Tender Offer 101
A tender offer is an offer to purchase some or all of the outstanding shares of a company for a specific price. The company doing the offering likely has some reason for wanting to acquire more shares, despite already having a majority of the ownership. A typical rationale for making a tender offer might be to consolidate control among a smaller group, or to procure the financial and management resources necessary to finance its purchase offer. To make a tender offer, the offering company will offer to purchase the outstanding shares of a target company’s shareholders at a specified price , which is usually above the market price (for listed companies) or the book value (for private companies). Such purchase offers usually require participating shareholders to turn over their shares to a custodian who will hold them as collateral pending consummation of the offer. Once the company has secured the appropriate number of shares, it will either close the transaction or return the shares. As with a listed company, a tender offer by a private company is typically subject to stockholder and regulatory approval.
Legal Basis for Private Company Tender Offers
Tender offers in private companies often have a different legal framework than tender offers for companies listed on a national securities exchange, such are in the case of publicly traded companies. Some of the difference in the legal framework for tender offers in private companies as compared to public companies arise in the context of state law, such that the relevant case law and constitutional issues differ from jurisdiction to jurisdiction. The federal law requirements under the Williams Act, though applicable to publicly traded companies, do not apply to private companies with less than 500 shareholders, even if the tender offer is made to holders of the company’s debt securities (e.g., in the case of distressed debt that is a minority stake of the company’s total issued debt). But as described above, there are federal requirements that apply to "fundamental decisions."
Although state law may differ in certain respects, it is necessary to comply with the common law and statutory requirements in the state in which the company is organized, in addition to the federal law requirements discussed in this article, to reduce legal risk in connection with a proposed tender offer.
Among the flood of state court decisions involving stockholder and director litigation in recent years, Delaware has enhanced its reputation as the most favorable judicial home for companies in the United States. In Delaware, both stockholders and directors of a company have broad and flexible rights under the statutory and common law to enforce corporate law. While the fiduciary obligations of directors have been outlined in the context of negotiations for a merger or acquisition, the same standards, known as the "Revlon duties", have been discussed by Delaware courts in connection with other significant transactions. Delaware corporate law does not prohibit the sale of control in a tender offer.
Shareholders may, however, bring suit to enforce compliance with corporate law, under Section 141(a) of the Delaware General Corporation Law (the DGCL), which gives the board the power over the management of the corporation. To the extent that a board decides to alter the management of the company and the direction of a tender offer, the board must act in good faith, pursuant to its fiduciary duties, in order to avoid a successful challenge to the legality of the tender offer. Based on Delaware precedent, a board will be in compliance with the DGCL and fulfill its fiduciary duties if the board acts reasonably in finding that the tender offer is inadequate.
State corporate laws in jurisdictions other than Delaware may permit a board to consider other factors in addition to maximizing shareholder value. Therefore, when negotiating the terms of a tender offer, the potential buyer should not assume that a tender offer might be upheld even if the board finds the offer inadequate or otherwise harmful to the company, particularly where that finding is based on a consideration other than shareholder value.
Key Steps for Tender Offers in Private Companies
Steps Involved in a Tender Offer for a Private Company
Assuming the board of directors decides to proceed with a tender offer rather than other types of liquidity options, the process to undertake a tender offer for a private company would generally follow these sequential steps: Step 1: The board appoints a committee of independent directors to work with company management and legal counsel to (i) monitor the process and (ii) assist the company in determining an appropriate value on the company securities to be offered in the tender offer. The independent committee will also play a key role in determining whether the tender offer is in the best interests of the shareholders.
- Once the company determines the appropriate offer price, the company prepares a "Schedule TO" (which is a public filing with the SEC). The Schedule TO will contain information about the tender offer, including the type of security to be purchased, the purchase price, the purpose of the offer and certain other disclosures regarding the company and the offer. Once filed with the SEC, the Schedule TO will become public information. (For practical purposes, the tender offer could also be made pursuant to Rule 506(d) of Regulation D under the Securities Act, if applicable.)
- The company notifies shareholders of the tender offer. (No minimum shareholder approval needed for private companies.) If too few shares are tendered, the company reserves the right to extend the tender offer at its discretion. If too many shares are tendered, the company reserves the right to prorate the shares purchased from the various tendering shareholders in order to purchase all of the shares it wishes to purchase.
