Zachary J. Schnapp
On August 1, 2018, Senate Bill 180 (the “2018 Amendments”)—a technical bill proposed by the Delaware General Assembly that amended several provisions in the Delaware General Corporation Law (“DGCL”), Delaware Limited Liability Company Act (“DLLCA”), and Delaware Revised Uniform Partnership Act (“DRUPA”)—went into effect. Among the most notable corrections made by the 2018 Amendments, the law altered DGCL § 262, which addresses the statutory appraisal rights of shareholders. Appraisal rights provide a shareholder who opposes a merger the ability to force the corporation to buy back her stocks at fair market value, which is determined by the Court of Chancery. Specifically, the 2018 Amendments revisit the appraisal rights of shareholders by changing the applicability of the “market out” exception to appraisal rights for intermediate-form mergers pursuant to DGCL § 251(h).
In the case of a merger pursuant to DGCL § 251(h), the “market out” exception allows for the corporate board of directors to complete a merger without a shareholder vote if the corporation has “a class of or series of stock that is listed on a national securities exchange or held of record by no more than 2,000 holders immediately prior to the execution of the agreement of merger.” Additionally, under the provision, shareholders are empowered to refuse anything in exchange for their shares except:
(i) stock of the surviving corporation (or depository receipts in respect thereof), (ii) stock of any other corporation (or depository receipts in respect thereof) that at the effective time of the merger will be listed on a national securities exchange or held of record by more than 2,000 holders, (iii) cash in lieu of fractional shares or fractional depository receipts in respect of the foregoing, or (iv) any combination of the foregoing shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts.”
In other words, DGCL § 251(h) provides the opportunity for an intermediate-form merger when all other shareholders are taken out of the market by a purchase to acquire all stocks remaining after the tender offer, so long as the enumerated statutory criteria are met.
Intermediate-form mergers require two steps. First, one corporation must tender an offer to purchase the majority of the other corporation’s stock with cash, stock (called “stock-for-stock” consideration), or some combination of cash and stock. Second, the corporation must purchase the remaining stocks. Unlike regular two-step mergers, intermediate-form mergers do not require a vote by the shareholders after the tender offer.
Prior to the 2018 Amendments, DGCL § 262(b)(3) “provided that appraisal rights would be available in any intermediate-form merger effected pursuant to section 251(h) unless the acquirer owns all of the stock of the target immediately before the merger.” The 2018 Amendments clarify the application of the “market out” exception in the context of intermediate-form mergers by shifting the language related to DGCL § 251(h)’s impact on DGCL § 262(b) from subsection (3) to subsection (1). The effect of this technical change to the DGCL is that remaining minority shareholders lose their appraisal rights after the tender offer is accepted by all corporations involved.
In addition to the alteration made to DGCL § 262(b), the 2018 Amendments revised subsection (e), “a provision that requires notice to holders of shares who have demanded appraisal.” The changes to subsection (e) simply clarify what information must be provided to dissenting shareholders in a statement by the surviving corporation in the context of intermediate-form mergers controlled by DGCL § 251(h). “[T]he amendments clarify that the statement must set forth the number of shares that were not tendered or exchanged in connection with a tender or exchange offer.” Further, the 2018 Amendments corrected the inconsistencies in the former statutes which provided appraisal rights, even where they would have been excluded under the “market out” exception.
Only time will tell how the Court of Chancery will interpret the changes made by the 2018 Amendments, yet it appears the alterations to DGCL § 262 simply correct the written law to match how practitioners interpreted the section prior to the changes.
Zachary is a 3L regular division student at Widener University Delaware Law School. He is Editor-in-Chief of the Delaware Journal of Corporate Law, Judicial Intern to the Honorable Thomas L. Ambro of the United States Court of Appeals for the Third Circuit, Competition Chair for the Transactional Law Honors Society, and first place champion of the 2018 Transactional LawMeets regional meet held at Northwestern University Pritzker School of Law. Next year, Zachary will be clerking for the Honorable Kevin Gross of the United States Bankruptcy Court for the District of Delaware.