Several amendments were made to Section 251(h) of the Delaware General Corporation Law that became effective for merger agreements entered into on or after August 1, 2016. Section 251(h) permits acquisitions of publicly listed Delaware corporations to be accomplished via a tender offer without the need to approve the second-step “squeeze-out” merger at a stockholder meeting if certain conditions are met, including that the acquiror of the tendered shares and its affiliates would be able to unilaterally approve the second-step merger if a meeting were to be held.
Of particular note to private equity acquirors, Section 251(h) now expressly exempts “rollover stock”, which is broadly defined to include shares transferred to the acquiror or its affiliates pursuant to a written agreement in exchange for equity in the acquiror or its affiliates, from the requirement in Section 251(h) that all shares not purchased in the tender offer be converted in the second-step merger into the same consideration as was offered to tendering stockholders. Additionally, the amendments make clear that all shares of rollover stock contributed to the acquiror and its affiliates prior to the effectiveness of the merger, including shares contributed after the tendered shares are accepted for purchase, will count for purposes of determining whether the acquiror owns the minimum number of shares necessary to allow the second-step merger to proceed without a vote. Given the frequency with which private equity acquirors seek to have senior management of the target roll over some or all of their existing investment in connection with an acquisition, these amendments are important statutory improvements that allow the Section 251(h) conditions to be met, and the rollover shares to be counted in determining whether the acquiror owns sufficient shares to rely on Section 251(h), in a rollover exchange that takes place after the tender offer is completed, eliminating the need to structure the rollover around the SEC’s “best price rule” (which requires that the same consideration per share be paid in tender offers).
The adoption of Section 251(h) in 2013 paved the way for the increased use of tender offers by private equity acquirors as a result of the elimination of the potential for an interim period during which the acquiror would own a majority but less than 100% of the target company pending the perfunctory stockholder vote required to effect the squeeze-out of the minority. Since its adoption, the Delaware legislature has made several revisions to Section 251(h) in response to feedback from the M&A bar, and the latest amendments enhance the value of Section 251(h)-governed tenders offers as part of the private equity M&A toolbox. Assuming the SEC staff continues to take the view that acquirors are required to hold tender offers open for five business days after satisfaction of a loan funding or disbursement condition (which effectively means any such financing condition must be waived at least a week prior to the expiration of the tender offer), private equity acquirors considering a Section 251(h) tender offer for a leveraged acquisition will need to continue to consider carefully the additional financing risk inherent in proceeding with a tender offer that the SEC might require to be closed in the event of an unanticipated, last minute debt financing failure, which risk would not be present in a one-step merger transaction that includes the typical private equity protections against having to close a leveraged acquisition if the debt financing turns out to be unavailable.