Quick facts
- What it is: a public offer to buy shares directly from holders
- Minimum open period: 20 business days
- Must be open to: all holders of the class
- Price: every tendering holder receives the highest consideration paid
- Governing regime: the Williams Act amendments and SEC Regulation 14D and 14E
A tender offer is a public proposal to buy shares directly from a company's shareholders, usually above the market price. Because the offer goes to the owners rather than the board, it is the classic route for an acquirer whose approach has been refused.
In plain English
Most acquisitions are negotiated with a board, which then recommends the deal to shareholders. A tender offer inverts that. The buyer publishes terms and invites shareholders to sell directly.
The board's opinion becomes advisory rather than decisive, which is exactly why defences exist.
The rules that shape it
Federal law does not prevent a hostile tender offer. It regulates the conduct of one, and the constraints determine what tactics are possible.
It must stay open long enough to think. A bidder may not hold a tender offer open "for less than twenty business days from the date such tender offer is first published or sent to security holders."1 That is roughly a calendar month, and it is the window in which a board can respond, seek a white knight, or argue the price is inadequate.
It must be open to everyone, at one price. Rule 14d-10 provides that no bidder shall make a tender offer unless "the tender offer is open to all security holders of the class" and "the consideration paid to any security holder... is the highest consideration paid to any other security holder."2
These are known as the all-holders rule and the best-price rule. Together they prevent a bidder from picking off large holders quietly at one price while offering the public something worse.
It is preceded by disclosure. A buyer accumulating a position before bidding crosses the Schedule 13D threshold at 5% and must file within five business days.4 In practice, the market usually learns that someone is building a position before the offer itself arrives.
How the mechanics run
- The bidder publishes the offer and files its disclosure documents.
- Shareholders tender their shares, meaning they commit to sell.
- Tendered shares can generally be withdrawn while the offer remains open, so a tender is a reversible decision until it closes.
- The offer usually carries a minimum condition, commonly a majority of outstanding shares, so the bidder is not left holding a stake too small to control.
- If more shares are tendered than sought, they are accepted pro rata.
Finishing the job
Acquiring most of the shares still leaves a minority behind. Delaware provides a route to clean that up quickly.
Under section 251(h), no vote of stockholders is required to authorise the back-end merger if the company's stock is listed on a national exchange or held of record by more than 2,000 holders, and the merger agreement expressly permits the merger to be effected under that subsection.3
This is why the two-step structure is now standard: a tender offer for control, followed immediately by a merger that acquires the remainder without convening a shareholder meeting. Minority holders who object are generally left with appraisal rather than a vote.
Why a poison pill defeats it
A poison pill works precisely because a tender offer is about accumulating shares. Cross the trigger and every other shareholder can buy discounted stock, so the shares the bidder is trying to accumulate multiply beneath them.
This is the reason hostile bids are usually paired with a proxy fight. The tender offer supplies the price and the pressure. The proxy contest replaces the directors who would otherwise refuse to redeem the pill.
Friendly versions
Not every tender offer is hostile. Where a board has already agreed a deal, a negotiated tender offer is often faster than a merger vote, particularly combined with the 251(h) route. Same instrument, opposite temperature.
What this means for a founder
Your shares are not registered and not publicly traded, so nobody will tender for them. The concept still reaches you in one specific situation: an acquirer, or an existing investor, approaching your other shareholders individually.
Your protections are contractual rather than regulatory. Rights of first refusal, transfer restrictions, co-sale rights and drag-along provisions decide whether shares can move without you, and at what price. The federal all-holders and best-price rules have no equivalent in a private company, which means an acquirer can offer your early employees a very different price from the one it offers your investors, unless your documents say otherwise.
Check whether they say otherwise.
Related reading
- Poison Pill covers the defence built to stop this
- Proxy Fight covers the campaign run alongside it
- White Knight covers the alternative buyer a board looks for during the 20 days
- Squeeze-Out Merger covers what happens to holders who never tendered