Mini-tender offer
From Wikipedia, the free encyclopedia
A mini-tender offer is an offer to acquire a company's shares directly from current investors in an amount less than the minimum amount (5% of issued stock).
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[edit] Exempt from SEC
As the solicitation does not meet the 5% threshold, it does not follow the guidelines set by the Williams Act. Mini-tenders are exempt from Regulation 14E which requires that the offer be registered with the U.S. Securities and Exchange Commission and that a Schedule TO be filed. Thus, mini-tenders do not have to comply with investor protections and required disclosures that are in place for larger tender offers.
While technically not illegal, the SEC advises extreme caution, so the investor should carefully read the mini-tender disclosure and check market prices with their broker.
Problematic is the back office systems of many broker-dealers which do not distinguish between mini-tenders and SEC-registered tender offers. In a potentially deceptive practice, a mini-tender is never labeled as a "mini-tender". It has been reported that investors assume that mini-tenders have the same protection as larger tenders, simply because both types of offers are presented as a solicitation on the broker's letterhead.[1]
Unlike real tender offers, a mini-tender offer can be made at no cost, so the bidder may not have adequate financing to purchase the shares in the offer. A mini-tender offer may allow the bidder to gain control of the shares before making payment to the investors, as they are not required to place tendered shares into an escrow account or independent receiving agent. This potentially results in the bidder's tardiness in paying the investors (often weeks or months) or even an inability to pay at all (in the latter case, leaving the investor with nothing).[2]
Some mini-tenders are exchange offers, in which one security is exchanged for another. If the investor tenders publicly traded shares in return for shares with an illiquid market, they will end up with securities that they cannot sell.[3]
Crucially, investors cannot back out after tendering their shares to mini-tender, whereas a registered tender offer allows investors to change their minds.
[edit] Rationale
The Motley Fool advises that mini-tenders are "zero-sum games" where investors are guaranteed to lose. First, nearly all mini-tenders are made below market value, with the bidder immediately selling the acquired shares at market for a profit. (In contrast, tender offers that are registered with the SEC usually offer a substantial premium to market, and the bidder is interested in taking a controlling stake in the target company for a period of time.)[4]
Second, while mini-tenders may be occasionally made at a small premium to the market, the offer can remain open for weeks or months, locking in the investors' tendered shares. The bidder is gambling that the market price will eventually rise above the initial bid premium, so they can profit while investors lose out (despite initially believing that they tendered at a premium).
In fact, the bidder can continually keep extending the expiration date to give the market price more time to rise above the offer. As many mini-tenders do not offer withdrawal rights, the investor essentially loses control of his shares.[5] The bidder is in a no-lose situation either way, if the market price never exceeds the offer price, the mini-tender will be withdrawn and the investors never get their premium.[6]
If the market price of the stock falls below the mini-tender price before the offer closes, the bidder can cancel the offer or reduce the offer price. While a price change allows investors to withdraw their shares, this process is not automatic. The onus is on the investor, as they (and not the bidder or broker) are responsible for acquiring the revised offer information and withdrawing their shares by the deadline.[7]
Bidders in mini-tenders generally prey on naive investors, who assume that the mini-tender offer is at a premium to the market.[8] A mini-tender offer may be structured on a first come, first purchase basis, where the bidder accepts shares in order of receipt. Consequently, investors are pressured into believing that they are obligated to tender their shares before having solid information about the offer.[9]
Bidders of mini-tenders have often argued that they provide a market for investors to sell illiquid securities. However, this assertion is invalid, as the bidder would have more difficulty than individual investors, since they have a larger block of accumulated shares. Therefore, bidders will only solicit a mini-tender for liquid securities.
[edit] Example
The practice is most associated with a company called TRC Capital, a private firm founded by a Canadian securities lawyer. In the early 21st century, they repeatedly made mini-tender offers at below-market prices in an attempt to trick people into selling their stock at a price less than its actual value.
The boards of target companies, such as MetLife and AMD, have attempted to counter mini-tenders by issuing recommendations to reject such offers.[10]
