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How does one apply the medium form merger rule under DGCL 252(h) when there are multiple classes of stock

I got an email from a student that posed an interesting question: 

According to the DGCL 251(h): no vote of stockholders of a constituent corporation that has a class or series of stock that is listed on a national securities exchange or held of record by more than 2,000 holders immediately prior to the execution of the agreement of merger by such constituent corporation shall be necessary to authorize a merger if: ... (3)  Immediately following the consummation of the offer referred to in paragraph (h)(2) of this section, the stock irrevocably accepted for purchase or exchange pursuant to such offer and received by the depository prior to expiration of such offer, together with the stock otherwise owned by the consummating corporation or its affiliates and any rollover stock, equals at least such percentage of the shares of stock of such constituent corporation, and of each class or series thereof, that, absent this subsection, would be required to adopt the agreement of merger by this chapter and by the certificate of incorporation of such constituent corporation;

My question is if there is Class A, B, C voting stock, would this mean that the buyer would have to acquire the outstanding % of all three classes of voting stock? I would presume that the same rule would apply to a company that had common stock and preferred stock. Am I interpreting this part of the statute correctly?

Two points:  Section 251(h) applies to a target corporation with any class or series of stock that is listed on a national securities exchange or held of record by more than 2,000 stockholders.  In other words, not all classes or series of stock of the target corporation need to be listed on such exchange. 

Subsection (3) of Section 251(h) requires that subsequent to the close of the tender or exchange offer, the acquirer must own enough target stock as would be necessary to adopt the merger agreement, both under the terms of the Delaware General Corporation Law and the target’s certificate of incorporation, such that the acquirer could complete the merger, even if Section 251(h) was inapplicable.

The first question thus is what classes are eligible to vote. The articles of incorporation will tell you what voting rights each class of stock has. See Mariner LDC v. Stone Container Corp., 729 A.2d 267 (Del. Ch. 1998) (charter amendment giving non-voting preferred stock voting rights subsequent to merger did not confer right to vote on merger or right to vote on the non-adverse charter amendment itself).

The second question is whether the shareholders will vote as a single class or whether each class will vote separately. The default rule is that all shares of all classes vote as a single group unless the articles of incorporation provide to the contrary. This is implicitly confirmed by Section 251(c), which states that a merger must be approved by “a majority of the outstanding stock of the corporation entitled to vote thereon.”

So let’s say there is Class A common with 1 million shares outstanding and Class B common with 100,000 shares outstanding. Assuming both have 1 vote per share, you’d need to get a total of 550,001 shares in the first step tender offer. Any combination of A and B should work.

But what if the Class B has 10 votes per share. DGCL 212(a) provides that “If the certificate of incorporation provides for more or less than 1 vote for any share, on any matter, every reference in this chapter to a majority or other proportion of stock, voting stock or shares shall refer to such majority or other proportion of the votes of such stock, voting stock or shares.” Accordingly, the outstanding shares would have 2 million votes and you’d need some number of Class A and Class B shares totalling 1,000,001 votes.

In some cases, however, DGCL 242 may kick into play. It provides a for a class vote when an amendment to the articles would adversely affect the rights of that class. Compare Elliott Associates, L.P. v. Avatex Corp., 715 A.2d 843 (Del. 1998) (merger operated to repeal rights of preferred granted in the articles; vote by preferred required) with Warner Communications Inc. v. Chris-Craft Industries, Inc., 583 A.2d 962 (Del. Ch. 1989), order aff'd, 567 A.2d 419 (Del. 1989) (no class vote of preferred required in connection with merger where preferred was merely converted into common).

Guest Post from Andrew A. Schwartz: A Missing Piece in Regulation Crowdfunding

I write today to highlight a significant market failure in the field of investment crowdfunding, one that the current set of rules does not adequately address. At the end of the post, I will propose a simple rule that the SEC can adopt to resolve the problem.

Investment crowdfunding—the public offering of unregistered securities through an independent online platform—generally calls for a light-handed set of regulations, for a number of reasons, including: One, an issuer may only raise up to $5 million at a time, and so the regulatory cost must be minimal to make it work. Two, we already have a heavily regulated form of public offering, namely the traditional IPO; investment crowdfunding is meant to be a simpler method of public fundraising. Three, each issuance is at such a small scale that no single blowup can cause anything close to systemic harm.

Thus, in my recent book, Investment Crowdfunding, I advocate for a liberal regulatory system that eschews many of the traditional bulwarks of securities regulation, including mandatory disclosure. Even so, there are certain areas where the market, left to its own devices, will not produce an optimal result, and thoughtful regulation can help achieve a better outcome for all concerned.

