The Tender Offer
Overview of Tender Offers
An acquirer may resort to a tender offer when it has made a friendly offer to management that has been turned down. The acquirer uses a tender offer to go around management and appeal directly to the shareholders. The SEC defines a tender offer as follows:
“A tender offer is a broad solicitation by a company or a third party to purchase a substantial percentage of a company’s … registered equity shares or units for a limited period of time. The offer is at a fixed price, usually at a premium over the current market price, and is customarily contingent on shareholders tendering a fixed number of their shares or units.”
Tender Offer Advantages
The particular advantage of a tender offer is that the acquirer is under no obligation to buy any shares that have been put forward by shareholders until a stated total number of shares have been tendered. This eliminates the initial need for large amounts of cash to buy shares, and also keeps the acquirer from having to liquidate its stock position in case the tender offer fails. The acquirer can include escape clauses in its tender offer that releases it from the liability to purchase any shares; for example, an escape clause could state that, if the government rejects the proposed acquisition for anti-trust reasons, the acquirer can refuse to buy tendered shares. Such an escape clause is only prudent for the acquirer, which would otherwise have to buy shares that it no longer needs, since the acquisition will not be allowed to proceed.
Another advantage of the tender offer is that the acquirer could potentially gain control of the target company in as little as 20 days, if it can persuade shareholders to accept its offer. This period will be extended if a rival bidder appears or if not enough shares are tendered. Even so, the matter will typically be decided within a few months.
Testing for the Existence of a Tender Offer
The courts have created two tests for determining whether a tender offer exists. The first is the eight factor test. The following factors indicate the presence of a tender offer; not all eight are needed to establish that a tender offer exists:
- Active and widespread solicitation of public shareholders;
- Solicitation for a substantial percentage of the target’s stock;
- The offer is made at a premium to the current market price;
- The terms offered are firm (i.e., not negotiable);
- The offer is contingent upon the tender of a minimum number of shares;
- The offer is open for a limited period of time;
- Those subjected to the solicitation are subjected to pressure to sell their stock; and
- Public announcements precede or are issued at the same time as the rapid accumulation of large amounts of the target’s stock.
Some courts also rely upon the totality of circumstances test, under which you examine the totality of the circumstances to decide whether, in the absence of compliance with the Williams Act, there will be a substantial risk that the information provided to shareholders will be insufficient to make a considered appraisal of the acquirer’s offer.
The Tender Offer Process
The general steps involved in a tender offer are:
- The acquirer files Schedule TO with the SEC, and delivers a copy to the target company. This schedule includes the terms of its tender offer.
- The target company files a Schedule 14D-9 within ten days of the commencement of the tender offer. In this schedule, the target either recommends that shareholders accept or reject the tender offer. If the target does not make a recommendation either way, then it must state its reasons for doing so.
- Shareholders tender their shares to an intermediary, which tracks the cumulative total of shares tendered.
- The tender offer ends on the designated termination date, or is extended for a longer period of time while the acquirer tries to obtain additional shares. If the acquirer intends to extend the tender offer, it must do so by 9 a.m. Eastern time on the business day following the termination date of the current tender offer. The notice of extension must include the number of shares tendered to date.
- If the number of required shares is reached, the intermediary holding the shares pays shareholders the price stated in the tender offer.
- Depending on the existence of any anti-takeover defenses, the acquirer appoints its directors to the board of directors. The new board members presumably enact any changes to the target company required by the acquirer.
- The acquirer customarily de-lists the shares of the target company from any exchanges on which it had been listed.
The tender offer can be an expensive way to complete a hostile takeover, since it involves not only filing fees paid to the SEC, but also the costs of attorneys to prepare the Schedule TO and other documents, the services of a proxy solicitation firm, and the advisory services of tender offer specialists. There must also be a depository bank that verifies tendered shares and issues payments for them on behalf of the acquirer. Further, it may attract another interested buyer, who ratchets up the price even further. In addition, since the management of the target company was circumvented, it is a reasonable assumption that this group will not want to continue to work for the company after it has been acquired. In short, it is nearly always better to successfully complete a friendly offer than to engage in a tender offer.