Tender Offer Rules & Regulations: What Private Companies Need to Know

Tender offers may seem like they're exclusive to publicly listed businesses, but they actually play a crucial role in private company dealings too. These offers serve as a bridge connecting aspiring investors, or even the company itself, to shareholders. They allow for an increase in stake or a reduction in outstanding options. However, it's important to conduct these offers within the rules and regulations set by the U.S. Securities and Exchange Commission (SEC). So, get ready as we explore the intriguing question of when a transaction qualifies as a tender offer and the potential regulatory implications it carries for private companies.

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About the authors:
D. Scott Anderson
Patrick T. Strubbe
Jake G. Rifkin

Transcript

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Though more commonly associated with publicly listed companies, tender offer rules and regulations apply to private company transactions as well. Tender offers provide a mechanism for a prospective investor, or the company itself, to acquire shares or reduce the number of options outstanding by directly approaching the company’s shareholders, while also providing the company or investor certain protections if done in compliance with the regulatory framework for tender offers. These transactions implicate certain rules and regulations promulgated by the U.S. Securities and Exchange Commission. This episode explores the concept of whether a particular transaction constitutes a tender offer, and if so, its regulatory implications through the lens of a private company.

Despite such transactions being regulated under U.S. federal securities law, the term “tender offer” is not defined by any statute, rule, or regulation. However, its characterization is crucial since it determines the legal framework governing a transaction. For purposes of determining whether a transaction constitutes a “tender offer” under the SEC’s rules and regulations, courts often apply an eight-factor test – commonly known as the Wellman test. This test sets forth certain criteria to help determine whether a tender offer exists – note that not all factors must be present. 

Each company and/or shareholder seeking to initiate a transaction which may constitute a tender offer under the SEC rules and regulations will have different circumstances and motivations. However, there are some common objectives that may implicate a tender offer based on application of the Wellman test. Note that these motives are not mutually exclusive, and a party may wish to achieve a myriad of objectives at once.

Some of these options include the following: 

First up, liquidity to Shareholders. By allowing shareholders to sell their shares back to the company, the company offers an opportunity for thes shareholders to realize a return on their investment. Often, such transactions occur when a liquidity event has not materialized as expected or may not materialize for some time. In such situations, a tender offer serves as a mechanism to unlock the value of their shares, providing shareholders with an opportunity to cash out without waiting for a potential future liquidity event.

Next: liquidity to Optionholders. Similarly, by allowing optionholders to either exercise and sell their shares back to the company or cancel their existing vested options for a cash value (based on a specified price per share of the underlying security), the company offers an opportunity for optionholders to realize cash value and, presumably, reap the benefits of their hard work. Additionally, such a transaction may have the benefit of reducing the number of outstanding options, helping to simplify and streamline the company’s capital structure. Further, when optionholders are able to realize cash value for their options, it may serve to incentivize them to continue contributing to the company's growth and success, fostering a more engaged and motivated workforce.

Third, consolidation of ownership – A tender offer is one way in which a company can consolidate ownership by acquiring shares from existing shareholders or canceling a number of outstanding options and optionholders from the capitalization table. The primary goal here is likely to streamline decision-making, enhance control over the company, or facilitate a change in management or strategic direction. 

And finally, exit strategy – Such transactions may be part of an exit strategy for existing shareholders, such as founders, early investors (angel, seed, venture, etc.), or private equity firms, providing them with an opportunity to sell their shares – either entirely or in part – and realize a return on their investment.

By launching a tender offer, a company can thus strategically manage its financial structure and equityholder composition, helping to ensure and/or create alignment with its broader strategic objectives. A formal tender offer process, if done in compliance with regulatory requirements, may also offer the company protection against shareholder claims and/or regulatory audit risk. 

However, it is crucial to remember that the process of initiating and completing a tender offer must be carried out in compliance with regulatory guidelines to ensure fairness and transparency. Additionally, it is important to note that the specific reasons that a private company may consider a tender offer transaction will depend on its unique circumstances, strategic goals, and the needs/goals of its equityholders. Each company’s situation will vary, and the decision to pursue a tender offer should be carefully evaluated in light of such factors.

Generally speaking, tender offers are regulated by the SEC under the Securities Exchange Act of 1934, primarily through Sections 14(d) and 14(e). However, private companies are not subject to the same level of public disclosure and regulatory oversight as public companies. Assuming that the underlying securities are exempt from registration, the filing and documentation burdens are far less onerous than for their public company counterparts.

If a transaction involving the securities of a private company is determined to be a tender offer, certain requirements apply. In our show notes, you’ll find a link to the article this episode is based on which sets forth a non-exhaustive list of these requirements.

Though far less burdensome and onerous than such a transaction is on their public company counterparts, tender offers involving a private company introduce layers of complexity and risk that would not otherwise exist were the transaction not characterized as a “tender offer” (e.g., a 20-day mandatory offering period). Private companies and prospective buyers and sellers should be mindful of these added burdens and make decisions accordingly. 

 Thank you for listening to Womble Perspectives. If you want to learn more about the topics discussed in this episode, please visit The Show Notes, where you can find links to related resources mentioned today. The Show Notes also have more information about our attorneys who provided today's insights, including ways to reach out to them.

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