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The Tender Offer

Overview of Tender Offers

A tender offer is used by an acquirer to go around management and appeal directly to the shareholders to acquire a business. 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. 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.

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.

The Eight Factor Test

The courts have created a test for determining whether a tender offer exists, called 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 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

The Tender Offer Process

The general steps involved in a tender offer are:

1. The acquirer files Schedule TO with the SEC. This schedule includes the terms of its tender offer.
2. 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.
3. Shareholders tender their shares to an intermediary, which tracks the cumulative total of shares tendered.
4. 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.
5. If the number of required shares is reached, the intermediary holding the shares pays shareholders the price stated in the tender offer.
6. Depending on the existence of any anti-takeover defenses, the acquirer appoints its directors to the board of directors. The new board members enact any changes to the target company required by the acquirer.

The acquirer can make its tender offer more attractive to shareholders by offering them a choice of either cash or the securities of the acquirer. If a shareholder were to select the securities of the acquirer, it might (depending on the circumstances) defer the recognition of taxable income. However, a securities offering must be examined by the SEC, so giving shareholders this choice may delay the tender offer.

The tender offer can be an expensive way to complete a hostile takeover, since it involves 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. 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.