Tender Offers Explained: How a Takeover Bid Reaches Shareholders

A tender offer is a public offer, made directly to a company’s shareholders, to buy their shares at a stated price during a fixed period. The bidder does not need the target board’s agreement to make the offer, and shareholders decide for themselves whether to tender. Because the offer can pressure holders to act quickly, Congress and the SEC regulate how long it must stay open, what the bidder must disclose and how holders are treated. News reports often call an unsolicited tender offer a takeover bid, though friendly deals use the same mechanism.

In brief

• A tender offer goes to shareholders, while a merger needs a negotiated agreement and, usually, a shareholder vote.
• SEC rules require the offer to stay open at least 20 business days, give holders withdrawal rights while it is open and require equal treatment of all holders of the class.
• The bidder files a Schedule TO. The target must tell holders its position, in a Schedule 14D-9 filing, within 10 business days.
• Offers can be friendly, with the target’s board recommending acceptance, or hostile, with the board opposed.
• A tender offer is often the first step of a two-step deal, followed by a merger that buys out the remaining holders.

Where the rules come from

The Williams Act of 1968 added Sections 13(d), 13(e), 14(d) and 14(e) to the Securities Exchange Act of 1934. The SEC implements them through Regulation 14D, which applies to third-party tender offers for registered equity securities, and Regulation 14E, which applies to tender offers generally. Rule 13e-4 governs issuer tender offers, where a company buys back its own shares. The rules are in Title 17 of the Code of Federal Regulations, Part 240, and the SEC’s website and the eCFR carry the full text.

Who is involved

• The bidder, which can be another company, an investor group or the issuer itself.
• The target company and its board, which must respond to the offer.
• Shareholders of the target, who tender or decline.
• The depositary, usually a bank or transfer agent, which receives tendered shares and pays for them.
• The information agent and dealer manager, who handle shareholder communications and solicitation.
• The SEC, which reviews the filings and enforces the rules, and in some cases antitrust agencies.

How a tender offer works

Launch and disclosure

The bidder starts the offer by publishing or sending the offer materials to holders. Rule 14d-3 requires a bidder that would own more than 5 percent of the class after the offer to file a Tender Offer Statement on Schedule TO with the SEC on the date the offer begins, and to deliver copies to the target and to the exchanges where the shares trade. The offer to purchase describes the price, the number of shares sought, the conditions, the bidder’s background and plans for the company, and the source of financing. Rule 14d-4 and Rule 14d-6 govern how the offer is disseminated and what the disclosure must contain.

The offer period

Rule 14e-1(a) says a person making a tender offer may not hold it open for less than 20 business days from the date it is first published or sent to security holders. Because the count uses business days, the minimum runs a little over four calendar weeks. The bidder may extend the offer, and extensions are common when conditions have not yet been met. If the bidder raises or lowers the price or the percentage of the class sought, Rule 14e-1(b) requires the offer to stay open for at least 10 business days after notice of the change, with a limited exception for accepting up to two percent more of the class.

Withdrawal rights

Holders who have tendered can withdraw their shares while the offer remains open, under Section 14(d)(5) of the Exchange Act and Rule 14d-7. This lets holders change their minds if a higher bid appears. A bidder need not offer withdrawal rights during a subsequent offering period.

Equal treatment and the best price

Rule 14d-10 requires that the offer be open to all holders of the class and that each tendering holder receive the highest consideration paid to any other holder in the offer. The rule has an exception for compensation arrangements that meet specified conditions, such as employment agreements with a target executive who is also a holder, so that payments for services are not treated as extra price for shares. The bidder may offer a choice of consideration, such as cash or stock, as long as all holders have an equal right to elect.

Proration

When a bidder seeks less than all of a class and more shares are tendered than it will take, the shares accepted are taken pro rata among the tendering holders. Rule 14d-8 provides that the securities taken up are taken as nearly as may be pro rata, according to the number deposited by each depositor while the offer is open.

Acceptance, payment and the subsequent offering period

At expiration, if the conditions are satisfied, the bidder accepts the tendered shares and promptly pays for them. Rule 14e-1(c) requires prompt payment or return of securities after the offer ends. Under Rule 14d-11, a bidder that is buying all outstanding shares and meets other conditions can add a subsequent offering period of at least three business days, during which tendered shares are accepted and paid for immediately and no withdrawal rights apply.