As I discuss in my book, there is a problem with the ‘all-or-nothing’ model of crowdfunding. Under the JOBS Act, crowdfunding issuers must announce a target funding amount, and a time frame to reach it. If enough investors contribute within the relevant time to hit the target, the deal succeeds, the company gets the money, and the investors get securities. But if a project fails to meet its target, then the deal is off and no money changes hands. Hence, the issuer gets either ‘all or nothing.’ Companies must also announce a maximum amount they are willing to take.

This all-or-nothing model is a key governance mechanism for the investment crowdfunding market. Based on the ‘wisdom of the crowd,’ good companies will get funded and bad companies won’t. Moreover, any individual investor who selects a bad (unpopular) investment will be saved from his poor choice, because it won’t reach its target funding amount, and the deal will be cancelled. Rather than walk off the cliff alone, such an investor will be pulled back to safety by his fellows.

Consider, for example, a company that wants to raise money to develop a new type of electric car battery and sets a target of $2 million. If it only can get $20,000 worth of investments, it is much better for the deal to be canceled than for it to go through. The poor investors would have all their money eaten up by the costs of raising it, and the company has no chance of developing the battery with only $20,000. Furthermore, the founder now knows that the market is not receptive to his proposed idea, so he may pursue some other endeavor, or at least make drastic changes to this one.

All this shows the value of the all-or-nothing model. Unfortunately, the simple version enacted in the JOBS Act and Regulation Crowdfunding can be gamed by companies and platforms, because there is no minimum target in the law, and no relation between the minimum and the maximum. Thus, there is nothing to stop a company from setting its funding target at some absurdly low level, say $100, and the maximum at, say, $1 million. Once that low bar is cleared, the company is home free and will get the money regardless of how little or how much is ultimately raised—and the platform will receive its commission for hosting a ‘successful’ offer. Unfortunately, this is not at all merely hypothetical but appears to happen every day.

Rather than setting the funding target on an individual basis, the leading American platforms appear to impose uniform funding targets on all, or nearly all, of the companies they list. One leading platform sets the funding target at $50,000, another sets it at $25,000, and a third requires that every company on its site set a funding target of just $10,000. This practice defeats the purpose of the all-or-nothing rule, as it effectively ensures that every company will meet its target and thereby ‘succeed’ in its crowdfunding campaign.

But it is a bit silly for a company that really needed $2 million to call it a success to have raised $20,000. In fact, it’s worse than silly, since the whole $20,000 will go toward the costs of raising the funds (audit fees, for instance), harming the company and the investors at the same time. The platform, by contrast, might not mind, since it receives its commission (which it would not get if the offer were to fail).

Furthermore, because the rule allows for any minimum and maximum, companies routinely select a minimum of $10,000 and a maximum of $1 million. This is bonkers. A company that seeks to raise anywhere between $10,000 and $1 million clearly has no idea what amount of funding it actually needs.

An additional problem with the rule in Regulation Crowdfunding is that there is no legal limit on the deadline, so companies routinely give themselves many months, or even a year or more, to reach their funding target. This is a common occurrence on all platforms, as crowdfunding companies can close the offering ‘early,’ so long as they give the investors forty-eight hours to cancel.

The effect of such a long time-frame is to undermine the whole point of having a deadline in the first place, which is to test the crowd’s appetite for what the company has to offer. In addition, it may also harm the company by keeping its attention on the crowdfunding campaign for many months, rather than getting on with business.

In the end, the all-or-nothing model is a useful structure, but it is not presently working well. I accordingly would recommend that Regulation Crowdfunding be revised and tightened up to prevent the sort of gaming we have seen to date.

One way to address the low-target problem is to create a new rule that links the maximum to the funding target, such that a company is only legally allowed to raise a certain multiple (perhaps four times) of the funding target. For example, if a company announces a funding target of $20,000, it would only be legally allowed to raise up to a maximum of $80,000 (assuming a four-times multiple). If it announces a target of $250,000, it can raise up to $1 million.

A rule like this would effectively force a company to think carefully about how much funding it really needs and would rehabilitate the power of the all-or-nothing model in the United States. Were such a rule in effect, platforms would not have their listing companies all use a standard funding target like $10,000 or $25,000, as they commonly do now. This would be a big change from the current practice, but a good one, I think.

If my proposed rule were enacted, a crowdfunding company would have to analyze its individual circumstances and set its funding target at an amount that it actually needs to raise. Typical funding targets would likely be in the range of $100,000, $250,000, or even $1 million (as we see in other jurisdictions). Having to reach those lofty targets in order to get a penny would present a real test of the investors’ view of the company—which is exactly the point of the all-or-nothing regime.

