Mini-tenders have a bad reputation, which may explain why they are used infrequently. This is the first in a trilogy of articles about mini-tender offers from the perspectives of offerors, issuers and shareholders. It reviews factors that an offeror should consider before launching a mini-tender offer.
A mini-tender is simply an offer to purchase securities below the threshold that triggers regulatory rules for take-over bids. Such an offer is not specifically regulated and can be used to acquire small but not insignificant positions in public companies, often at a discount to the prevailing market price.
How much to bid for?
A mini-tender offer seeks to purchase a small percentage of the outstanding securities of a public company, typically well below the threshold that triggers regulatory rules on take-over bids (20% in Canada). The offer is made publicly rather than by purchasing securities outright on a stock exchange.
Limiting the offer in this manner avoids the need to comply with take-over bid rules — a strategic goal of mini-tender offers. Triggering these rules would impose specific obligations on the offeror under securities laws, such as the need to disclose information about the offeror and the offer, and to permit shareholders the right to withdraw after tendering their shares while the offer remains open.
What regulations do apply to a mini-tender?
Although mini-tenders are not specifically regulated in Canada and the US, certain regulations do apply.
The Canadian Securities Administrators (CSA), an umbrella group of Canada's provincial and territorial securities regulators, has made it clear that "causing" shareholders to tender to a mini-tender based upon a misunderstanding about the nature of the offer may be abusive of the capital markets, making such conduct actionable under the regulators' public interest power.1
In the US, section 14(e) of the Securities Exchange Act and Regulation 14E require the offeror making the mini-tender to not engage in fraud or deceptive practises, to hold the offer open for a minimum time period, and to promptly pay investors who tendered after the offer closes.2
How should the offer be priced?
A mini-tender can be priced above or below the prevailing trading price of the security. Most mini-tenders are priced at a discount to the market price. One rationale for this is that in some circumstances (such as when shareholders own less than a board lot of securities), shareholders are better off tendering to a mini-tender to avoid minimum brokerage commissions that make a sale costly. More controversially, there is a perception that a mini-tender offer is often made below the market price in the expectation that shareholders might tender into the offer on the mistaken assumption that the offer price is a premium to the prevailing market price, which is generally the case in take-over bids. This perception has led to the relevant commentary described above from the CSA and the U.S. Securities and Exchange Commission.
Even though there is no specific obligation to do so, an offeror should consider stating in the tender offer document whether the price being offered is below the current market price, and whether investors have withdrawal and proration rights. An offeror should also consider stating the final price to be paid for the target securities, after fees and expenses (if any) are deducted from the offer price.
How long should the offer be open for?
A mini-tender may remain open for as long as necessary to achieve the offeror's strategic goals. Some mini-tenders remain open for weeks and months. If the market price rises above the offer price, the offeror is more likely to acquire the shares tendered to the offer. Conversely, if the market price falls below the offer price, the offeror is less likely to acquire the shares tendered to the offer.
Stay tuned for our second article about how public issuers should respond to a mini-tender offer.
Footnotes
1. CSA Staff Notice 61-301, Staff Guidance on the Practice of "Mini-Tenders." See http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_19991210_61-301.jsp.
2. SEC Investor Information, Mini-Tender Offers. See http://www.sec.gov/investor/pubs/minitend.htm.
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