- There is a set duration period for the tender offer (not less than 20 business days). Often, the tender offer can be extended an unlimited number of times. The tender offer ends when all of the terms and conditions of the tender offer are satisfied (or waived).
- The independent committee makes a recommendation to the shareholders as to whether to accept the offer. The company must purchase all securities i.e., shares that have been validly tendered after deducting the number of tendered shares that are prorated due to exceeding the number of shares the company has decided to purchase.
- Payment for securities validly tendered is made to the shareholders for the full consideration offered. The company then determines whether it should take any further action in order to effectuate its "going private" plan (see discussion below for the potential "going private" steps).
The above tender offer steps would not need to be followed if the private company is prepared to redeem its own securities by making a common stock redemption offer (Stock Redemption Plan) to its shareholders.
Pros and Cons of Tender Offers
As with any strategic decision, tender offers have both advantages and disadvantages to the offeror (the party that makes the offer) and the target company (the company to which the offer is being made). There are a variety of variables that change the amount of risk there is for both sides in the transaction. Tender offers provide an advantage to the offeror and target company from the outset through a premium price. Because the offer is not only for cash or stock, the price is that price plus a premium for control or ownership. Tender offers provide the offeror with several key advantages. Not having to re-negotiate with stockholders can potentially save the offeror time like no other option to purchase shares. A tender offer also provides the offeror the ability to specify the number of shares and particular prices within the spread they will accept; another advantage over other forms of acquisition. The tender offer process also has its disadvantages. An offer can take a long time to be accepted. A persistent investor can increase the risk to the offeror as the investor holds out for more. The potential for a stockholder holdout can lower valuation for the target company. Additionally, tender offer processes can be very costly to the offeror, both from the price of the offer itself and the legal and financial advisory fees involved in the process. The target company also benefits from the offer of a premium price. In addition, a tender offer provides the target company with an opportunity to obtain a fair price during what the management team views as an unfair takeover for control of the company. However, hedging against a tender offer by issuing poison pills and other mechanisms can make the process much more expensive.
Implications for Company Stakeholders
Tender offers in a private company can have significant implications for many different stakeholders. Some of the most obvious and the most common affected stakeholders are the shareholders of the company who will be receiving the offer from the buyer. However, depending on the structure and the impact on the company, other stakeholders including employees, management and even outside creditors could be impacted as well.
Shareholders
The impact on shareholders receiving a tender offer is apparent. Tender offers allow shareholders to bid for cash or other property in exchange for their securities. The price per share (or some other property such as stock or debt securities) may be above the fair market value of the shares or below fair market value. The shareholders will generally make a determination to tender or not tender their shares based on a perceived benefit to themselves and will need to assess whether the overall transaction is beneficial for them as a class of shareholders.
Employees and Management
Tender offers do not impact only the shareholders; other stakeholders of the company could be affected as well. Tender offers frequently have specific terms with regard to employees and members of management or key employees . Depending on how the offer is structured, it can be an opportunity for management to liquidate its holdings in the company at a preferred price than if it were a shareholder in the open market. Further, some tender offers will provide some form of compensation for key employees in order to "buy-in" to the new business strategy or to avoid losing key employees to a competitor as a result of the financial windfall provided for in the tender offer.
Outside Creditors
Tender offers can also have implications for outside creditors or third parties. Frequently, tender offers will result in a change of control and therefore a review of the loan documents in place by the lenders. Since a change of control typically affects how the loans can be made, any syndicate of lenders will frequently be involved in the negotiation of the tender offer letters and agreements and how they impact that lender’s existing loan documents with the company. In that regard, the lenders are an important stakeholder in the transaction and relationship with the company. Further, outside creditors that are not lenders but hold other debt securities (e.g. convertible notes) will also be stakeholders in the transaction and will frequently be required to approve any changes to the terms of the debt or the payment of principal and interest typically included in the tender offer.
Tender Offers and Other M&A Alternatives
Tender offers are but one option available to private corporations when planning a purchase of the business or assets of another company. Typically, private companies tend to use one or a combination of several strategies to acquire another company. Below we provide a brief overview of some of the more common acquisition strategies that companies might pursue.
