A Company (the bidder) makes a general offer for another company (the target).
There are several ways to define Tender Offers. Below you can find 3 definitions each from a different view point
- Definition – From the bidding company’s point of view
A tender offer is often part of a program of a company trying to take over (control of) another company. The bidder makes a general offer. The offer is made publicly and directly to the target firm’s shareholders to buy their stock (so not via the board of directors of the target company). The price (paid to the shareholders of the target company) is usually above the current market price during a limited amount of time, called an offer period. The bidder may specify offer conditions, meaning for example that the offer may be subject to the tendering of a minimum and maximum number of shares. Current stockholders, individually or as a group, can accept or reject the offer.
- Definition – From the target company’s point of view (shareholders)
A tender offer is a public, open offer or invitation by a prospective acquirer to all stockholders of a publicly traded corporation (the target corporation). The details of the offer are often announced via the media. The shareholders have the option to accept the offer or to take no action and keep their shares. Shareholders have a certain period during which to submit their instructions to participate. The proceeds can be cash or stock or even a mixture. They are paid on the Pay Date of the event. The shareholders will have to consider their tax position for Capital Gains Tax when making their investment decision to participate in the offer or not.
Definition – From the target company’s point of view (Board)
Another company is making an offer to the shareholders of the company. The board has two choices; it can either support the offer or it can advise the shareholders to reject the offer. The board will have to assess whether the offer details (i.e. offer price) is good enough to give it their support compared to the perceived future prospects of the company in case it remains independent. As the Board of Director’s of the target company often hold shares in their own company, they will benefit from the offer if the price is high enough. Board Directors of the company are also often promised positions in the new company.
There are other definitions out there, as defined and seen from the viewpoint of organisations that are involved in the process of tender offers. One example is that of the Regulators (insofar the tender offer process is really being regulated – sometimes there are just guidelines). More of the way different organisations define Tender Offers can be found below.
Legislation and Governing Bodies
- Legislation: Williams Act (USA)
Senator Williams proposed amendments to the Securities Exchange Act of 1934 regarding Tender Offers. The Act requires that everybody who makes a Tender Offer discloses the source of the funds used in the offer, the purpose for which the offer is made, the plans the offeror has after the offer and its current contractual relationships with the target company to the Federal SECURITIES AND EXCHANGE COMMISSION (SEC)
For many years after the addition of this act in 1968, the provisions of this act helped to minimize the potential for the use of a creeping tender offer. Some key elements of the Williams Act is that shareholders must be offered the same price for their available shares. This means that if one shareholder is offered a particular price for their shares, the same investor or group of investors cannot offer a different shareholder a different price in order to attract a sale. Until the original price is rejected, the group cannot offer a higher price per share to a different shareholder.
Further provisions of the Williams Act require that any investor or group of investors attempting to acquire shares of stock must file all relevant details of their tender offer with the Securities and Exchange Commission and the company that is targeted. These details includes the price per share that is being offered.
- Governing Body: Federal Securities and Exchange Commission (SEC)
The SEC’s Rules in a Tender Offer:
These rules require bidders to:
- Disclose important information about themselves;
- Disclose the terms of the offer;
- File their offering documents with the SEC; and
- Provide the target company and any competing bidders with information about the tender offer.
The rules also give investors important protections, including the right to:
- Change their minds and withdraw from the transaction while the offer remains open;
- Have their shares accepted on a “pro rata” basis (if the offer is for less than all of the company’s outstanding shares and investors tender too many shares); and
- Be treated equally by the bidder.
- Definition of the Securities and Exchange Commission (SEC): A tender offer is a broad solicitation by a company or a third party to purchase a substantial percentage of a company’s Section 12 registered equity shares or units for a limited period of time. More answers from the SEC about Tender Offers can be found here.
- Legislation: Takeovers Directive (2004/25/EC) (the “Directive”) by means of Part 28 of the Companies Act 2006 (the “Act”) and based thereupon;
- The Takeover Code from the
- Governing Body the Takeover Panel
The City Code on Takeovers and Mergers (the “Code”) has been developed since 1968 to reflect the collective opinion of those professionally involved in the field of takeovers as to appropriate business standards and as to how fairness to shareholders and an orderly framework for takeovers can be achieved.
6 Principles which are summarised here:
- All holders should be treated the same
- Good quality information should be provided and the board of the target company should issue a statement of advice
- Board of the target company must act in the interest of the shareholders of the target company.
