Step 1—tender offer: The first step of a tender offer is the offer by Acquiror directly to Target shareholders to purchase their Target shares for the specified offer price. Upon commencing a tender offer, Acquiror must file a Schedule TO (tender offer) with the SEC. If Acquiror offers stock as part of the transaction consideration (i.e., an exchange offer), Acquiror also must file a registration statement for the securities since any company issuing public stock in the U.S. must file a prospectus, whether it is “selling” the stock in an IPO or “issuing” the stock as consideration in a proposed acquisition.
Within 10 business days after Acquiror has filed the Schedule TO, Target must file a Schedule 14D-9 with the SEC pursuant to which Target is required to state whether it (i) recommends the offer to shareholders, (ii) does not recommend the offer to shareholders, or (iii) makes no recommendation to shareholders.
In the Schedule TO, Acquiror will state the minimum percentage of shares that must be tendered in order for the tender to close. The minimum threshold chosen in the tender offer is almost always equal to or greater than the voting requirement in a traditional one-step merger. In this way, should a subsequent shareholder vote be required, approval of the transaction would be guaranteed. If the minimum threshold of tendered shares is met, the transaction will move to Step 2 (described below). If the minimum threshold is not met, Acquiror has the option (i) to withdraw the tender offer or (ii) to extend it. If the offer is withdrawn, no shareholders will receive the consideration offered (as if the offer never occurred).
The tender offer must be “open” for at least 20 business days (4 weeks) and, during that time, shareholders can elect to tender or exchange their shares. Acquiror cannot “take up” or purchase any shares until this initial tender period has closed. After the initial 20-day tender period has run, Acquiror is allowed to purchase the shares tendered to date and to extend the offering period by between 3 and 20 business days (this is called a subsequent offer period). If a change is made to the offer, the tender offer must be kept open for additional time. The length of time that a tender offer must be extended if a change is made depends on the nature of the change.
For example, assume Target has a simple majority requirement for approval of a sale of the company. If Step 1 of the tender results in greater than 50% of Target shares being tendered (offered for sale by Target shareholders), then the tender offer proceeds to Step 2 below and Acquiror is contractually required to purchase the tendered shares. If, on the other hand, the initial 20-day tender period does not result in a majority of Target shares being tendered, Acquiror can either extend the offer period (the subsequent offer period) or withdraw the tender entirely.
Step 2a.—Short-form merger: If 90% (or more) of Target shares are tendered, Acquiror can effect a short-form merger under applicable state law to “squeeze out” the remaining 10% (or less) of shares not tendered in the tender offer process. In a short-form merger, there is no shareholder vote—all remaining shares must be sold. Upon filing of the short-form merger certificate with the Secretary of State, the minority shareholders no longer have any rights to the shares, other than the right to receive the same consideration paid to the other shareholders in connection with the tender offer.
Step 2b.—Long-form merger: If Acquiror obtains more than the minimum threshold but less than 90%, the tender still closes but Acquiror must proceed down the traditional merger path in which: (i) disclosures are sent to shareholders, and (ii) shareholders must vote in favor of the transaction in order for the transaction to close. This is generally referred to as a long-form merger. This long-form merger (also called a one-step merger) is exactly the same process described above in the section entitled Merger. Since the tender offer in Step 1 closed (and Acquiror therefore already owns a certain number of Target shares), Acquiror will vote those newly acquired shares in favor of the transaction at the shareholder vote. Assuming that the minimum threshold chosen in the tender offer is equal to or greater than the percentage required for approval in a traditional merger (>50% in our example above), Acquiror already owns enough shares to guarantee a winning shareholder vote.
Two other things to note: (1) The percentage requirement for a short-form merger (90% in the example above) is set by the state in which Target is incorporated. While 90% is a common setting for this percentage requirement (and is the Delaware requirement), the required approval level for a short-form merger may differ in other states. (2) While tender offers are usually done to try to purchase control of a company, their use is not restricted to this purpose. If Acquiror simply wanted to purchase 4.9% of Target, Acquiror could structure the tender offer accordingly. Similarly, if Acquiror simply wanted to effect a significant share repurchase of its own stock, it could do so through a tender offer (as opposed to the more common “open market” programs that many companies have in place).