In addition, there should be some regulatory guardrails on the deadline as well. Regulation Crowdfunding should be amended to include a legal limit on the length of time that a crowdfunding offer can remain open. Both Canada and Australia have done just that, imposing a legal limit of ninety days, which seems like a reasonable choice. This concentrates the discussion among the crowd and allows the company to raise money and then get back to its primary business, whatever it may be.

In conclusion, although I generally support a liberal and light-handed approach to investment crowdfunding regulation, I would call on the SEC to add a new rule that enhances the effectiveness of the all-or-nothing concept. My proposal is to add a rule that limits an issuer to raising four-times the target amount, and to impose a ninety-day time limit for crowdfunding offerings to remain open.

Andrew A. Schwartz, Professor of Law at the University of Colorado and Fulbright Scholar, is the author of Investment Crowdfunding (Oxford University Press 2023), from which this post was adapted.

Rallying Behind Coinbase: A Deep Dive into the Amicus Brief

Yours truly was privileged to co-sign an amicus brief in the SEC v. Coinbase litigation, along with:

• Tamar Frankel from Boston University
• Sean J. Griffith from Fordham Law School
• Lawrence Hamermesh from Widener University
• M. Todd Henderson from the University of Chicago Law School
• Jonathan R. Macey from Yale Law School

Crytopolitan takes a deep dive into the brief's core argument. The basic issue in the case is when cryptocurrency become a security, which focuses on whether it is an investment contract under the Howey test:

The Howey test, a cornerstone in securities law, has been a pivotal point of contention in the case. In their filing, the professors emphasized the importance of this test in determining what constitutes an “investment contract.”

According to the Howey test, for something to be deemed an investment contract, there must be an expectation of profits from the investment, which will be derived from the efforts of others. In simpler terms, an investor should anticipate returns based on the endeavors of the enterprise they’ve invested in.

The professors argued that federal cases, through the Howey test, have consistently recognized that “investment contracts” necessitate an expectation in the business’s income, profits, or assets. They stated, “An investor must be promised, by his or her investment, an ongoing contractual interest in the enterprise’s income, profits, or assets. In this section, we discuss some of these cases.” Their argument underscores the need for the Court to remain consistent with the established definition of ‘investment contract’ when interpreting it in this case.

 

The AMCAPES settlement is approved. But what about Blasius?

VC Zurn has issued her long awaited opinion in the $AMC #APES litigation. Bottom line? She approved the settlement. She also denied the request for a stay pending appeal. https://t.co/Hv1l0SOI1I HT: Chancery Daily #AMCAPES

— Steve Bainbridge (@PrawfBainbridge) August 11, 2023

A quick read suggests Zurn (1) thinks Blasius is still an independent standard, (2) thinks Blasius applies outside the context of director elections, but (3) Blasius now only requires defendants to "show their actions were reasonable in relation to their legitimate objective."

— Steve Bainbridge (@PrawfBainbridge) August 11, 2023

On Doing Legal Scholarship and Finding Your Scholarly Voice

I've been asked to participate in a faculty program offering "a broad discussion on scholarship, including the following:

• Finding your scholarly voice;
• When and how to engage multiple literatures (including when to stop reading and start
• writing);
• When and how to seek feedback on your work, both internally and externally;
• Conferences;
• Promoting your work (e.g., through social media); and
• Submissions."

Here's what I intend to say:

When I started out as a law professor I didn’t spend a lot of time thinking deep thoughts about what I was doing. I didn’t worry much about finding my scholarly voice. I was not very intentional about picking topics. I just sort of jumped into the pool and hoped for the best. And it worked out reasonably well.

Some years later, however, I encountered George Orwell’s essay Why I Write, and discovered that it was possible to be very intentional about the process.

Orwell says there are four primary motives for writing, all of which seem to me to be relevant to the scholarly enterprise.

“(i) Sheer egoism. Desire to seem clever, to be talked about, to be remembered after death . . ..” We are all guilty of it, but I think we need to be conscious of the errors that it can lead to. In particular, the desire to appear brilliant. Smarter than the average bear. Which leads to works like James Joyce’s Ulysses: impenetrable masses of jargon; choosing complexity over clarity; adopting tribal mores and memes so as to be accepted. 

“(ii) Aesthetic enthusiasm. Perception of beauty . . . in words and their right arrangement.” When I was a kid, I wanted to grow up to be a science fiction writer. As I got older, I realized two things: (1) I can’t write dialogue and (2) the vast majority of science fiction writers make almost no money. But I still think of myself as a writer. I enjoy the process of trying to find just the right word. Of trying to be clear. Turning a good phrase. Developing a flow and rhythm to the work. And I wanted to get better. So, I studied writing as a discipline. I found some excellent books on writing. I took some seminars on writing. “Craftsman-like” is a kiss of death in a tenure letter, but I think we should all aspire to a high level of craftsmanship.