How the target responds

The target board cannot ignore a tender offer. Rule 14e-2 requires the subject company, no later than 10 business days after the offer begins, to give holders a statement that it recommends acceptance or rejection, expresses no opinion and remains neutral, or is unable to take a position. The statement must give the reasons. In practice the company files this statement on Schedule 14D-9, and it often includes the board’s analysis, any fairness opinion and its reasons.

The target’s choices include recommending that holders accept, recommending that they reject and explaining why, staying neutral, seeking a higher bid from the bidder, or seeking another buyer. Boards may also adopt defensive measures, such as a shareholder rights plan, subject to their fiduciary duties under state law. Courts evaluate those measures differently from state to state, and this guide does not address them.

Tender offer versus merger

A negotiated merger needs the target’s board to approve an agreement and the stockholders to vote, which requires a proxy statement and a meeting. A tender offer skips the meeting: the bidder buys shares directly from those who tender. That can be faster, and it lets the bidder approach shareholders even if the board has refused to talk.

The catch is that a bidder rarely wants to own only part of the company. Many tender offers carry a minimum condition, such as a majority of shares or a higher percentage, and if the condition is not met the bidder is not obligated to buy. After a successful offer, the bidder generally uses a second-step merger to acquire the remaining shares. Delaware’s Section 251(h) permits that second step without a stockholder vote when the merger agreement provides for it, the bidder completes an offer for all of the outstanding stock, and the bidder then holds at least the percentage of shares that would have been required to approve the merger, among other conditions. The statute applies to targets with a class listed on a national securities exchange or held of record by more than 2,000 holders. Other states have different rules, and the company’s charter can require a vote.

Trading and insider information

Rule 14e-3 prohibits trading on material, nonpublic information about a tender offer when the person knows or has reason to know it came from the bidder, the target or people acting for them, once the bidder has taken a substantial step toward commencing the offer. Section 13(d) separately requires beneficial owners above five percent to file Schedule 13D or 13G, so a bidder building a stake before an offer may need to disclose it.

A worked example

Suppose Bidder X wants to buy Target Y, a listed company. All figures are invented.

• X announces a cash tender offer for all outstanding Y shares at a stated price, subject to a condition that a majority of Y’s shares are tendered and to regulatory clearance. X files a Schedule TO and mails the offer to purchase.
• Within 10 business days, Y’s board files its Schedule 14D-9. In this example, the board recommends that holders reject the offer as too low.
• The offer must remain open for at least 20 business days. Midway through, X raises the price. Under Rule 14e-1(b), the offer must stay open at least 10 business days after the notice of the increase.
• Holders who tendered at the lower price can withdraw while the offer is open, and the higher price applies to everyone who tenders under Rule 14d-10.
• At expiration, holders of more than half the shares have tendered. X accepts and pays for them, and may then complete a second-step merger for the rest.

If the minimum condition is not met and X does not waive it, X is not required to buy any shares, and the tendered shares are returned.

FAQ

How long must a tender offer stay open?

Rule 14e-1(a) sets a minimum of 20 business days from the date the offer is first published or sent to holders. A price or percentage change generally requires the offer to stay open for at least 10 business days after the change is announced.

Can holders change their minds after tendering?

Yes, while the offer is open. Rule 14d-7 and the Exchange Act give tendering holders withdrawal rights during the offer period, though not during a subsequent offering period.

Does the target board have to agree to a tender offer?

No. A bidder can go directly to shareholders. The target must give holders its position within 10 business days under Rule 14e-2, and the board’s recommendation often influences the outcome.

What is the difference between a tender offer and an exchange offer?

In an exchange offer, the bidder offers its own securities, or a mix of securities and cash, for the target’s shares. The tender offer rules apply, and the bidder also registers the securities it is issuing under the Securities Act, usually on Form S-4.

Is a company buying back its own shares a tender offer?

It can be. An issuer tender offer, governed by Rule 13e-4, is a repurchase offer the company makes to its own holders, often at a premium to the market price, for a stated number of shares.

Where can I read the filings?

Schedule TO and Schedule 14D-9 are public on the SEC’s EDGAR system. The offer to purchase, filed as an exhibit to the Schedule TO, contains the conditions and the expiration date.