Amended Delaware merger law will benefit financial buyers

The revised law lowers the theshold for completing short-form mergers from 90 percent to a majority of shares tendered.

The Delaware legislature voted to amend its ’short-form’ merger law on June 18 to make it easier for buyers to complete a negotiated merger through a tender offer. The tender offer-short form merger process is faster and more streamlined than the traditional ‘long form’ merger process because the Securities and Exchange Commission’s review of filings is much quicker and a time-consuming shareholder meeting/vote process is not necessary. But the short form approach is not automatically available to buyers making tender offers; the buyer has to acquire a threshold number of shares.

Until now that threshold has been very high, 90 percent of shares, limiting how useful the approach is to most buyers. ‘If a tender offer structure is used to complete a negotiated merger, unless the buyer gets 90 percent of the shares, it still has to engage in all processes a traditional merger approach takes, including a shareholder vote,’ says Brad Faris, a partner in Latham & Watkins’s Chicago office.

The amendment, which is pending the Governor’s signature into law, will lower the threshold for avoiding a shareholder vote and all associated compliance processes from 90 percent to a simple majority of outstanding shares. That in theory matches the number of shares that would have voted to approve the merger in a long-form structure.

’The rationale is simple: if the buyer has a majority of the shares, it will win the eventual shareholder vote, so why have it?’ says Faris.

The most direct benefit to shareholders is that ’this process is more efficient and thus less costly, and it ensures shareholders get their value more quickly,’ says Tim FitzSimons, also a partner at  Latham & Watkins in Chicago.  Another benefit that may result is that because the tender offer structure will become more available to financial buyers, ‘it may facilitate a more competitive sales process, which can then deliver better prices and better value to shareholders,’ he adds.

The changes will be more useful to financial buyers such as private equity firms than to strategic buyers. They are ‘particularly helpful for parties that need third party financing to complete the deal,’ says Faris. ’With this structure, buyers can avoid expensive bridge financing needed to close a tender offer if the tender offer fails to reach 90 percent.’

Even when strategic buyers need third party financing, they may face another hurdle in trying to use the new approach: regulatory approvals. ’The speed that is one of the tender offer’s advantages is incompatible with deals that potentially raise anti-trust concerns,’ FitzSimons notes. ’Regulatory hurdles can be even more complex in today’s global economy; even midrange companies can do significant overseas business and need multiple regulators’ approval.’ In those situations, buyers will be more likely to use the long-form merger structure, he adds.

How big an impact will these changes have? In 2006, amendments to the Delaware code made the tender offer process much easier for cash buyers, and those buyers took note. Where just 6.4 percent of cash buyers used tender offers to complete negotiated mergers in 2006, one in five cash buyers were using them by 2012. Faris expects the use of tender offers to further increase now that the Delaware legislature has approved the proposal, but says it will probably take a few years before the impact of the changes can be assessed.

Both Faris and FitzSimons generally praise the amendments for the efficiencies they will bring, but they note a couple of drafting issues with the new language that may reduce their usefulness. Those issues are described at length in an analysis of the amendments they co-wrote when the amendments were still in the proposal stage

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