the cited decisions indicates there is a strong argument in favor of the parties’ ability to stipulate to certain conditions under which an appraisal will be conducted—certainly to the extent that it would benefit dissenting stockholders and not be inconsistent with the purpose of the statute. In this case, I find that § 2.2(c) of the Merger Agreement, which states that “the fair value of theAppraisal Shares shall be determined in accordance with Section 262 without regard to the Top-Up Option . . . or any promissory note,” is sufficient to overcome Plaintiffs’ professed concerns about protecting the Company’s stockholders from the potential dilutive effects of the Top-Up Option. Accordingly, I find that Plaintiffs have not shown that they are likely to succeed on the merits of their claims based on the Top-Up Option.
When the top-up option was simply a cleaning up device to help tidy up a tender, I suspect that few merger agreements included protective provisions as part of the top-up. If we are moving toward lower and lower top-up triggers, then this kind of protective provision will become required, lest a challenge get some traction in the courts.
Monday, October 18, 2010
The recent upswing in merger activity has led some to believe that maybe we are seeing a light at the end of the tunnel and that perhaps M&A might lead us out. Reporting the results of an Ernst & Young survey the FT.com is trying to put a squash on that:
Some of the world’s top business leaders are reversing plans for mergers and acquisitions due to a sharp deterioration in confidence over the past month amid fears of the uncertain macroeconomic outlook.
Austerity measures, increasing taxes, currency conflicts and regulatory concerns, among other issues, are undermining confidence in the global economy and reducing appetite for M&A, in spite of improved funding availability.
There has been a big turnaround in confidence from April when there were still hopes that the summer would represent the turnaround. According to the April 2010 study 47% of respondents anticipated doing an acquisition in the next six months. Now? That number has dropped to less than 25%.
Sunday, October 17, 2010
Mike McCann over at SI.com has to low-down on the acquisition of Liverpool FC by New England Sorts Ventures. It certainly was not a simple transaction - involving the High Court in London and a TRO issued by a court in Texas. In any event, Liverpool FC is the newest addition to Red Sox Nation. Welcome on board.
Saturday, October 16, 2010
The WSJ highlights the potential costs of CEOs of a sale of their company:
Only 14.5% of chief executives would do better selling their companies at a 25% premium than they would under their current pay packages, according to an analysis of compensation packages for CEOs of companies in the Standard & Poor's 1500 index by compensation consultancy Shareholder Value Advisors.
In many cases, the loss of expected future pay and the time value of options would more than wipe out gains on equity and on the spread between the option exercise price and the take-out price.
The analysis showed that most CEOs—729, or 78.9% of the sample—would be significantly worse off (or more than a 5% loss) if their companies were acquired at a 25% premium, though shareholders likely would be better off. Of those CEOs, 428, or 46% of the full sample, would see their wealth fall by 50% or more in a sale that brought shareholders a 25% premium.
Another 61 (6.6%) CEOs would come out roughly even (within +/- 5%) with a sale at a 25% premium.
It's hard to say how these kind of incentives affect decisions by CEOs when there's an offer on the table, but it might be worth thinking about whether these wealth effects result in entrenchment.
Wednesday, October 13, 2010
I just want to add a couple of things to Afra and The Deal Professor's posts on the recent In re Cogent opinion from Vice Chancellor Parsons. In addition to providing clarity on the question of top-up options, the opinion provides more data points in at least two other areas of interest. First, Vice Chancellor Parsons signs up to the "sucker's insurance" school with respect to matching rights in merger agreements. Here's the relevant portion of the opinion on the plaintiff's matching rights argument.
The first two items challenged by Plaintiffs are the no-shop provision and thematching rights provision, both of which are included in §6.8 of the Merger Agreement.The no-shop provision, according to Plaintiffs, impermissibly restricts the ability of the Board to consider any offers other than 3M’s. It also prohibits Cogent from providing nonpublic information to any prospective bidder. Similarly, Plaintiffs object to the matching rights provided for in the Merger Agreement, under which 3M has five days tomatch or exceed any offer the Board deems to be a Superior Proposal. Plaintiffs arguethat these two provisions, taken together, give potential buyers little incentive to engagewith the Cogent Board because they tilt the playing field heavily towards 3M. As a result, according to Plaintiffs, prospective bidders would not incur the costs involved withcompiling such a Superior Proposal because their chance of success would be too low.
After reviewing the arguments and relevant case law, I conclude Plaintiffs are not likely to succeed in showing that the no-shop and matching rights provisions are unreasonable either separately or in combination. Potential suitors often have a legitimate concern that they are being used merely to draw others into a bidding war. Therefore, in an effort to entice an acquirer to make a strong offer, it is reasonable for a seller to provide a buyer some level of assurance that he will be given adequate opportunity to buy the seller, even if a higher bid later emerges.
