'Two-step' mergers made easier

GPs taking public companies private through a “two step” acquisition process, which can shave months off the time it takes to close a deal, will find the process easier following amendments to the Delaware General Corporation Law (DGCL), according to legal sources.

Under the two-step merger process, GPs first gain 90 percent of a target company's shareholder control (typically through a cash tender offer), and then complete the deal with a time convenient “short-form” merger.

With the reforms GPs can now use the short-form merger with only 51 percent of shareholder control. Short-form mergers allows a super majority shareholder to buyout minority shareholders without their approval. 

The two-step merger acquisition method has grown in popularity as a “one-step” merger can require time intensive disclosure filings with the US Securities and Exchange Commission and target company shareholder meetings.

However, last year still less than 40 percent of large ($500 million or more) US leveraged buyouts of public companies were initiated under a two-step acqusition process, according to data from a Debevoise & Plimpton client alert.

Andrew Bab, corporate  partner at Debevoise & Plimpton, said he expects the number of sponsor-driven two-step acquisitions to increase but also does not expect them to become GPs' only weapon of choice. 

For instance, if a deal was expected to run long the original tender offer under a two step merger may give interlopers more time to disrupt a deal and give activist shareholders a greater chance to block the deal. 

The reforms are expected to be adopted and made effective this week.