The Delaware General Corporation Law has been recognized as the finest in the land for many years. This is one reason why more than 50% of corporations traded on the New York Stock Exchange have elected to incorporate in Delaware.
The world's business environment is in a state of constant flux. This includes accounting matters, tax matters, international markets and technological change. All of these have significant impacts on business mergers and acquisitions.
Appraisal Rights and American Depository Receipts ("ADR's) Delaware stockholders owning shares of a merged corporation have a right, by statute, to require that their shares be appraised at "fair value" rather than just accepting the merger consideration offered by the acquiring company.
Nevertheless Delaware has long provided what is called a "market out". This withdraws the right to appraisal where stockholders have the ability to sell their shares on a market. Thus under Delaware laws stockholders are not entitled to appraisal rights in a merger when the stock is traded publicly and if, as a consequence of the merger, they receive publicly traded stock.
The increasing globalization of the economy has provided a number of recent mergers which resulted in the issuance of American Depository Receipts. These represent equity interests in a non- US company. Until recently those ADR's did not qualify for the "market out" provision since ADR's were not technically considered to be "stock".
In recognition of the increasingly global nature of the world's business, the Delaware statute was amended in 1994 to provide that the receipt of publicly traded ADR's pursuant to a merger would not trigger appraisal rights.
Section 251 of the Delaware General Corporation Law provides that the terms of a merger agreement may depend on "facts ascertainable outside of" the agreement.
This language was generally thought to authorize the payment of merger consideration (stock and cash) pursuant to an agreed-upon formula. For example, the merger agreement might provide that stockholders would receive shares of the acquiring corporation with a fixed cash value which was to be determined at the time of the stockholders' vote approving the merger.
The statute left some room for debate regarding the question of whether the formula provisions could authorize subjective judgments by the acquirer. An example of such a so-called "subjective" judgment would be whether to pay cash or stock. Suppose the bidder who agreed to pay a fixed value in stock wished to reserve the right to pay cash instead under certain circumstances, such as when the value of the bidder's stock falls significantly.
In 1996 Section 251 was amended to permit the "facts" to include "a determination or action by any person or body, including the corporation". This language provides corporations with flexibility, thereby enabling them to draft creative arrangements for their merger agreements.
A similar change to Section 151 of the DGCL which governs the terms of stock was made two years earlier. Thus there is equal flexibility now both with respect to merger agreements and the terms of stock.
Delaware Law provides that mergers are generally approved first by the Board of Directors and second by the stockholders. Where the target is a public company, the time between its Board approval and its hoped-for stockholder approval is a risky one for acquirers. This is for the reason that once the Board approves the merger, the transaction becomes public. And although it is then public the merger agreement cannot be completed until stockholder approval is also secured. Thus in the intervening period competing bidders may arise.
Should a superior bid emerge in the interim, the directors can be placed in an uncomfortably difficult position. Before 1998 Delaware case law held that directors could not withdraw their recommendation to stockholders during that interim period unless the directors withdrew the merger altogether from stockholder consideration.
In 1998 the Delaware General Corporation Law was amended. It is now clear that a merger agreement can require a company to present that proposal to stockholders for a vote even if the directors change their recommendation following their initial approval of the merger.
This change allows the directors to give a bidder added comfort that it is not simply a "stalking horse" for higher bids. Likewise, directors may fully satisfy their disclosure duties to their shareholders if they no longer believe they can stand behind their initial recommendation.
The purpose of this memo was to point out several recent amendments to the Delaware General Corporation Law which permit corporations here to structure mergers in ways that provide the greatest value to stockholders.