Delaware's amendments apply market-out exception to appraisal rights for Section 251(h) mergers

In July 2018 Delaware Governor John Carney signed into law amendments to the Delaware Limited Liability Company Act and the Delaware General Corporation Law, which took effect on 1 August 2018. Notably, the amendments expanded the application of the market-out exception to appraisal rights, which has long been applicable to 'long-form mergers' (ie, mergers in which the stockholders of a target company vote to approve the transaction), to also include 'medium-form mergers' (ie, mergers that occur following a tender offer with a separate stockholder vote) effected pursuant to the Delaware General Corporation Law Section 251(h). As a result, appraisal rights will no longer be available in connection with Section 251(h) mergers to stockholders of a target company listed on a national securities exchange or held of record by more than 2,000 holders if the merger consideration received for such shares consists solely of:

• stock (or depositary receipts thereof) of the surviving company, or stock of any company that is listed on a national securities exchange or held of record by more than 2,000 holders;
• cash in lieu of fractional shares or depositary receipts; or
• any combination of these.

Eliminating the inconsistency between the rule applicable to long-form and medium-form mergers may increase the utility of the Section 251(h) structure in stock-for-stock transactions; however, the securities registration requirements for such a transaction erode its timing advantage over long-form mergers.

Separately, the Delaware General Corporation Law Section 262(e) was amended to provide that, where a statement is given to stockholders seeking appraisal in the context of a Section 251(h) merger, the surviving company must set forth the aggregate number of shares that are not tendered for purchase or exchange, rather than the shares not voted for the merger, for which appraisal has been demanded.

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