August 3, 2010
In Olson v. ev3, Inc., C.A. No. 5583-VCL (Del. Ch. June 25, 2010) (Transcript), the plaintiff sought to enjoin a merger between ev3, Inc. (“ev3”) and Covidien Group S.a.r.l. (“Covidien”), arguing, among other things, that the top up option granted to Covidien was invalid and coercive, and that ev3’s disclosure regarding the top up option was materially misleading and incomplete. The Court of Chancery granted, in part, the plaintiff’s motion to expedite, finding that the potential coercive nature of the top up option and the disclosure regarding the top up option gave rise to a basis to claim irreparable harm.
Top up options are common in two-step merger transactions, in which an acquiror commences a tender offer followed by a merger. If an acquiror obtains a certain percentage of outstanding shares from the tender offer, a top up option enables the acquiror to purchase additional shares of the target sufficient to satisfy the 90% threshold it would need to finalize the transaction with a short-form merger under 8 Del. C. § 253.
In ev3, Inc., the merger agreement provided that if, at the close of the first-step tender offer, Covidien owned more than 75% (but less than 90%) of ev3’s shares, Covidien was required to exercise the top up option to increase its ownership to one share more than 90% of ev3’s then-outstanding shares. If the top up option were exercised, shares would be sold to Covidien at the same price offered to all other stockholders, but Covidien had the option of paying with cash or with a promissory note payable to ev3. Under the merger agreement, the terms and conditions of a promissory note had to be reasonably satisfactory to ev3 and its board of directors.
The plaintiff’s claims included breach of fiduciary duty by ev3’s directors for, among other things, approving the merger, approving the top up option, and omitting material disclosures concerning the merger, the top up option, and the potential effects of the top up option in an appraisal proceeding; aiding and abetting breach of fiduciary duty by Covidien; statutory invalidity of the top up option under 8 Del. C. §§ 152 and 157; and impairment of ev3 stockholders’ appraisal rights under the theory that the issuance of the top up option shares would dilute the fair value of the shares of non-tendering stockholders. The plaintiff based her claims primarily on the fact that Covidien had the option of paying for the top up option shares with a promissory note that did not have fixed terms under the merger agreement.
At the expedition hearing, the Court noted that the treatment of top up options is unsettled under Delaware law, and that given their prevalent use in merger transactions, it is important for the Delaware courts to address their validity. The Court was particularly interested in the potentially coercive nature of top up options and their effect on the appraisal process, given their potential to dilute appraisal value. After the expedition hearing, the parties entered into a memorandum of understanding which set forth an agreement in principle to settle the litigation. The proposed settlement is subject to the approval of the Court.