In Olson v. EV3, Inc., the Delaware Chancery Court provides guidance for M&A practitioners in crafting top-up options. As set out in Vice Chancellor Laster’s recent opinion, the terms of a top-up option must first comply with the procedural requirements of the Delaware General Corporation Law for the issuance of shares of stock. This means the value of the consideration to be paid in exchange for the top-up shares on exercise of the option must be readily ascertainable, must be greater than or equal to the aggregate par value of the top-up shares, and must be approved by the issuing corporation’s board. Second, the merger agreement governing the second-step merger should make clear that in any appraisal proceeding to determine the value of a share of target corporation stock, neither the shares issued upon exercise of the top-up option nor the consideration provided in exchange for those shares will be considered.
A top-up option is an option designed to increase the grantee’s ownership in a corporation to at least 90%, allowing the grantee to acquire the granting corporation through a short-form merger under Section 251 of the DGCL. A short form-merger is attractive because it can be completed without the approval of the target’s stockholders and because the target’s stockholders’ sole recourse in the transaction is the appraisal of their shares under Delaware’s appraisal statute. Typically, top-up options are granted to an acquirer in connection with the acquirer’s launch of a tender offer. Once the acquirer obtains at least a majority of the target’s shares in the tender offer, the top-up option is triggered, and the target corporation issues the acquirer a number of shares sufficient to bring the acquirer’s ownership in the corporation to at least 90%. The acquirer then completes the acquisition via short-form merger, and those target stockholders that did not tender are entitled to receive in the merger the same consideration per share paid in the tender offer or to seek appraisal of their shares.
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January 27, 2011 | Posted by susan.wilson@alston.com | Topic(s): Appraisal Rights
In Golden Telecom, Inc. v. Global GT LP, the Delaware Chancery Court recently reiterated its definition of “fair value,” rejecting arguments from both the company and the stockholder who exercised its appraisal rights under Section 262 of the Delaware General Corporation Law. According to the opinion authored by Chief Justice Steele, the court’s definition of “fair value” for Section 262(h) purposes includes “the value to a stockholder of the firm as a going concern, as opposed to the firm’s value in the context of an acquisition or other transaction.”
Relying on this definition, the court rejected the company’s argument that the lower court should have deferred to the merger price—either conclusively or presumptively—in the appraisal proceeding. Golden argued that the arms length nature of the merger resulted in a merger price that was indicative of the company’s fair value and should be given at least presumptive deference. The court concluded, however, that “Section 262(h) neither dictates nor even contemplates that the Court of Chancery should consider the transactional market price of the underlying company.” Instead, the opinion notes that Section 262(h) requires a court to make an independent evaluation of fair value, considering all relevant factors. Deference to the merger price would “inappropriately shift the responsibility to determine ‘fair value’ from the court to the private parties.”
Further relying on its established definition of fair value, the court rejected the stockholder’s argument that the fair value determined in the appraisal proceeding should have used the tax rate set forth in the fairness opinion that the company distributed to the stockholders, rather than a different tax rate presented by the company during the proceeding. Global argued that that Golden should have been bound by the company specific data it previously provided to the stockholders. The court disagreed, stating that “[r]equiring public companies to stick to transactional data in an appraisal proceeding would pay short shrift to the difference between valuation at the tender offer stage—seeking ‘fair price’ under the circumstances of the transaction—and valuation at the appraisal stage—seeking ‘fair value’ as a going concern.” The court noted that if a company’s presentation of different data at the tender offer and appraisal stages implicates concerns about director abuse of the system, stockholders have mechanisms for redress under fiduciary duty law.
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In a case of first impression, the Delaware Chancery Court recently held in Roam-Tel Partners v. AT&T Mobility Wireless Operations Holdings, Inc., that a minority stockholder in a short form merger is entitled to participate in an appraisal action notwithstanding the fact it previously waived that right, if the waiver is revoked prior to the end of the appraisal notice period and without the stockholder “exercis[ing] dominion over the merger consideration.”
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On October 5, 2010, in In re Cogent the Delaware Court of Chancery denied plaintiff stockholders’ motion for a preliminary injunction seeking to halt the proposed friendly two-step acquisition of Cogent, Inc. by 3M Company. The court found that the Cogent board had not violated its Revlon duties, provided clarity on the appropriate calculation of termination fees, and provided comfort that top-ups may be used to accelerate the time required for closing.
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In a recent letter opinion, Berger v. Pubco Corp., Chancellor Chandler held that the application of a control premium in an appraisal action under Delaware law is not appropriate where the appraisers did not rely upon a comparable company valuation methodology.
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A recent Delaware Chancery Court decision, In re Sunbelt Beverage Corporation Shareholder Litigation, should be of significant interest to both lawyers and investment bankers. In its decision, the court provided a detailed analysis of competing discounted cash flow and other valuation analyses . The court also described the fairness opinion as being “highly suspect” and “a mere afterthought, pure window dressing.” This case is discussed further in a blog posted by Alston & Bird on DealLawyers.com.
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Two cases in the Delaware Supreme Court and Delaware Court of Chancery highlight the disclosure obligations of Delaware corporations in two situations: when notifying stockholders of appraisal rights related to a short-form merger, and when notifying stockholders of a written consent action. The rulings apply to all Delaware corporations, but are of particular note for those that are privately held. Public companies will in all likelihood satisfy Delaware’s disclosure standards by complying with applicable federal securities laws. In contrast, many privately held companies are not in the habit of carefully evaluating the level of information disclosed to their stockholders. Further, the rulings mandate disclosure beyond that expressly required on the face of the Delaware General Corporation Law, so a simple read of the applicable statutes will not reveal all applicable disclosure requirements.
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