Tender Offer

Definition

A tender offer is a public proposal made by an individual or entity (the offeror) to the shareholders of a corporation to buy a specified number of shares of the company’s stock at a particular price. The offer generally contingent upon obtaining a certain percentage of the shares for the transaction to be valid. Often used in attempts to acquire control over a company or during takeover bids, the tender offer lays out the terms, duration, and procedural steps necessary for shareholders to tender their shares.

Examples

Hostile Takeover Bid: A corporation might make a tender offer to the shareholders of another company, offering to buy their shares at a premium to the market price. If successful, this could result in a controlling stake in the target company.
Going Private Transactions: A company might make a tender offer to buy back shares from the public in order to reduce the number of shareholders and transition from a public to a private company.
Spin-offs and Divestitures: A parent company might offer to purchase shares of a subsidiary in a tender offer as part of a strategy to divest from that business unit.

Frequently Asked Questions (FAQs)

1. What is the primary purpose of a tender offer?

A tender offer is typically used to acquire a significant amount of a company’s stock or to gain control of the company. It can be part of a merger or acquisition strategy.

2. How does a tender offer differ from a merger?

While a merger involves combining two or more companies into a single entity following negotiations with the target company, a tender offer bypasses the company’s board and makes a public request directly to shareholders to purchase their shares.

3. Can shareholders refuse a tender offer?

Yes, shareholders can refuse a tender offer by choosing not to sell their shares.

4. What is a hostile tender offer?

A hostile tender offer is an attempt to take over a company without the approval of its board of directors. The offer is made directly to the shareholders.

5. What regulatory requirements govern tender offers?

In the United States, tender offers are regulated by the Securities Exchange Act of 1934 and subjected to rules enforced by the Securities and Exchange Commission (SEC), including the Williams Act.

6. How is the tender offer price determined?

The offer price is often set at a premium over the current market price to incentivize shareholders to sell.

7. What happens if the tender offer conditions are not met?

If the conditions, such as the minimum number of shares, are not met, the offeror may withdraw the offer.

8. How long is a tender offer usually open?

A tender offer must typically remain open for a minimum period, often 20 business days, as specified by regulations.

9. Can the terms of a tender offer change?

Yes, the offeror can modify the terms of a tender offer during the offering period, including extending the duration or changing the price.

10. Why might a company prefer a tender offer over other methods of acquisition?

A tender offer can be quicker and more direct compared to negotiated mergers, especially in hostile situations where board approval is unlikely.

Takeover: The acquisition of control over a company, typically by purchasing a majority of its shares.
Merger: The combination of two companies into one, typically by mutual agreement.
Acquisition: The process of one company purchasing most or all of another company’s ownership stakes.
Proxy Fight: An attempt by a group to take control of a company by convincing shareholders to vote for their proposed candidates for the board of directors.
Corporate Raider: An investor conducting hostile takeovers to acquire companies.

Online References

Suggested Books for Further Studies

“Takeovers: A Strategic Guide to Mergers and Acquisitions” by Alan K. Sester and T. R. Chemburkar
“Mergers, Acquisitions, and Corporate Restructurings” by Patrick A. Gaughan
“The Art of M&A” by Alexandra Reed Lajoux

Fundamentals of Tender Offers: Business Law Basics Quiz

### Does a tender offer require the approval of a company's board of directors? - [x] No, shareholders can respond directly to the offer. - [ ] Yes, the board of directors must approve it. - [ ] Sometimes, depending on the offeror's strategy. - [ ] Only in hostile takeover attempts. > **Explanation:** A tender offer bypasses the company's board of directors and is made directly to shareholders, so board approval is not necessary. ### What regulatory body oversees tender offers in the United States? - [ ] Federal Trade Commission (FTC) - [x] Securities and Exchange Commission (SEC) - [ ] Department of Justice (DOJ) - [ ] Federal Reserve > **Explanation:** The SEC regulates tender offers in the United States, ensuring adherence to the requirements of the Securities Exchange Act of 1934 and the Williams Act. ### When making a tender offer, what is the usual minimum duration for which the offer must be open? - [ ] 10 business days - [ ] 15 business days - [x] 20 business days - [ ] 30 business days > **Explanation:** Tender offers are typically required to remain open for a minimum of 20 business days to allow shareholders sufficient time to decide. ### A public offer to buy a specific number of shares at a specified price is called a: - [ ] Merger Proposal - [ ] Acquisition Bid - [ ] Share Buyback - [x] Tender Offer > **Explanation:** A tender offer is a specific type of public offer targeting shareholders to sell a defined number of shares at a set price. ### What might indicate a hostile tender offer? - [ ] Board of directors approve the offer. - [ ] Shareholders are not consulted. - [x] The offeror bypasses the board and contacts shareholders directly. - [ ] The offer is made during a closed market. > **Explanation:** A hostile tender offer involves the offeror bypassing the company's board of directors and making the offer directly to the shareholders ### What strategy can shareholders use to resist a tender offer? - [x] Refusing to sell their shares - [ ] Increasing the company's stock price - [ ] Lobbying the board of directors - [ ] Merging with another company > **Explanation:** Shareholders can refuse to sell their shares if they do not wish to accept the terms of a tender offer, effectively resisting it. ### The Williams Act is associated with which regulation? - [ ] Labor Laws - [ ] Environmental Laws - [ ] Antitrust Laws - [x] Securities Laws > **Explanation:** The Williams Act forms part of U.S. securities laws and regulates tender offers to protect investors. ### Can a tender offer price be lower than the current market price? - [ ] Yes, to attract more shareholders to sell. - [x] No, it is generally set at a premium. - [ ] Sometimes, depending on company policy. - [ ] Only during hostile takeovers. > **Explanation:** Tender offers typically offer a premium over the current market price to incentivize shareholders to sell their shares. ### A successful tender offer can result in: - [ ] Increased stock prices. - [ ] Reduced market competition. - [x] Gaining control over the target company. - [ ] Disbanding of the board of directors > **Explanation:** Successfully completing a tender offer can result in the offeror gaining control over the target company by acquiring a significant number of shares. ### What is the core difference between a merger and a tender offer? - [ ] The former involves negotiations, and the latter bypasses them. - [ ] The latter involves only cash payments. - [ ] Mergers do not require shareholder involvement. - [x] A merger requires internal approval; a tender offer can bypass it. > **Explanation:** A merger involves internal negotiations and approvals, whereas a tender offer bypasses the board of directors by making a direct proposal to shareholders.

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