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Editor: Brian JM Quinn
Boston College Law School

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Tuesday, August 6, 2013

Requiem for the top-up option

Just like that.  It's gone.  The top-up option has gone the way of the dodo bird.  The handwriting has been on the wall for some time (since at least VC Laster's opinion in Olson v EV3), so it's not a surprise.  Vice Chancellor Laster described the role of the top-up option in the following way:

The top-up option is a stock option designed to allow the holder to increase its stock ownership to at least 90 percent, the threshold needed to effect a short-form merger under Section 253 of the Delaware General Corporation Law (the “DGCL”), 8 Del. C. § 253. A top-up option typically is granted to the acquirer to facilitate a two-step acquisition in which the acquirer agrees first to commence a tender offer for at least a majority of the target corporation’s common stock, then to consummate a back-end merger at the tender offer price if the tender is successful…

The top-up option speeds deal closure if a majority of the target’s stockholders have endorsed the acquisition by tendering their shares. Once the acquirer closes the first-step tender offer, it owns sufficient shares to approve a long-form merger pursuant to Section 251 of the DGCL, 8 Del. C. § 251. Under the merger agreement governing the two-step acquisition, the parties contractually commit to complete the second-step merger. A long-form merger, however, requires a board resolution and recommendation and a subsequent stockholder vote, among other steps. See id. § 251(b) & (c). When the deal involves a public company, holding the stockholder vote requires preparing a proxy or information statement in compliance with the federal securities law and clearing the Securities and Exchange Commission.

The top-up option accelerates closing by facilitating a short-form merger. Pursuant to Section 253, a parent corporation owning at least 90% of the outstanding shares of each class of stock of the subsidiary entitled to vote may consummate a short form merger by a resolution of the parent board and subsequent filing of a certificate of ownership and merger with the Delaware Secretary of State. See 8 Del. C. § 253(a). This simplified process requires neither subsidiary board action nor a stockholder vote.

The Chancery Court has consistently ruled that top-up options as described above are permissible because at least in part once the acquirer has sufficient shares to approve a long-form back end merger it's not a question of if the merger will occur, but when.  So long as the acquirer merger agreement does not permit the dilution of remaining shares for appraisal purposes, the top-up option is unremarkable.  Of course, there was the slightly complicated top-up option math that made top-up options fun for exams and tripping up junior associates (hint - you have to add the newly issued shares into the numerator and the denominator...).

All that is gone now that DGCL Sec 251(h) has gone into effect.   Sec. 251(h) eliminates the requirement for a shareholder vote in a back end merger following a tender offer if the acquirer is able to obtain control through the tender offer.  Here's the new 251(h):

(h) Notwithstanding the requirements of subsection (c) of this section, unless expressly required by its certificate of incorporation, no vote of stockholders of a constituent corporation whose shares are listed on a national securities exchange or held of record by more than 2,000 holders immediately prior to the execution of the agreement of merger by such constituent corporation shall be necessary to authorize a merger if:

(1) The agreement of merger, which must be entered into on or after August 1, 2013, expressly provides that such merger shall be governed by this subsection and shall be effected as soon as practicable following the consummation of the offer referred to in paragraph (h)(2) of this section;

(2) A corporation consummates a tender or exchange offer for any and all of the outstanding stock of such constituent corporation on the terms provided in such agreement of merger that, absent this subsection, would be entitled to vote on the adoption or rejection of the agreement of merger;

(3) Following the consummation of such offer, the consummating corporation owns at least such percentage of the stock, and of each class or series thereof, of such constituent corporation that, absent this subsection, would be required to adopt the agreement of merger by this chapter and by the certificate of incorporation of such constituent corporation;

(4) At the time such constituent corporation's board of directors approves the agreement of merger, no other party to such agreement is an "interested stockholder" (as defined in § 203(c) of this title) of such constituent corporation;

(5) The corporation consummating the offer described in paragraph (h)(2) of this section merges with or into such constituent corporation pursuant to such agreement; and

(6) The outstanding shares of each class or series of stock of the constituent corporation not to be canceled in the merger are to be converted in such merger into, or into the right to receive, the same amount and kind of cash, property, rights or securities paid for shares of such class or series of stock of such constituent corporation upon consummation of the offer referred to in paragraph (h)(2) of this section.

If an agreement of merger is adopted without the vote of stockholders of a corporation pursuant to this subsection, the secretary or assistant secretary of the surviving corporation shall certify on the agreement that the agreement has been adopted pursuant to this subsection and that the conditions specified in this subsection (other than the condition listed in paragraph (h)(5) of this section) have been satisfied; provided that such certification on the agreement shall not be required if a certificate of merger is filed in lieu of filing the agreement. The agreement so adopted and certified shall then be filed and shall become effective, in accordance with § 103 of this title. Such filing shall constitute a representation by the person who executes the agreement that the facts stated in the certificate remain true immediately prior to such filing.

Oh, sure. It doesn't actually say the top-up option is no more.  It doesn't have to. It just makes the top-up irrelevant.  Like the dodo bird.

-bjmq

http://lawprofessors.typepad.com/mergers/2013/08/requiem-for-the-top-up-option.html

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