What Is a Tender Offer?

Understanding the SEC's tender offer rules and regulations are crucial for compliance with federal securities laws. By familiarizing yourself with these regulations, companies can avoid legal pitfalls and conduct tender offers both effectively and efficiently.

For private companies looking to gain specific insights, please check out our webinar - Private Companies: Understanding and Managing Tender Offers

What Is a Tender Offer?

A tender offer is a liquidity event in which several sellers (including employees and early investors) may sell their shares at a specified price to a new investor, a group of investors, or the firm itself. Tender offers give potential investors or the company itself a way to buy shares or lower the number of shares outstanding by going straight to the shareholders.

If done following the legal requirements of a tender offer, they also offer the company or investor, specific protections. In other words, it can provide an opportunity for owners of private company stock to sell their shares while their company remains private.

The 8 Criteria of a Tender Offer 

The Wellman test established the criteria to assess if a transaction is in fact a tender offer (though not all components must be present):

1. Security holders are actively and widely solicited for a company's shares.
2. A solicitation is made for a significant portion of a company's securities.
3. An offer to buy is made at a premium price, above the current market price.
4. The conditions of the offer are fixed and not negotiable.
5. The offer is dependent on the tender of a certain number of securities, generally with a predetermined maximum quantity to be acquired.
6. The deal is valid for a limited amount of time.
7. Security holders face pressure to sell their holdings.
8. The public notification of the transaction precedes or coincides with the quick accumulation of substantial quantities of the subject securities.

Tender Offer Regulations

According to the SEC, tender proposals must also comply with the following essential legal requirements:

• The bidder must submit a Schedule TO (buyer's tender offer statement).  A bidder must submit a Schedule TO to the SEC as soon as possible after the tender offer begins. The bidder must provide a copy of it to the target business, any other bidders who have filed a Schedule TO for a current offer, and each national securities exchange where the target company's shares trade.
• The target must submit a Schedule 14D-9. It is the target company's SEC filing in reply to an offer. Within 10 working days of the start of a tender offer, the target company's board of directors must issue a statement to its securities holders stating the target company's stance on the offer. A Schedule 14D-9 must be submitted to the SEC on the day it is first published, mailed, or distributed to securities holders.
• Distribution of information. To allow a bidder to deliver offer papers to the target company's shareholders, the target may give the bidder a shareholder list or mail the offer to acquire directly to its stockholders. If there is a mailing to shareholders, it will be sent to all holders.
• Minimum offer period. Tender offers must be available for a minimum of 20 days after they begin. Meanwhile, tender offers frequently are not finalized within 20 business days if their terms are not met within that time frame. Additionally, an offer must stay available for a minimum of 10 business days soon after certain major revisions. Furthermore, security holders have the right to withdraw tendered shares at any time throughout the timeframe of the equity tender offer.

Documents Needed

Documents needed for a tender offer are:

1. A formal approval from the company's board of directors - or a comparable governing body if it is not a corporation - to approve the tender offer.
2. A written permission of the number and/or constituency of shareholders is necessary by the organization's legal documents to approve the tender offer.
3. A concise "Notice of Offer to Purchase" that describes the essential terms of the offer.
4. A more detailed "Offer to Purchase" that outlines the details of the offer. This document should have at least the following information:
   
   
   • Buying price.
   • Details of the offer include qualifying shareholders.
   • The number of shares available.
   • The minimum tender requirements.
   • The tender offer period should be at least 20 working days.
   • The mechanism for tendering securities should also be described.
   • Information on withdrawal rights.
   • The data of the offeror(s), including identification of any interested parties.
   • A "Letter of Transmittal" or similar document that describes the legal method and procedures by which security holders offer their stocks.

Tender Offer Example

Rakuten Group, Inc. stated that the company has begun the tender offer to buy its shares for cash at a premium price. The maximum amount is $1 Billion for the series of 10.250% Senior Notes due 2024 and 3.546% Senior Notes due 2024

How Does a Tender Offer Work?

The details of tender offers may differ, but overall, the tender offer procedure procedure looks like the following:

1. A bidder (or investor) proposes to acquire a certain number of shares at a predetermined price.
2. The corporation verifies the offer size and price and receives initial approval from its BoD (Board of Directors).
3. The corporation collaborates with its legal counsel and purchasers to create disclosures and transaction paperwork.
4. A timeframe of 20 business days is available for sellers to review the transaction details, determine whether to participate and, if so, how many qualifying shares to sell.

According to SEC standards, tender offers must be available for at least 20 working days to enable sellers to ask questions, contact an adviser, review the documents, and determine whether or not they wish to participate. The corporation will provide financial records, a comprehensive list of risk factors, and other disclosures in the offering materials to assist potential sellers in making an educated decision. For more detailed information about tender offers, please check out our webinar here.

Different Types of Tender Offers

There are several types of tender offers through company initiatives, such as:

• Share buybacks or repurchases.
  • A share buyback involves the corporation repurchasing shares from its owners, who are often workers, investors, and (in certain situations) former employees.
    
• Third-party tender offers.
  • The corporation permits buyers to buy shares from current owners.
    

While tender offers initiated by the bidders have the following types:

• Mandatory
• Voluntary
• Friendly Offer
• Exclusionary Tender
• Hostile Offer
• Mini-Tender
• Self-Tender
• Partial Tender
• Two-Tier

How To Prepare Your Private Company for a Tender Offer?

Your company can prepare for a tender offer by following the below steps:

1. Decide your buyer - You have the option of a share buyback or a third-party tender offer.
2. Set the stock price.
3. Decide those who will be allowed to sell their stock - Determine the transaction's amount and participant qualifications.
4. Evaluate the tax impact on workers.
5. Understand the effects of the tender offer on your 409A valuation.

A tender offer can be and often is, a complex process, but we at the NASPP can help you tackle the complexity of tender offers and have created a webinar to do just that. In our webinar Michael Mauro of Insightsoftware and DeRonnie Pitts from Fidelity Private Shares, will teach you how to communicate difficult information, understand risk mitigation strategies, and increase employee involvement and participation.

This training is ideal for people in charge of equity-based initiatives and will provide you with the tools you need to confidently manage your own tender offers. This webinar is free for members and qualifies for continuing education for Certified Equity Professionals (CEPs).

Become a member today at the NASPP and join in the same benefits that our community of over 5,000 equity professionals routinely leverage to enhance their professional careers and fine tune their skill sets. For more information, call 925-685-9271 or email naspp@naspp.com.