2016 Amendments to Delaware General Corporate Law Include Revisions to Appraisal Statute and Section 251(h)
Several amendments recently adopted to the Delaware General Corporate Law (DGCL) may interest M&A practitioners. These include the amendments to DGCL §251(h), which address various issues left open from its adoption in 2013, and amendments to DGCL §262 to eliminate certain de minimis appraisal claims and to give corporations a mechanism to curtail the accrual of interest on appraisal claims.
Section 251(h)—Intermediate-Form Mergers
The adoption of DGCL §251(h) in 20131 (so-called "intermediate-form mergers") provided acquirers of public companies with a means to complete a short-form back-end merge. The ability to complete such a merger would be available after completing a tender offer that results in ownership of at least that percentage of target's shares (and each class and series thereof) that would be required to complete a long-form merger (Statutory Minimum Condition). For most public targets, Section 251(h) therefore provides a means to complete a back-end short-form merger with only a majority of the outstanding voting shares, instead of the 90 percent required under DGCL §253. The new amendments address some of the ambiguities under Section 251(h).
Multiple Cases or Series of Stock
The amendments address application of Section 251(h) to targets that have more than one class or series of stock. The amendments clarify that Section 251(h) is available for targets that have a class or series of stock that is listed on a national securities exchange or held of record by more than 2,000 holders, even if they have other classes or series of stock that are not so listed or held. The amendments also provide that the offer can contain a minimum condition that relates to all of the outstanding shares of stock of the target, or to just one or more classes or series of stock. An offeror can also consummate separate offers for separate classes or series of stock.
Calculation of Statutory Minimum Tender Condition
The amendment provides that for purposes of determining whether the Statutory Minimum Condition has been satisfied, target shares held by any person that owns, directly or indirectly, all of the outstanding stock of the offeror, or that is a direct or indirect wholly owned subsidiary of any such person or of the offeror are included in the calculation (collectively, the "Offeror Affiliates"). Rollover stock (described below) is also included in the calculation.
Rollover stock is shares of stock that are subject to a written agreement to be transferred, contributed or delivered to the offeror or any Offeror Affiliate in exchange for equity of such entity. It typically arises in the context of private equity deals, where management exchange their target shares for equity interests in the post-closing entity, instead of being cashed out with the public stockholders in the tender offer or back-end merger. The amendments clarify that rollover stock is included in the calculation of whether the Statutory Minimum Condition has been satisfied. The amendments provide that rollover stock and treasury shares are excluded from the requirement that they be converted in the merger into the right to receive the same consideration as paid in the tender offer.
Receipt of Stock
Section 251(h) requires tendered shares to have been received by the depository prior to expiration of the offer in order to factor into the calculation of whether the Statutory Minimum Condition has been satisfied. The amendments clarify when shares will be treated as having been "received." Certificated shares require physical receipt of a stock certificate accompanied by an executed letter of transmittal. Uncertificated shares held through a clearing corporation such as DTC, require transfer into the depository's account through an agent's message. For uncertificated shares held other than through a clearing corporation, physical receipt of an executed letter of transmittal is required. Shares cease to be "received" if the stock certificate is canceled prior to consummation of the offer or if uncertificated shares have been reduced or eliminated due to a sale prior to consummation of the offer.
The amendments to Section 251(h) are effective with respect to merger agreements entered into on or after August 1, 2016.
Section 262—Appraisal Rights
Section 262 has been amended in two fairly significant respects. The amendments prohibit de minimis claims in order to limit the ability of stockholders to bring nuisance suits against public companies. The amendments also provide corporations with a mechanism to curtail the accrual of interest on appraisal claims, thereby removing a perceived unfairness to corporations and potential windfall to appraisal arbitrage funds.
Elimination of De Minimis Claims
Amendments to Section 262(g) limit appraisal actions with respect to shares of public companies unless:
- the total number of shares entitled to appraisal exceeds one percent of the outstanding shares of the class or series eligible for appraisal;
- the value of the consideration provided in the merger or consolidation for such total number of shares exceeds $1 million; or
- the merger was effected as a short-form merger pursuant to Section 253 or 267.
These amendments are intended to mitigate the risk that a stockholder will use the appraisal process solely to gain leverage in a settlement negotiation. Even if the number of shares or the value of such shares were minimal, a corporation may have been inclined to settle a claim to avoid the litigation costs associated with an appraisal proceeding. Appraisal rights are not lost in short form mergers, however, because there is no obligation for the target's board of directors to approve and recommend the merger; thus appraisal rights may be the stockholders' only remedy for an unfair transaction.
Termination of Accrual of Interest
Amendments to Section 262(h) provide that a corporation may pay a sum of money to dissenting stockholders in an appraisal proceeding prior to the entry of judgment in such proceeding, in order to avoid interest accruing on that sum. These amendments reflect an attempt to eliminate the incentive to initiate such proceedings by certain stockholders in order to benefit from the statutorily guaranteed interest rate of five percent above the Federal Reserve discount rate. This benefit is one of the factors attributed to the development of the appraisal arbitrage industry.
Previously, the initiating stockholder was awarded interest on the entire fair value amount of the shares at stake in the proceeding from the date of the merger through the date of payment of the appraisal award. This was the case even if the fair value was ultimately determined to be the same as the consideration paid in the merger. Now, a corporation may terminate the accrual of interest by opting to make a cash payment to such stockholders. After such payment, interest will accrue only on the sum of (1) the difference, if any, between the amount paid and the fair value of the shares as determined by the Court, and (2) unpaid interest already accrued at the time of such payment.
The amendments to Section 262 are effective with respect to transactions consummated pursuant to agreements entered into on or after August 1, 2016 (or, in the case of mergers pursuant to Section 253, resolutions of the board of directors adopted on or after August 1, 2016 or, in the case of mergers pursuant to Section 267, authorizations provided on or after August 1, 2016), and appraisal proceedings arising out of such transactions.
The amendments to the DGCL also include changes to numerous other sections, including to the jurisdiction of the Court of Chancery (DGCL §111), the introduction of default quorum and voting requirements for committees and subcommittees (DGCL §141), the requirements as to signatories on stock certificates (DGCL §158), and sections governing the restoration and revival of certificates of incorporation (DGCL §§311 & 312).
These amendments became effective on August 1, 2016.
This article originally appeared in the firm's Summer 2016 M&A and Corporate Governance Newsletter.
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