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).