- It’s not allowed to create a “false market”
- An offerer should only make the offer if it can guarantee the full cash consideration
- The target company should not be hindered for longer than is reasonable
Set of rules, here are some of the rules in summarised form;
- Cash Offer must be made when 30% of the voting rights of the target company have been acquired
- If the Offeror acquires shares of the target company at a higher price than the value of the offer, the offer must be increased accordingly
- The Target company must appoint a competent independent adviser whose advice on the financial terms of the offer must be made known to all the shareholders, together with the opinion of the board.
- Favourable deals for selected shareholders are banned.
- All shareholders must be given the same information.
- Those issuing takeover circulars must include statements taking responsibility for the contents.
- Profit forecasts, quantified financial benefits statements and asset valuations must be made to specified standards and must be reported on by professional advisers.
- Employees of both the offeror and the offeree company and the trustees of the offeree company’s pension scheme must be informed about an offer. In addition, the offeree company’s employee representatives and pension scheme trustees have the right to have a separate opinion on the effects of the offer on employment appended to the offeree board’s circular or published on a website.
The full version of all the forms can be found here:
Tender Offer Glossary
There are quite a few specific words that relate to the Tender Offer in particular that everyone involved in a Tender Offer should know.
As an alternative to blocking tendered shares, some countries book shares into an acceptance line upon receipt of the investor election. This is to prevent the investor from both tendering the shares as well as selling them in the market.
Tendered shares may have to be blocked in the accounts of the investors who have elected to tender their shares. This is to prevent them from tendering them to the offer and selling the same shares in the market at the same time.
The offerer will want to be sure that their interests are served in the best way and that risks are kept to a minimum. Therefore they can make the offer conditional meaning that if certain conditions are not met, the deal will not go through. If during the offer period the conditions are met, the lead agent in the event can send out a press release updating the public that the offer has become unconditional.
The offer period is the period from the start date of the offer until the Market Deadline of the offer.
A Tender Offer must specify an Offer Price, the maximum amount of shares that will be purchased, the beginning and expiration dates of the offer and the last day when tendered stock can be withdrawn by shareholders. It’s probably worth mentioning that these documents can easily contain several hundreds of pages.
!! !! Please note that there are almost always legal restrictions attached to the distribution of these documents !! !!
In several markets it is possible that, after the first offer period has been successful and become unconditional, a 2nd offer period is announced. Shareholders who took no action during the 1st offer period will potentially see a smaller market and liquidity for the remaining shares and may choose to tender their shares on 2nd thought. The price in the 2nd offer period is the same as in the 1st offer period.
is an event whereby a majority shareholder with at least 90% (the exact percentage can differ per country) of the shares or voting rights in a company to acquire the remaining shares or voting rights compulsorily, and allows minority shareholders to exit the company by selling their shares to the majority shareholder.
Types of Tender Offer
From a shareholder’s perspective a tender offer is always a voluntary corporate action. (The exception being that at the end of the process squeeze outs are sometimes processed as Mandatory Tender Offers). However, from a bidder’s perspective, it can be mandatory to make an offer.
Besides offers being made voluntarily or mandatorily, there are several types of tender offers:
Mandatory Tender Offers are offers whereby the offeror is required (by law) to make an offer for the rest of the shares of the target company.
A majority stakeholder could use the right to vote at the AGM to their own advantage at the expense of other shareholders. For that reason, if the offeror has reached a certain stake in the target company and has gone over certain thresholds (in certain jurisdictions it might for example become mandatory to make a bid for the rest of the shares once a 25% stake has been reached) it has to make an offer for the rest of the shares.
A company can choose to make an offer on a voluntary basis.
When an offer is made for the outstanding shares of a target company, the board of directors usually is being informed about the imminent bid by the offeror first. It can then advise its own shareholders whether to accept the offer or to reject it.
In case the board of the target company recommends its shareholders to accept the offer, the offer is called a friendly offer.
In case the offeror does not inform the board of the target company of the imminent publication of its bid, or if the board thinks the offer price is too low and the offerer still continues to publicize the bid, the offer is called hostile.
In the United States Tender Offers are regulated by the Williams Act. Other countries in the world have similar acts. In these legislations, the law sets the rules on what is allowed and what not when it comes to Tender Offers.
In a creeping Tender Offer, investors or a group of individuals adopt a strategy to get around these rules. Typically a group of individuals try to gradually acquire target company shares in the open market. Often, the ultimate goal of a creeping tender offer is to acquire enough shares of the stock to have enough interest in the company to create a voting bloc at the target company’s AGM.
