Delaware Code has been amended to drop the tender offer
threshold from 90% to the number of shares needed to approve
a merger, which is usually a simple
takes effect from August, and will make it significantly
easier for private equity sponsors to conduct two-step
mergers can now be completed within five weeks, while
one-step mergers often take up to four
change all-but eliminates the margin rule hurdle faced by
sponsors looking to use the two-step structure, as the lower
threshold it makes it easier to simultaneously close a tender
offer and back-end merger.
drastic but little-noticed change to US tender offer rules
means from next month it will be significantly easier for
private equity sponsors to takeover US-listed
from August 1, the US’s tender offer threshold
drops from 90% to 50%. The amendment to Delaware
General Corporation Law (DGCL)
with little fanfare on June 30.
creates greater certainty for two-step mergers –
private equity’s favoured take-private structure
– by mitigating problems created by federal margin
may see on the margin some more leveraged buyout (LBO) activity
as a result of the new rules, but the real change is that you
should see sponsors using more two-step structures in lieu of
one-step deals," said Debevoise & Plimpton partner Andrew
Bab. "The new rules should make tender offers a lot more
attractive to private equity buyers."
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private equity sponsors looking at a US take-private, two-step
mergers – also known as short-form mergers –
offer significant benefits over one-step, or long-form,
two-step deal consists of a successful tender offer followed by
a back-end merger to acquire the outstanding shares. It is
significantly quicker and less burdensome than a long-form
merger because there is no need to prepare and file a proxy
statement or gain stockholder approval.
of subsection 251(h) into the DGCL makes
two-step deals more attractive by creating greater
allows a two-step merger to be closed, without a shareholder
vote, if the buyer/s: obtain via a tender offer the number of
shares needed to approve the merger; immediately close the
back-end merger after the tender offer; and, collectively hold
less than 15% of the target.
companies generally require a 50% majority to approve mergers,
however it is possible that a company’s charter
may stipulate a higher threshold.
State Bar Association (DSBA)
proposed the amendment in the second quarter of this
on the change, the DSBA’s immediate past president
Theresa V Brown-Edwards said: "The DSBA believes the amendments
to DGCL 251(h) make good business sense because it will create
greater efficiency and speed in a tender offer merger
transaction thus increasing the interest in these type
transactions among financial bidders and, ultimately, will
prove desirable to shareholders as it will allow them to reap
the benefits of the transaction, their money,
rules: hurdle no more
change will boost private equity buyers’
competitiveness, by putting them on more of a par with
strategic buyers regarding their ability to take advantage of
the timing and cost benefits associated with tender offers,
according to Bab.
beneficial to strategic buyers, I don’t think the
new rules would change their calculus as to whether to do a one
or two-step deal," he said.
different for private equity sponsors is that the changes
minimise problems associated with the margin rules, which have
been a key impediment to their ability to do two-step deals in
the past," he added.
Federal Reserve’s (Fed) so-called margin rules
prevent acquirers from securing borrowed funds with more than
50% of a public company target’s shares. This has
proved problematic for LBOs.
to Fed guidance, a back-end merger that closes simultaneously
with the tender offer will comply with the margin rules. This
is because the acquisition financing is essentially secured by
the target and bidder’s combined
the 90% tender threshold has proved a real stumbling block, as
can be confident of meeting such a high target. It means that
neither simultaneous closings, nor top-up
other fixes have proved a silver bullet in overcoming margin
tender threshold, however, is promising.
new, lower standard is tipped to make a private equity bidder
significantly more comfortable embarking on a two-step merger.
It makes the chances of reaching the tender threshold,
simultaneously closing the back-end merger, and thereby
sidestepping margin rule complications much more
change makes US tender offers significantly easier than
elsewhere in the world. Across Europe, thresholds are generally
between 90% and 95%, although a UK scheme of arrangement can be
effected with 75% approval.
move also coincides with the apparent
LBO revival in
for one-step mergers
market is, however, still thinking through the
general notion is that it will make two-step mergers easier.
But there are a number of questions that must be considered
when looking at how it will work in practice," said Private
Equity Growth Capital Council general
counsel Jason Mulvihill.
example, the speed offered by a two-step merger is futile if
regulatory approvals or financing can’t be secured
within that short timeframe.
buyouts may not be able to satisfy the 15% pre-acquisition
ownership cap, meaning they can’t rely on the new
the amendment does not signal the end for one-step mergers, it
is a more ominous sign for dual-track deals.
King structure after
its inaugural use in 3G’s takeover of the fast
food chain in 2010, this structure allows a bidder to start
both a one-step and two-step merger at the same time. If the
tender offer is not successful, the bidder drops out of the
two-step deal and proceeds with the one-step deal without
losing any further time.
rule would eliminate the need in most cases for a dual-track
structure, as sponsors will be more confident in their ability
to close a tender offer, immediately do a back-end merger, and
avoid the margin rule issue," said Bab.
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