By James D. Rosener
With debut of the market sell-off in January, expected volatility in the coming months and valuation pressures on small-cap equities, it is reasonable to expect that boards of public companies may consider if there are sufficient advantages to remaining a public reporting company. Although the cost of going-private and the near certainty of litigation has been an historical deterrent, two fairly recent actions have set the stage for a more streamlined process.
First, the Delaware Chancery Court issued several opinions on disclosure-only settlements. In particular, Chancellor Bouchard rejected the settlement negotiated with Zillow last year over its $3.5 billion takeover of Trulia. That settlement provided nothing more to the shareholder-plaintiffs than “supplemental disclosures” of information beyond the previously circulated 200-page proxy statement detailing the terms of the merger. In addition, Zillow received a release of all claims stemming from the merger, including “unknown claims” the plaintiffs were not even aware of yet.
With dimming hopes for easy settlement fees, plaintiffs’ lawyers are bringing fewer cases. Over the first nine months of 2015, 78 percent of Delaware companies that sold themselves faced at least one lawsuit there, according to a recent Wall Street Journal analysis. But, since Oct. 1, just 34 percent of mergers have been challenged. Thus, the first impediment —the cost of defending the inevitable lawsuit — has been mitigated.
The second action is the adoption in 2013 and the clarifying amendments in 2014 of Section 251(h), which permits a bidder and a public target company to conduct a back-end merger without a stockholder vote under Delaware General Corporation Law Section 251(h), even if the bidder does not attain 90 percent or more of the company’s stock in the front-end tender offer. The primary requirements for the provision are:
- The merger agreement must require or permit the use of Section 251(h).
- The bidder must consummate a tender or exchange offer for any and all of the outstanding stock of the company that would be entitled to vote on the merger (with limited exceptions) and thus obtain such number of shares as would otherwise be sufficient to approve the merger.
- Holders of each outstanding share not tendered or exchanged in the tender or exchange offer must receive the same amount and kind of consideration provided in the tender or exchange offer.
Although Section 251(h) has only recently been enacted, it is becoming the preferred approach to take-private transactions because it speeds transactions where there is no certainty that the bidder would gain in the tender 90 percent or more of the shares necessary to approve a transaction. Also, the clarifying amendments to the statute now permit “interested shareholders” to bid and also remove various uncertainties that were present when Section 251(h) was originally passed. Thus, private equity buyers can acquire control using financing without the potential lag between an initial tender offer and the follow-on second-step merger.
With the confluence of a volatile stock market, depressed valuations for technology companies, mitigation of litigation expense and a faster and clearer path to completion, you can expect going-private deals to increase in 2016.
Mr. Rosener is a partner with Pepper Hamilton LLP, where he leads the International Practice and the New York office. He regularly represents private equity funds in public and private merger and acquisition transactions.
The materials included herein are not intended to be legal advice.