I tend to disagree that providing a first bidder with strong matching rights along the lines of those in the Cogent merger agreement is going to be a strategy that will maximize value for shareholders (previous posts here). Will it encourage an initial bid where there otherwise might not be one? Probably, but that's a different story. If a seller is looking to generate initial bids there are other ways to do so that don't deter second bidders. Vice Chancellor Strine and now Vice Chancellor Parsons, I suppose, think the fact that matching rights are so common in merger agreements and the fact that we see the occasional jumped bid means that matching rights are not a deterrent to second bids. I don't think that's right, but let's let that sit for another day.
The second additional point interest in the Cogent opinion is the fact that Parsons gives dealmakers some guidance on calculating termination fees. In a few opinions, Vice Chancellor Strine has asked whether it might make sense to calculate termination fees as a percentage of enterprise value and not equity or deal value (In re Dollar Thrifty, In re Toys r Us and In re Netsmart). Vice Chancellor Parsons makes it pretty clear where he stands on this question. If you're going to be in his court, best to talk equity value when calculating termination fees. Plaintiffs argued that although the termination fee was only 3% when using equity or transaction value, it was 6.6% when calculated as percentage of the enterprise value. Parsons was happy relying on equity value in determining that the termination was not unreasonable.
Tuesday, October 12, 2010
Humor me. It's just a thing I've been working on recently. Gymboree announced yesterday that it has sold itself to Bain in a going private transaction (Reuters) for $2.2 billion. So ... how soon before the first lawsuit is filed and will it be in Delaware or California?
The local community reaction to a potential acquisition is sometimes a matter of great importance. That's particularly true where governmental authorities will eventually be required to pass on the proposed deal. Such is apparently the case in Canada where the Potash/BHP fight is heating up. BHP has responded in part by throwing cash out of the back of a cargo plane.(WSJ):
Last week, BHP said it will sponsor Saskatoon's holiday light show, at a cost of 300,000 Canadian dollars ($296,000) over three years. That commitment follows the splash BHP made earlier this year—before launching its takeover plans—when it spent an undisclosed amount to sponsor the International Ice Hockey Federation's World Junior Championship in the city.
Sponsoring a hockey championship in Canada? BHP is going all in. Potash was having none that:
A day after BHP announced its sponsorship of the light show, Potash Corp. shot back, pledging to spend C$5 million to refurbish Kinsmen Park in the city's center.
All of this because Canada requires provincial government officials to offer an opinion whether they believe the proposed transaction will be a "net benefit" to the community before the federal government signs off on acquisitions by foreign acquirers under Canada's Foreign Direct Investment Review Act:
The Investment Canada Act is intended to ensure that all foreign direct investment in Canada provides a net benefit to the country. However, the Act does not specify what constitutes a “net benefit.” It is up to the industry minister to make that decision, giving consideration to the following factors:
- the effect of the investment on the level of economic activity in Canada, employment, resource processing, utilization of parts and services produced in Canada, and exports from Canada;
- the degree and significance of participation by Canadians in the Canadian business or new Canadian business and in any industry or industries in Canada;
- the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
- the effect of the investment on competition within any industry in Canada;
- the compatibility of the investment with national industrial, economic and cultural policies; and
- the contribution of the investment to Canada’s ability to compete in world markets.
If, in the minister’s view, a proposed investment is unsatisfactory in any of these areas, it can be rejected. As of 30 June 2007, there have been 12,342 applications to acquire Canadian businesses, and 3,652 applications to start new businesses in Canada, since the Act came into effect. Of the foreign acquisitions of Canadian companies, 1,545 were of sufficient size to trigger a review under the Act. To date no investments have been rejected under the Investment Canada Act.
So, until the minister of industry gives an opinion if you find yourself up in Saskatoon, watch out for falling cargo pallets!
Monday, October 11, 2010
Top-Up options are fairly standard in friendly tender offers. A top-up option provides that so long as x% of shareholders tender in the offer, the target will issue the remaining shares to put the acquirer over the 90% threshold so that it can complete a short-form squeeze-out merger. The minimum number of shares triggering the top-up varies but the target share issuance can be no more than 19.9% of the target's outstanding shares due to stock exchange rules (although it's debatable whether this really matters or not). Also, as Brian has pointed out before, make sure you do the math to determine if the target has enough authorized but unissued stock so that the top-up is possible (this should really make you remember the importance of paying attention in your basic Business Associations class).
Now, for people interested in learning more about Top-ups, Davis Polk has issued a client memo on two recent Delaware cases touching upon top-ups. As the Deal Professor notes, Chancellor Parsons’ recent opinion in the In re Cogent, Inc. S'holders Litig. case provides a good “road map for how deal lawyers should negotiate and structure top-up options in order for them to comply with Delaware law.”