Private Company Tender Offer: Should You Participate?
By: AJ Ayers, CFP®
Summary:
Private company tender offers, where companies buy back shares from existing shareholders, are an attractive liquidity option, especially in today's fluctuating economy. Participation depends on personal financial situations and requires understanding the tender offer's terms, including pricing and potential legal and tax consequences. These offers differ from public company offers in regulatory oversight and transparency, and involve considerations like shareholder communication and valuation challenges.
With the fluctuating economy causing ripples across financial markets, private companies increasingly seek liquidity events to provide exits for their shareholders. One such event that has steadily gained traction is the private company tender offer. In 2022, tender offers accounted for 7% of total GP-led secondary transaction volume, representing around $43 billion in market activity.
What does that really mean?
It means that companies are staying private longer and in order to retain top talent, they need to provide some liquidity to employees so they don’t leave for more compensation at publically traded companies.
Private company tender offers present a compelling opportunity for shareholders seeking liquidity. With private valuations declining from lofty pandemic highs, tender offers allow sellers to access a pool of motivated buyers and potentially higher bids compared to other transaction types. As an interested shareholder, understanding the latest tender offer landscape is key to making an informed participation decision.
So, should you participate in a private company tender offer? The answer depends on your personal financial situation.
Here at Brooklyn Fi, we do this type of analysis with all of our clients.
What to consider if your company is going through a tender offer:
How much CAN you sell? Often the decision is already made for you and employees can sell 15-20% of their total holdings
What are your personal financial goals? Could this tender offer exit be a downpayment on your forever home?
Will I be at this company forever?
Is this a good opportunity to get some liquidity (you know, MONEY) out? (the answer is more often than not, YES)
What will my tax liability be? (this is a big one, it’s an important one, don’t let this stop you from participating)
Understanding Private Company Tender Offers
Private company tender offers are a method used by companies to buy back their own shares from existing shareholders.
It happens when a company offers to purchase a specific number of shares at a set price, allowing shareholders the opportunity to sell their shares back to the company.
We'll explore the meaning of tender offers in the context of private companies.
A tender offer can be an attractive proposition for shareholders, as it often comes with a premium, which means the selling price is above the current market value of the shares. The primary motive for launching a tender offer could be to reorganize the company's capital structure, reduce the number of shares outstanding, or prevent a hostile takeover.
It's essential to distinguish private company tender offers from those involving public companies.
Public companies experience more regulatory oversight, and their tender offer process is more standardized.
On the other hand, private companies have more flexibility in defining the terms of their tender offers, making the process less transparent at times.
In a private company tender offer, there are some key factors to consider:
Shareholder communication: Private companies may lack a formal investor relations department, so communication between the company management and shareholders might be less structured. It's important to ensure that all shareholders receive the relevant information in a timely manner to make an informed decision about participating in the tender offer.
Valuation: Unlike public companies, private company shares are not openly traded on a stock exchange, making it more challenging to determine their fair market value. An independent valuation might be necessary to establish a reasonable purchase price for the tender offer.
Legal and tax consequences: Tender offers involve multiple legal and tax implications for both the company and shareholders.
When it comes to private company tender offers, not everyone has the opportunity to participate. In general, participation is limited to existing shareholders and investors who hold an ownership interest in the company.
So, let's explore who can participate in a tender offer and how the process works for different entities.
First off, any shareholder of the company can take part in the tender offer. Shareholders own a portion of the company, either through having invested in it previously or by receiving stock options as part of their compensation. When a tender offer is made, these individuals have the option to tender their shares for a specific price. This can be an attractive opportunity for shareholders looking to cash out their investment or make a profit if the tender offer price is higher than the current market value of the shares.
Investors play a similar role in the process.
They are individuals or entities that have poured money into the company, believing in its potential for growth and profitability. When a tender offer is announced, investors have the chance to sell their shares and possibly realize gains on their investment.
Now, what does it mean to tender shares?
Tendering shares essentially means offering the shares for sale at the price specified by the tender offer. Shareholders who decide to tender their shares are agreeing to sell them to the party making the tender offer, usually another company or a large investor. It's important to note that participating in a tender offer is voluntary. Shareholders and investors are not obligated to sell their shares if they prefer not to.
The Initiation Phase
In the initiation phase of a private company tender offer, the first step involves announcing the intention to make an offer to purchase a certain number of shares. This announcement typically includes the price being offered and other relevant details.
The process is regulated by the Securities and Exchange Commission (SEC), and the offer must be in compliance with the Exchange Act of 1934.
During this phase, we must be clear, concise, and informative in our communication to target shareholders.
As the offeror, our goal is to create transparency and encourage shareholder participation. The initiation phase is crucial as it sets the stage for the entire tender offer process.
The Consideration Phase
The consideration phase is when target shareholders evaluate the offer to make an informed decision. During this time, shareholders must assess whether the offered price is fair and accurately reflects the value of their shares.
