Lynch Communication Systems:2 the target board establishes a special committee (SC) of
directors who are independent from the controller; the SC hires bankers and lawyers to advise it;
and the SC negotiates with the controller over the terms of the deal, most importantly the price to
be paid to the minority shareholders and whether the deal will include a non-waivable majority-
of-the-minority (MOM) closing condition. If the controller and the SC reach agreement, the deal
is submitted for the necessary board and shareholder approvals. If approved, the transaction is
typically executed as a statutory merger or a two-step tender offer (that is, a first-step tender
offer followed by a short-form merger), though occasionally it is structured as a reverse stock
split or an asset acquisition by the controlling shareholder.
An alternative to the traditional route is a tender offer directly to minority shareholders. In
this route, the controller announces the tender offer and seeks to get to 90% voting control.
Typically the target board will appoint an SC of independent directors to evaluate the
transaction, negotiate with the controller, and issue a 14D-9 recommendation to minority
shareholders (approve, reject, neutral, or unable to take a position). If the controller gets to 90%
voting control, it then executes a short-form merger, which does not require a shareholder vote,
in order to eliminate the remaining (non-tendering) minority shareholders. Because 90% is the
critical threshold, the controller often conditions its tender offer on getting to 90% control (a
2 3 638 A.2d 1110 (Del. 1994). All states provide a short-form merger statute with a 90% control requirement, except Alabama, Florida, and Montana, which have an 80% control requirement. See ALA. CODE §10-2B-11.04; FLA. STAT. ANN. §§607.1104, 607.11045 (West); MONT. CODE ANN. §35-1-818. Even though the lower threshold would seem to make the tender offer freeze-out mechanism more attractive, there are no tender offer freeze-outs during my sample period in these three states. See infra Table 1.