M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, May 16, 2012

More fun with top-up option math

Comverge announced the completion of its tender offer and the closing of its acquisition by a private equity group.  The transaction included a top-up option, described in Comverge’s 14d-9:

Top-Up Option

Pursuant to the terms of the Merger Agreement, the Company has granted Purchaser an irrevocable option (the “Top-Up Option”), upon the terms and subject to the conditions set forth in the Merger Agreement (including that the Minimum Condition has been satisfied), to purchase from the Company, at a price per share equal to the Offer Price, an aggregate number of Shares (the “Top-Up Shares”) equal to the number of Shares that, when added to the number of Shares then owned of record by Parent or Purchaser, constitutes one Share more than 90% of the sum of the Shares then outstanding and the Shares the Company may be required to issue on or prior to the Closing (as defined in the Merger Agreement) as a result of vesting, conversion or exercise of the Company’s stock options or other derivative securities, including convertible securities and other rights to acquire the Company’s common stock. However, in no event shall the Top-Up Option be exercisable if the number of Top-Up Shares would exceed the number of authorized but unissued Shares that are not already reserved for issuance as of immediately prior to the issuance of the Top-Up Shares. The Company has approximately 147,698,561 authorized but unissued Shares, after giving effect to all outstanding Options as of March 31, 2012.

According to Comverge’s amended 14d-9, when the tender closed, 65% of the outstanding shares were tendered, or 17,972,755 shares.  Now, that’s enough to meet the 50% minimum condition for the tender, but well short of the 90% required to effectuate a 253 short form merger.  And that’s where the top-up option comes in handy. But, go ahead and guess how many shares Comverge has to issue to the acquirer pursuant to the top-up option to get to 90%?  C’mon, it’s lawyer math -

(17,972,755 tendered shares [corrected]  + x option shares) / (27,650,392 outstanding shares + x option shares) = 90%

x = 69,310,020

 That’s a lot of stock!  Fortunately, Comverge was awash in authorized, but unissued stock.  Even though you might get queasy at issuing so much stock in order to avoid a shareholder vote, the courts have ruled on this question and, subject to certain conditions, have okayed it (see Olson v EV3).

More on top-up option math, see an earlier post from a couple of years ago.



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Also, if the company is listed the exchange will usually require a shareholder vote if more than 20% of the target's stock needs to be issued to meet the short form merger threshold which obviously negates one of the advantages of using a tender offer format to accomplish the merger.

Posted by: Gustav | May 16, 2012 7:21:10 AM

Think you have a typo in your formula; you reference 17,972,755 in the text above but 12,972,755 in the formula.

Posted by: Anon | May 17, 2012 7:45:13 AM

There is a typo somewhere. The number of tendered shares is 13mm or 18mm?

Posted by: Aanand | May 17, 2012 9:09:42 AM

Thanks for picking up the typo! That's on me.

Usually, the listing rules will require a shareholder vote in this case. The penalty for not holding a vote could be a delisting. But guess what, after this transaction, this company will be delisted anyway. So, that's not much of a sanction.

Posted by: bjmq | May 22, 2012 3:09:49 AM

I think another way think about the solution of the precise top-up number of shares is to compute the fixed top-up "factor" based on the initial percentage tendered and then just multiply the factor times the number of shares tendered. This results follows from the same math but I think might be rendered in a more usable format. One could imagine a table much like an annuity table. In the top-up case, a 50% tender you will always have to issue 8 new shares for every share tendered; a 60% tender will require isuing 5 new shares for every share that was tendered and a 65% tender something like 3.8 new shares for every share tendered. The fixed top up factor obviously approaches zero as the number of tendered shares approaches the 90% threshold. As I said the solution follows from the same formula, but it just makes it clearer than the percentage tendered fixes the relevant multiplication factor and it is just a matter of multiplying that factor times the actual number of shares tendered. For lawyer's averse to math, you will always have a easy way to calculate the number of shares needed at various tendering thresholds. I think this works but then again I have to get back to grading exams.

Posted by: Anon | May 22, 2012 1:19:40 PM

Agree on your last point, but you have to get your bank that's going to finance your transaction to get comfortable with lending you all that money to do something that violates the listing rules.

Posted by: Anon | May 23, 2012 8:04:07 PM

I think that just 69,125,978 shares, not 69,310,020 shares, would do it.
(17,972,755 + 69,125,978) / (27,650,392 + 69,125,978) =
(87,098,733 / 96,776,370) =
90.00000000% (Excel tells me this is equal to or greater than 90%)

Using 69,310,020 shares gives us slightly more than 90%.
(17,972,755 + 69,310,020) / (27,650,392 + 69,310,020) =
(87,282,775 / 96,960,412) =

Posted by: Mark | Oct 10, 2012 3:04:16 PM

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