With a creeping tender offer, the offerer(s) will attempt to circumvent the legal requirements and quietly go about purchasing shares from different shareholders. Only once a substantial number of shares have been acquired with the group do they comply with filing the proper documents with the SEC. The result can be that the target company finds itself in a hostile takeover bid before there is a chance to prepare themselves.
In most countries this type of tender offer is forbidden. Under this scenario a bidder would offer to purchase outstanding shares from certain shareholders only while excluding others.
An offer to purchase less than 5% of a company’s stock directly from current investors. These types of Tender Offers are not regulated by the Securities Exchange Act and for that reason there is no requirement for disclosure.
Mini Tenders often carry high risk, because other than in a normal Tender Offer where a bidder often aims to take over the target company, in a mini tender it is not always clear what the real intentions of the offerer are. For more info on the problems surrounding mini-tenders please refer to the official site of the SEC
An offer to purchase shares of a company, but not all of the shares.
An offer from a firm to its own shareholders to buy some or all of the shares. Also known as a buy-back offer. Self Tenders are sometimes called in order to prevent a (hostile) Take Over or to make it more difficult.
The acquiring company will make a Tender Offer to obtain voting control of the target company. In a second stage they will try to purchase the rest.
Options for investors in a Tender Offer
A shareholder can choose to sell their shares for the consideration of the offer (could be cash, stock or a combination of cash and stock). (TEND)
A shareholder can also choose to take no action and keep their shares (and sell them on the market) (NOAC)
Point of view from different market participants
Below toggles will show you a tender offer from the point of view from some of the intermediaries in the chain of industry participants.
The issuer of the stock in a Tender Offer event is the target company. If the offer is a cash only offer, then the event will affect the shares of the target company and not the shares of the bidding company.
There are no specific roles for the registrar if the offer is a cash offer. The registrar of the target company will have to update the registered name on the shareholder register with the registered name of the bidding company for all the shares that were tendered on Pay Date. In case the offer involves a stock settlement, then the registrar of the bidding company will have to record the shareholders of the target company who have sold their original shares in the target company and from the Pay Date of the event hold stock of the bidding company.
The role of an agent bank in a Tender Offer can be quite substantial. Apart from advising their client (the bidding company) on how to organise the event, they are usually involved with writing the offer documentation (for example prospectus) as well. Besides that, the agent bank deals with collating all investor instructions and counting the end result. After the results are known, they need to be announced (which could be by means of a press conference) and a second offer period may have to be announced as well. In case of stock payments, the agent may have to request a new security identifier, especially in case interim securities are used. (in some countries the tendered shares are exchanged into an interim line upon receipt of the investors election to tender their shares. On the Pay Date(s) of the event, the Agent needs to initiate payment to all investors who have tendered their shares.
The Security Identification needs to issue a new security number in cases where interim securities are used.
Exchanges may have to delist the shares of the target company after it has been successfully acquired. It is possible that interim line shares can be listed as well.
If the deal is successful, the index may have to remove the target company from the index and they will have to decide which other company it will replace it with.
The issuer CSD will generate messaging and send it down the chain of industry participants. They will also receive back in their systems all the collated investor elections. Tendered shares may have to be blocked of the investors’ accounts or – alternatively in some countries – the shares are booked out and the investor will receive an interim line instead.
The custodians will receive the messaging from the Issuer CSD and pass it onward down the chain of industry participants. They will also receive back all the investor elections that are sent upward. Tendered shares have to be blocked in the investors’ accounts or – alternatively in some countries – the shares are booked out and the investor will receive an interim line instead.
The broker/dealers will receive the messaging from the CSD’s and pass it onward down the chain of industry participants. They will also receive back all the investor elections that are sent upward. Tendered shares have to be blocked in the investors’ accounts or – alternatively in some countries – the shares are booked out and the investor will receive an interim line instead.
Stock may have to be recalled, or instructions to tender may be passed onto the borrower.
The Fund Managers need to make a decision as to whether to Tender the shares (TEND) or to take no action (NOAC). This is an investment decision and needs to reflect the investment strategy of the fund.
Transfer Agents will have to send the elections to the brokers and potentially block shares in the account. They will also need to book out the shares on Pay Date and receive the proceeds of the offer.
Data Vendors need to keep track of the status of the event and update the data they send to their clients on time and accurately
The Retail Bank usually does offer their clients the option to participate in Tender Offers, so they will need to solicit instructions from the beneficial owners, send them on and process the resulting stock coming back.