The SEC is involved in this phase as well, ensuring that the process complies with all necessary regulations.
It's essential for us to provide shareholders with the information they need to make a well-informed decision. This includes offering documentation, financial statements, and other relevant data to promote transparency.
Throughout the entire tender offer process, our primary goal is to ensure that our clients are well informed and that their needs are met with professionalism and efficiency. Our expertise in navigating the complex world of tender offers translates into value-added guidance for shareholders during these critical transactions.
Types of Tender Offers
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There are two main categories of tender offers: public and private. Public tender offers involve a company making an offer to buy shares from the existing shareholders of a publicly traded company. This method is often used during a takeover bid when the acquiring company wants to gain a controlling interest in the target company. In contrast, private tender offers are when a company seeks to buy shares from the shareholders of a privately held company.
Public tender offers are typically more visible, as they involve publicly traded companies, whereas private tender offers may be less well-known due to the nature of private ownership.
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Tender offers can also be characterized by the method of payment involved in the transaction.
Cash tender offers are straightforward: the acquiring company offers to buy shares from existing shareholders at a specified price, usually higher than the current market price of the shares. This premium can be an incentive for shareholders to sell their shares to the acquiring company.
On the other hand, in exchange offers, the acquiring company offers existing shareholders a specific number of its own shares in exchange for the target company's shares. This method can preserve cash for the acquiring company, but it may also require the target company's shareholders to assess the value and potential growth of the acquiring company's shares.
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Lastly, we can classify tender offers as voluntary or mandatory. Voluntary tender offers are initiated at the discretion of the acquiring company and are usually made to achieve a strategic acquisition or increase share ownership in the target company. Shareholders of the target company are under no obligation to accept the offer, and the acquiring company may not reach its desired ownership level if too few shareholders are willing to sell.
In contrast, mandatory tender offers are required in certain jurisdictions when an acquiring company crosses a specific ownership threshold. In these cases, the acquiring company is compelled to make a tender offer to all remaining shareholders, often with regulatory conditions to protect the interests of minority shareholders.
Understanding the Pricing in Tender Offers
The first step in pricing a tender offer is determining the price per share, which is the amount an acquirer is willing to pay for each outstanding share of the target company. This price is typically based on the current market price of the shares, with consideration given to factors such as recent financial performance, growth prospects, and industry trends.
Once the market price has been established, the next step is to determine the premium to be paid on top of this value. A tender offer is usually made at a premium over the current market price to entice shareholders to accept the offer. This premium reflects the acquirer's belief in the target company's future potential and their willingness to pay a specific price for control.
In setting the offer price, considerations such as the company's financial health, growth prospects, and market position come into play. A higher premium may be warranted for companies exhibiting strong growth, a dominant market position, or a unique product offering. Conversely, a lower premium might be more suitable for companies facing headwinds or in a competitive industry.
There are various factors that can influence the offer price, including:
The target company's financial performance and growth potential
Competitive dynamics within the industry
Market sentiment and macroeconomic factors
The acquirer's strategic objectives
The availability and cost of financing
Ultimately, the offer price in a tender offer is a delicate balance of several considerations. It needs to be attractive enough to entice shareholders to sell their shares, while also reflecting the true value of the company and its future prospects. By carefully evaluating all of these factors, the acquirer can develop an offer that best meets their objectives, while also providing shareholders with a fair return on their investment.
Legal Aspects of a Tender Offer
The foundation for tender offers in private companies is rooted in the regulatory framework established by the Securities and Exchange Commission (SEC). Even though private companies are generally exempt from certain public company reporting requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934, they still need to abide by specific rules and regulations when it comes to tender offers.
One crucial regulatory structure is Rule 13e-4, which governs the solicitation of tender offers from companies listed on a national securities exchange, as well as certain private companies that have assets exceeding $5 million and a class of equity securities held by 500 or more persons. Rule 13e-4 outlines the necessary disclosures, filing requirements, and prohibitions on fraudulent practices for issuers seeking to engage in tender offers. Compliance with this rule is essential to avoid unwanted scrutiny by the regulatory authorities.
Another important set of regulations is found in SEC Rule 14d, which deals with tender offers initiated by third parties rather than the target company. This rule contains similar disclosure and filing requirements to those in Rule 13e-4, ensuring that investors have access to critical information before entering into a tender transaction.
Apart from the federal securities laws, private companies must also be mindful of the state laws that may apply to their tender offers. State securities laws, known as blue-sky laws, aim to protect investors from fraudulent activities and require compliance with various regulatory provisions. These laws vary from state to state but typically encompass registration, antifraud, and reporting requirements.
In addition to regulatory compliance, contractual obligations should not be overlooked. Existing shareholders' agreements or other contracts may contain provisions that restrict tender offers, such as rights of first refusal or tag-along rights. Private companies must carefully review these contractual rights and obligations to avoid potential disputes or challenges from shareholders who feel their rights have been infringed upon.