A top-up option or “top-up provision” in mergers & acquisitions is an agreement by the target firm’s board of directors to issue additional new shares exclusively to the acquirer following the close of a tender offer. This top-up option allows for the subsequent increase in the ownership level of the acquirer and when added to the stock owned following the tender offer will be sufficient to attain a level equal to or above the amount needed for the acquirer to complete a short form merger and consummate the deal. This required level of ownership is typically set as being one share above the threshold level and in most jurisdictions is set at 90%.
A top-up option can only be exercised after the tender offer closes. It is generally exercisable for the same consideration per share that the bidder offered in the preceding tender offer. In most cases, the top up option is only available in a limited quantity which is decided upon beforehand. Therefore, for the option to exercise, the acquirer must attain a certain level or threshold in the tender offer beforehand. If this level were not reached to top up provisions will not provide any benefit.
By their nature, deals which include a top up option are friendly takeovers or negotiated tender offers. This mechanism then provides a way for both acquirer and target to complete an acquisition efficiently should a sufficient number of shares be validly tendered. If by this stage the success of the deal is a foregone conclusion, it would be considered sensible to eliminate market risk and complete the deal without unnecessary delay.
The inclusion of a top up option demonstrates the willingness of the parties to complete a deal and this is generally reflected in a narrower merger arbitrage spread. These deals may produce less profit, but with a higher DCP, carry less risk of deal failure. Traders must familiarize themselves with this information which is usually found in the merger agreement in SEC filings.
Requirements
Top-up provisions may appear like a straight forward process but in reality require a number of considerations to be made by the board of directors in order fulfil their fiduciary duty. These may include but are not limited to
- Authority to Grant Options
- section 157 of the DGCL authorizes a board of directors to create and issue options entitling the holders of such options to purchase shares of its capital stock of any class or classes.
- The Amount and Type of Consideration Received
- Authorized Stock
- see below
- Timing
- Standard of Review
- Due Diligence Considerations
- Authority to Grant Options
Top Up Option Example
- A target firm has 100 shares in issue
- The tender offer receives 80%, thus the acquirer has 80 shares and requires another 10 to achieve 90%
- To achieve 90%, the target firm must issue 100% more shares, in this case, 100 shares to the acquirer
- The acquirer position will then be 180 shares out of the 200 shares outstanding.
- This now equals 90% (180/200)
