Tender Offers: How They Work and Key Regulations
Investors in the stock market will likely have heard the phrase “tender offers” come up at least once before. A tender offer is a public takeover bid made by an individual, group, or business that seeks to acquire a particular amount of a given company’s stock. The offer can be to purchase some or all of the shareholders’ shares in the target company. The tender offer typically invites shareholders to “tender”, or sell, their shares at a specified price within a specified time window.
There are two broad categories of tender offers—equity tender offers and debt tender offers. As the name implies, a debt tender offer involves a company buying back its outstanding debt securities such as bonds. Companies often use debt tender offers in the context of a capital restructuring or refinancing. Companies conduct equity tender offers to acquire equity securities such as common stock. A company seeks to take control of another company commonly uses this type of tender offer.
Purpose of Tender Offers
There are a number of purposes for the initiation of a tender offer. Either the company itself or a third party can initiate a tender offer. A publicly traded company often issues a tender offer with the motivation of buying back its own outstanding securities. This type of tender offer is an “issuer tender offer.”
In the context of an attempted takeover, a third party may propose a tender offer with the intent of accumulating enough common stock to gain a controlling interest in the company. This means the potential acquiror can take over the board of directors and carry out its takeover plan despite dissent from incumbent directors and officers. The tender is usually conditional upon the prospective acquiror first obtaining a large enough percentage of the outstanding shares. Once the prospective buyer has attained sufficient ownership, the prospective buyer can force all the remaining stockholders to sell their shares and take the company private.
Alternatively, once the acquiror has achieved a controlling interest, it can merge the company into an existing publicly traded business. This results in the company becoming a subsidiary of a holding company, and the subsidiary’s shares becoming void as only the holding company’s shares survive the merger.
Advantages and Disadvantages of Tender Offers
One major advantage of tender offers is their relative speed. Tender offers enable investors to gain control of a company in as little as one month. The process also protects investors from prematurely liquidating their shares if a tender offer does not succeed or other investors do not tender a threshold number of shares. A major disadvantage of a tender offer is the cost. Investors must pay SEC filing fees and fees for specialists such as lawyers. Additionally, complications can arise in the tender offer if other investors become involved in a hostile takeover.
Regulation of Tender Offers
Under securities law put in place by the U.S. Securities and Exchange Commission (SEC), the term “tender offer” is not clearly defined. The determination of whether a tender offer exists is based on an evaluation of the facts and circumstances. Courts use the following eight factors to determine the existence of a tender offer:
- The active and widespread solicitation of public security holders,
- The solicitation to purchase a substantial percentage of the securities,
- The offer to purchase the securities at a premium over the prevailing market price,
- The terms of the offer are firm rather than negotiable,
- The offer is contingent on the tender of a fixed minimum number of securities,
- The offer is open for only a limited period of time,
- The offerees are pressured to sell, and
- The public announcement of the purchasing program precedes or accompanies a rapid accumulation of securities.
If a party makes a tender offer, the Williams Act governs. Congres passed the Williams Act in 1968 in response to a number of hostile takeover attempts. It amends the Securities Exchange Act of 1934, more commonly referred to as the Exchange Act. Its main requirement is that an investor that acquires more than 5% of a company’s outstanding stock must immediately disclose this information to the public.
In addition to the Williams Act, the other major tender offer rule under the Exchange Act is Regulation 14E. Regulation 14E applies to tender offers of both debt and equity securities. Only exempt securities, as defined by Section 3(a)(12) of the Exchange Act, are excluded from Regulation 14E. The requirements of Regulation 14E are set forth by Rules 14e-1 to 14e-8 and Rule 14f-1 of the regulation. What follows is a brief description of each rule.
Rule 14e-1: Unlawful tender offer practices
The tender offer must not: (i) be open for an offering period of less than 20 business days, (ii) increase or decrease the percentage of a class of shares being requested without proper notice, (iii) fail to promptly pay or return tendered shares in the event that the tender offer is terminated, and (iv) extend the length of the offering period without proper notice.
Rule 14e-2: Position of subject company with respect to a tender offer
The target company, in responding to the bidder’s solicited tender offer, must publish a notice statement to its shareholders within 10 business days on whether it recommends acceptance or rejection of the bidder’s tender offer.
Rule 14e-3: Transactions in securities on the basis of material, nonpublic information in the context of tender offers
Insider trading of the target company’s shares must not occur.
Rule 14e-4: Prohibited transactions in connection with partial tender offers
An individual must not tender shares in a partial tender offer (i.e., a tender offer of less than 100% of the target company’s shares) unless they have a net long position.
Rule 14e-5: Prohibiting purchases outside of a tender offer
A “covered person” must not purchase the target company’s shares outside of the tender offer until the tender offer terminates.
Rule 14e-6: Repurchase offers by certain closed-end registered investment companies
Applies certain rules to closed-end funds, which involve portfolios of pooled assets that are listed on a stock exchange.
Rule 14e-7: Unlawful tender offer practices in connection with roll-ups
Applies certain rules in the context of a roll-up merger, which involves combining multiple small companies with complementary capabilities into a single larger entity.
Rule 14e-8: Prohibited conduct in connection with pre-commencement communication
Public announcement of a tender offer is prohibited except under conditions specified by the rule.
Rule 14f-1: Change in majority of directors
Notice must be provided at least 10 business days prior to a major change in the composition of the board of directors.
Recent Example: Rackspace Technology
To illustrate the concept in action, an example of a recently announced tender offer is that of Rackspace Technology, a cloud-computing company based in Texas that provides multi-cloud solutions for businesses. Rackspace Technology stated that it is commencing a tender offer to purchase its outstanding 8.625% senior notes due in 2024. Since the company itself is initiating the tender offer, rather than a third party, the Rackspace tender offer is classified as an issuer tender offer.
The cloud-computing company is offering $1,045.00 per $1,000 to existing noteholders that tender their notes by the early deadline of November 30, 2020. If noteholders tender their shares after the early deadline of November 30th but before the tender offer expiration date, Rackspace will offer $1,1015.00 per $1,000 of notes tendered. The tender offer expires on December 14, 2020.
Tender offers are a common tool for serving a variety of corporate goals. Awareness of the key regulations that govern the process are essential to better understanding how to navigate tender offers.