What Is a Top-Up Option?
A top-up option is a provision in a merger agreement that grants the acquirer the right to purchase newly issued shares of the target company at the tender offer price, in an amount sufficient to reach the ownership threshold (typically 90%) needed to effect a short-form merger without a shareholder vote. The top-up option is triggered after a successful tender offer in which the acquirer obtains a majority of shares but falls short of the squeeze-out threshold.
Top-up options are a critical tool in two-step acquisitions, allowing the acquirer to avoid the delay and uncertainty of a shareholder meeting for the back-end merger.
How It Works
Scenario
- Tender offer — acquirer launches a tender offer for target shares at $50/share
- Result — acquirer acquires 82% of outstanding shares (short of the 90% squeeze-out threshold)
- Top-up exercise — acquirer exercises the top-up option to purchase newly issued shares
- Calculation — target issues enough new shares so that the acquirer’s combined holdings equal 90%+
- Short-form merger — acquirer completes the squeeze-out of remaining minority shareholders
Mathematical Example
| Item | Shares |
|---|---|
| Outstanding shares | 100 million |
| Acquired in tender offer | 82 million (82%) |
| Shares needed for 90% | Enough to bring total to 90% of diluted shares |
| Top-up shares issued | Approximately 80 million new shares |
| Post-top-up total | 180 million shares outstanding |
| Acquirer’s ownership | 162 million / 180 million = 90% |
The acquirer pays the tender offer price ($50/share) for the top-up shares, typically in the form of a promissory note rather than cash.
Key Terms
| Provision | Typical Structure |
|---|---|
| Exercise price | Same as the tender offer price |
| Payment | Promissory note (immediate cash payment not required) |
| Maximum shares | Limited to authorised but unissued shares |
| Conditions | Tender offer must have been consummated; minimum tender condition satisfied |
| Expiration | Available for a limited period after tender offer closing |
Legal Considerations
Delaware Law
Top-up options have been validated by Delaware courts:
- Olson v. ev3 (2011) — the Court of Chancery upheld a top-up option as a legitimate deal mechanic
- The option must be exercised at fair value (the tender offer price satisfies this requirement)
- The shares issued are limited to authorised but unissued shares (cannot exceed the authorised share capital)
Limitations
- Authorised share cap — if the target does not have enough authorised but unissued shares, the top-up option cannot be fully exercised
- Dilution of non-tendering shareholders — the issuance of top-up shares dilutes minority shareholders, though they receive the same per-share price in the squeeze-out
- Fiduciary duties — the target board must determine that the top-up option is in shareholders’ interests
Strategic Importance
Benefits for the Acquirer
- Speed — avoids the 30-60 day delay of a shareholder meeting for a long-form merger
- Certainty — eliminates the risk that a shareholder vote fails
- Cost — avoids the expense of proxy solicitation and SEC filing for a shareholder meeting
Benefits for the Target
- Faster closing — reduces the period of uncertainty for employees, customers, and vendors
- Higher offer — the acquirer’s increased certainty may support a higher tender offer price
- Clean execution — the two-step process with a top-up option is well-established and predictable
According to Practical Law (Thomson Reuters), top-up options are included in approximately 70-80% of two-step acquisition agreements in the US, making them a standard feature of tender offer transactions.
APAC Context
Australia — the top-up option concept does not directly apply to Australian acquisitions, which typically use a scheme of arrangement structure (100% acquisition) or an off-market takeover bid (compulsory acquisition threshold of 90%). However, the compulsory acquisition provisions under the Corporations Act serve a similar function to the squeeze-out enabled by a top-up option.
Japan — Japanese law provides a squeeze-out mechanism through share cash-out rights (kabushiki tō uriwatashi seikyū) following a tender offer that achieves a 90% threshold. The concept is similar to a top-up option but operates through a statutory mechanism rather than a contractual right.
India — under SEBI’s Delisting Regulations, an acquirer must reach 90% ownership to complete a delisting. There is no direct equivalent of a top-up option, and the acquirer must rely on the tender offer process and reverse book building to achieve the required threshold.
“Top-up options are an elegant solution to the gap between tender offer results and squeeze-out thresholds,” notes Daniel Bae, founder of Amafi. “Understanding how different APAC jurisdictions handle this gap is essential for structuring cross-border acquisitions efficiently.”
Structuring acquisitions across Asia Pacific? Amafi helps companies and investors design transaction structures that achieve full ownership efficiently. Learn more.