I find it odd that a lot of law professors don’t seem to enjoy the writing process. They struggle. They view it as a chore. They labor endlessly over a project. I’ve got a friend who has been working on the same law review article for what seems like the last three years. I've read multiple drafts and it's very good. Yet, my friend can’t seem to cut the cord. My friend’s an editor, not a writer.

An analogy suggests itself. On my mother’s side, her father was a carpenter. Her three brothers were carpenters. My grandfather, in particular, was an exceptionally talented woodworker. He made beautifully crafted things. And then he sent them out into the world for others to enjoy. He got them to a stage at which they were the best work he could do and then he didn’t dither over trying to make them just a little bit better. So there’s a balance to be struck between creating a work of merit and deciding that’s it’s as good as it going to get. Or, as an older friend told me when I started out, you’re going to write a lot of juvenilia. We all do. You just have to be conscious of striving for maturity.

“(iii) Historical impulse. Desire to see things as they are, to find out true facts and store them up for the use of posterity.” When I started out at Illinois, my colleague John Novak used to say that the way to get tenure at a law school was to find an obscure legal issue and beat it to death in an article that has at least 300 footnotes. Rinse and repeat. Good advice at the time; probably not today. But it’s worth remembering that we are law professors. We teach in a professional school not a graduate school. Our students will go out into that profession. Our scholarship should be accessible and useful to them. We should see the law as it is and then share that insight with our profession.

“(iv) Political purpose – using the word ‘political’ in the widest possible sense. Desire to push the world in a certain direction, to alter other people’s idea of the kind of society that they should strive after.” Obviously, this is the reason and motivation most relevant to legal scholarship. As it should be. Yet, I think it is worth pondering the implications. We live in an increasingly tribal society. The legal profession is increasingly tribal. Even law schools show some tribalism, despite their tendency towards monoculture. Are you just writing for your tribe? Or are you trying to persuade people who reside in other tribes? Because they require different styles and choices.

Put another way, who is your audience? My scholarship got a lot better when I realized that I had a target audience and that I needed to adapt my work to reach them. So, for many years now, when I sit down to a new project, I have a specific audience in mind. It is the seven members of the Delaware Chancery Court and the five members of the Delaware Supreme Court. I see my job as writing them a letter that they will find useful and persuasive.

Find your audience and you’ll find your voice.

Tortellini and Sausage Soup

• 1 teaspoon olive oil
• 6 ounces bulk Italian sausage (sweet or hot, as you prefer)
• 2 garlic cloves sliced thin
• 1 small shallot, minced
• pinch red pepper flakes (optional)
• ½ cup dry white wine
• 3 cups low sodium chicken broth
• 1 14.5 ounce can diced tomatoes, drained
• ½ cup frozen spinach
• ½ cup frozen peas
• 6 ounces frozen cheese tortellini

Heat the olive oil in a large sauté pan (I use my All-Clad 3-quart sauté pan). If your sausage is in casings, remove and discard casings. Break the sausage into pieces. Cook over medium-high heat (I use the 7 setting) until lightly browned, breaking it up as you go. Remove sausage to a paper towel lined plate to drain. Leave a tablespoon or so of fat in the pan. Add garlic and sauté for a minute. Add shallot and sauté 2 minutes. Return sausage and stir to combine. Add white wine and raise heat to high. Bring to a boil, scraping up any browned bits. Add broth and return to the boil. Add tomatoes. Reduce heat to medium-low to simmer. Let cook for 10 minutes. Taste and add salt or pepper as needed. Add spinach, peas, and tortellini. Cook for five minutes. Serve in large bowls with crusty bread.

You can skew this soup in a slightly different direction by upping the tomato aspects. After you've sautéd the shallot for a minute and a half, add 1 tablespoon of tomato paste and sauté to a minute. Next, reduce the chicken broth to two cups. Next, add the tomatoes with their juice instead of draining them. Finally, season to taste with basil (fresh is better but dried works).

Since I decided at the last minute to go the tomato route, we drank a 2020 Marchese Antinori Chianti Classico Riserva instead of the white wine on which I had planned. It's a little heavy for a soup, but it worked reasonably well. On its own merits, it's a deep ruby color. Cherry, raspberry, and plum fruit associations. Well integrated oak provides vanilla, leather, and tobacco note. Excellent.