The Beneficial Owner needs to make the investment decision to either take up on the offer and tender their shares (TEND) or to keep their shares and do nothing (NOAC)
Geographical differences mostly pertain to the fact that the tender offers are anchored in national legislation and are governed by national institutions.
In cases where Interim Lines are used, a separate event will be set up on the Acceptance Line, usually a Tender (MAND)
The process of a Tender Offer can be described using the following steps:
- Bidding Company to form strategy about expanding by acquiring other companies
Most companies aim to expand their businesses. Expansion can be realised by organic growth, or by buying other companies. Often there are a lot of consultants involved in generating a strategy for expansion, like management consultants, legal consultants, financial consultants, accountants and controllers.
- Bidding Company to request approval from their own shareholders
- Bidding Company to obtain the necessary financial means in order to finance any potential future purchases (often referred to as a war chest). The company can choose to finance any purchase by issuing debt or equity (in case of issuing extra equity, a company should first call a Rights Issue).
- Bidding Company to make a long list of potential targets
- Bidding Company to make a short list of the most attractive targets.
- In case of a friendly Tender Offer, the Bidding Company should conduct a due diligence. Due Diligence involves looking closely at all of the target company’s records: statutory financial statements, internal process controls, management accounts, budgets, analysis and projections/forecasts, contracts with employees, suppliers, customers and others, insurance policies etc. Underlying reason for conducting Due Diligence is that nobody wants nasty surprises and to protect themselves, due diligence offers the potential buyer a chance to ask the right questions and to discover any reasons not to invest in the target company.
- Bidding Company to establish an Offer Price it is willing to pay for the target company.
- Bidding Company to appoint Deal makers and a Paying agent to execute the Tender Offer.
- Paying Agent will prepare a Prospectus / Offer Document in collaboration with Legal Advisors.
- Paying agent to register the offer with the relevant regulatory authorities and to announce the Offer Publicly.
- All Parties like Custodians, Broker Dealers, Financial Advisors to pass on the message to the ultimate beneficial owner of the securities being subject to the offer. In some cases the beneficial owner has contracts in place that specify that registered holders can make the decision on behalf of the beneficial owners.
- Beneficial Owners to make a decision as to whether to accept the offer or not and send instructions about their decision to the paying agent.
- Paying agent to collate all instructions from all shareholders and calculate the result/success of the offer.
- Paying Agent to publish the results officially.
- Paying Agent to collect all tendered shares and to pay the cash proceeds to the beneficial owners
- Beneficial owners to collect their money and may have to pay tax (Capital Gains Tax).
- In case of a Take Over, Bidding Company to incorporate the target company in its books and legal entities.
- Often the process ends with the Delisting of the Target Company.
- Announcement Date
- Offer Period Start
- Offer Period End
- Market Deadline (and derived deadlines)
- Pay Date
Often a 2nd offer period will follow with the same date as above repeated.
!!Important!! You should contact your own Tax Advisor for your specific Tax queries. No rights can be derived from any information on this website or from any of the websites that the below text links to. This topic is included for Information purposes only.
Tax consequences will be mainly on the Capital Gains Tax Position of an investor. As this is different per investor it is difficult to say something about this in general. You can read more about Corporate Actions and Tax in general here.
FUJITSU made an offer for Mandator (a Swedish Company, which – at the time – was listed at the Nordic Exchange OMX).
Summary: Fujitsu offered 3 Swedish Krona (SEK 3,00) per share Mandator (which according to the official documentation represented a 28% premium over the closing price of Mandator Shares on the 5th of October 2007). Just like the USA has the SEC, Sweden has the Swedish Industry and Commerce Stock Exchange Committee that monitors if the offer is compliant with the Swedish Takeover rules. The offer details were submitted to the commission.
Shareholder could accept the offer during the period commencing 11 October 2007 and ending on 31 October 2007. They could do so by completing an acceptance Form and sending it to the Agent who took care of the administrative parts of the process.
There will be no claims and transformations on voluntary offers. But there will be buyer protection.
It is unlikely that there are fractions in a tender offer. The offer price is specified per 1 share if the proceeds are 100% cash. If there are stock proceeds as well, investors are required to instruct in the multiple of the ratio, which usually is “1” as well. For example, if the offer is USD 10 per share plus 3 shares of the bidding company, then there will be no fractions as the investor will instruct to sell in multiples of 1.
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