Merger: The merger of the target company with the acquirer can be a particularly useful strategy when both companies share common synergies with one another. For example, if a technology company were to acquire a competitor that has similar products, the acquirer might realize increased revenues by eliminating the need to compete with one another. In addition, the merger could help eliminate the duplication of resources such as sales, marketing and administrative personnel and facilities. One cautionary note about mergers is that they are highly susceptible to being challenged by antitrust regulators if the merged company gains too much market power in its respective industry/market.
Tender Offer: As indicated above, tender offers can be an ideal way for an acquirer to obtain control of a target company. However, there are some important factors that a company should consider before undertaking a tender offer. For instance, the timing of the tender offer may be critical. If a target company is in its final year of "passive" treatment and recent news or accurate rumor suggests that the "passive" treatment may be lost, then a tender offer may be in order. Also, the extent to which the target company’s open market trading fluctuates may be a factor in determining whether to undertake a tender offer. In considering these and other factors, a company may determine that a "go private" transaction or a reverse "going private" transaction might be a more effective avenue to achieve the intended purpose of the transaction. For example, if the stock of a target company has been trading sluggishly at or below the amount of the proposed tender offer price, than the target company’s shareholders may be more inclined to consider a tender offer, as a means to realize gains, than they would be in the context of a cash-out merger which would likely be a liquidation event for them.
Reverse Tender Offer: A reverse tender offer is somewhat analogous to a "reverse" stock split, whereas reverse "going privatization" is somewhat analogous to tax-free mergers.
Cash-Out Merger: As noted above, there are certain advantages to cash-out mergers. Sometimes however, "appropriate" taxes may be triggered, depending on the structure and nature of the merger. In addition to the potential U.S. tax aspects, most state statutes provide certain minority shareholder "appraisal rights." However, in recent years many states have amended their corporate statutes such that a cash-out merger that meets specified requirements is granted "de-facto" appraisal rights.
Success Stories of Private Company Tender Offers
One of the most notable examples of a successful tender offer was that of Google in 2004. The company initially offered $3 billion to employees to cash out, with the hope of retaining top talent. To the surprise of management, they were able to retain only about 600 employees who accepted the offer and did not consider it enough to leave the company over. All but 20 employees came back to work, although many left in the near future. The offer, coupled with vesting in stock options, was an attractive offer for many and ended up costing the company very little money. The remaining employees recognized the ridiculous value of Google stock and wanted to hold on, despite seeing their coworkers leaving.
Kik Interactive Inc., a small Canadian start-up, announced its intention to go public in 2015. Also in 2015, Kik launched a tender offer as part of that process, offering employees a substantial amount of money for their equity. It offered $30 million for those qualifying employees holding common shares to sell. As was the case with the offers to Google employees, the offer was well received. KG funds (the venture capital investors in Kik) also sold a significant portion of their shareholdings. 60% of management and 70% of the other employees chose to participate. The total estimated $33.5 million was raised – significantly more than anticipated, thanks to premium prices being paid for the shares. The purchase price per share increased to $1.90 from Kik’s original paperwork price of $1.38. This offer was one that both the employees and the company felt satisfied with at the end of the day.
A less happy story comes from Glyde Corporation , which had been funded by venture capitalists and launched in 2009, initially funded by $6 million in seed capital. Four years later, the company launched a tender offer and was able to raise $7.2 million. However, many employees did not sell their shares, as many believed the company was worth much more than the $15 million evaluation that the tender offer suggested it was worth. The offer raised $5.5 million – $2 million less than projected. At the end of the day, only about 30% of workers within Glyde took part in the offer, which was mandatory for all employees. Many of the employees left over the following years, as recognized by the fact that, while the company had 40 employees in 2013, it had only 16 in 2015.
With the suspension of Glyde, however, this became a moot point because, even though some employees had held on, the company changed its business model after the tender offer and shut down in 2017 when investors were no longer willing to fund it.
These real-world examples show how even small companies can undertake a tender offer despite limited resources. It also demonstrates that the company needs to be careful about timing. Tender offers are successful when, as the examples show, employees crave the security of their paychecks and recognized the need to hold on to their shares despite their release. It can be worthwhile from the standpoint of the employees to suggest to their workers to accept the offer – money now may turn out to be better than more money later.