While most U.S. public company mergers occur pursuant to a one step merger structure, in which one entity merges with another entity and assumes substantially all of its assets and liabilities, public company mergers may also occur through a tender offer structure. A tender offer involves the public solicitation of the target company’s shareholders to sell (or “tender”) their shares to the acquiror company at a specified price per share.

The first step in a two-step tender is the initial tender offer by the acquiror to purchase shares from the target company’s shareholders, usually at a premium to the current stock price. Following the close of this “first step” tender offer period, the acquiror company will buy up additional shares of the target company in order to reach the requisite threshold.

The requisite threshold depends on state corporate law. In Delaware, where most U.S. companies are incorporated, public companies can rely on Section 251(h) of the Delaware General Corporation Law (DGCL) to complete a “short form” merger once at least 50% of the target company’s shares have been acquired in a public tender offer. In other states, this threshold may be 90%.

In order to use Section 251(h) of the DGCL, the target company must be listed on a national stock exchange or its shares must be held by more than 2,000 shareholders of record. The merger agreement must also explicitly specify that the transaction is governed by Section 251(h). A vote of the target company’s shareholders is not required to approve the second-step merger under Section 251(h).

In a two-step tender offer, the acquiror company will file a Tender Offer Statement on Schedule TO-T, which includes the Offer to Purchase as an exhibit. The Offer to Purchase describes the material terms, conditions, and purpose of the tender offer. It will also describe the merger agreement and the parties to the transaction.

The target company will promptly file a Solicitation/Recommendation Statement on Schedule 14D-9, which will disclose whether the target company’s board recommends or opposes participation in the tender offer. The rules of the Securities and Exchange Commission (SEC) require the Schedule 14D-9 to be filed within 10 business days of the commencement of the tender offer. In a negotiated transaction, the parties will coordinate to file the Schedule 14D-9 on the same day as the Schedule TO-T containing the Offer to Purchase.

A recent example of a merger that occurred pursuant to a two-step tender offer structure was Johnson & Johnson’s $18 billion acquisition of Abiomed, Inc., a global leader in heart, lung, and kidney support technologies. The acquisition was completed in December 2022 in accordance with Section 251(h) of the DGCL. The merger involved 100% cash consideration.

As another example, Oracle completed its $28 billion acquisition of Cerner Corporation in June 2022 using a two-step tender offer in accordance with Section 251(h) of the DGCL. Cerner is a provider of health information technology platforms. The merger involved 100% cash consideration.

As yet another recent example, Salesforce completed a $15 billion acquisition of Tableau Software in 2019 using a two-step tender offer. Salesforce relied on Section 251(h) of the DGCL to complete its acquisition and the merger involved 100% stock consideration.