Definition of the Purchase Offer
A purchase offer is a public offer made by an individual, company, or group that wishes to acquire a specific quantity of securities. The name comes from the fact that they invite current shareholders to “offer” or sell their shares to them. In fact, a purchase offer is considered a conditional offer to buy.
Purpose of the Purchase Offer
Purchase offers are typically proposed with the aim of accumulating a sufficient amount of common stock to gain significant influence over the board of directors or to entirely take control of the board.
How the Purchase Offer Works for Investors
Imagine you own 1,000 shares in ABC Company at a price of $50 per share and a market value of $50,000. One day, you wake up and log into your brokerage account. You are informed that XYZ Company has made a formal offer to buy your shares at a price of $65 per share, but the deal will only proceed if 80% of the outstanding shares are offered to the buyer by shareholders as part of the deal. You have a few weeks to decide whether to tender your shares.
Accepting the Purchase Offer
If you decide to accept your purchase offer, you must provide your instructions before the deadline; otherwise, you will not be eligible to participate. Typically, it’s as simple as telling your broker, either by phone, in person, or through the brokerage website, “Sure, I’ll sell at $65 per share” and wait to see what happens. If the purchase offer is successful and a sufficient number of shares are tendered, the deal is completed, and you will see 1,000 shares of ABC Company withdrawn from your account and $65,000 in cash deposited into it. If the purchase offer fails because less than 80% of the shares were tendered to the potential buyer, the offer disappears, and you will not sell your shares. You will retain your original shares of ABC Company in your brokerage account.
Rejecting the Purchase Offer
If you reject the purchase offer or miss the deadline, you will receive nothing. You still have 1,000 shares of ABC Company and can sell them to other investors in the broader stock market at whatever price is available. In some cases, the individuals behind the initial purchase offer may return and make a secondary offer if they did not receive a sufficient number of shares or wish to obtain additional ownership, and in that case, you may have another opportunity. However, as mentioned earlier, if you do not tender but a sufficient number of people do, you may be forced out of your ownership anyway, as the company is taken private in the future.
Regulations of Purchase Offers in the United States
Purchase offers are subject to extensive regulations in the United States. These regulations aim to protect investors, maintain the effectiveness of capital markets, and provide a set of basic rules that can grant stability to the company involved in the acquisition to interact effectively. Purchase offers primarily intersect with the Williams Act and SEC Regulation 14E. Let’s take a look at each of them separately.
Williams Act
The Williams Act – part of the Securities Exchange Act of 1934 – requires that individuals, companies, or other groups seeking to gain control of a company follow a set of guidelines designed to increase fairness for participants in capital markets and allow the concerned parties, including the company’s board of directors and management, adequate time to formulate and present their arguments for supporting or rejecting the purchase offer to the shareholders.
Regulation 14E
Regulation 14E (Rules 14e-1 to 14f-1) covers a range of rules regarding purchase offers, each detailed and specific. For example, it is illegal for a person to announce a purchase offer if they do not have a reasonable belief that they will have the funds available to complete the transaction, if accepted, as this would lead to significant fluctuations in the stock price, making market manipulation easier. Additionally, this would reduce the confidence investors and business managers have in capital markets because people would have to question whether each purchase offer is legitimate every time they hear that their company has faced one, distracting all parties involved.
Questions
Frequently Asked Questions (FAQs)
What is a Dutch auction tender offer?
Dutch auctions can refer to two different ways of selling a product. One type of Dutch auction involves starting with a high asking price and then gradually lowering the price until a buyer accepts the deal. Another common type of Dutch auction associated with U.S. bonds is taking multiple bids from investors and then selling the securities at the price that most investors are willing to pay. In the case of U.S. bonds, the Dutch auction helps the government determine the minimum yield that investors will accept.
What happens if you do not respond to a tender offer?
If you do not respond to a tender offer, it means you are rejecting the offer. Since you have not explicitly accepted the offer, your shares will not be sold.
Source: https://www.thebalancemoney.com/what-is-a-tender-offer-4129430
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