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

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 (the “SEC”). This article 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.¹

Is the Transaction a Tender Offer?

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. The Wellman test sets forth eight criteria to help determine whether a tender offer exists (not all factors must be present):

1. There is an active and widespread solicitation of security holders for the securities of a company;
2. A solicitation is made for a substantial percentage of a company’s securities;
3. An offer to purchase is made at a premium over the prevailing market price;
4. The terms of the offer are firm rather than negotiable;
5. The offer is contingent on the tender of a fixed number of securities, often subject to a fixed maximum number to be purchased;
6. The offer is open only for a limited period of time;
7. The security holders are subjected to pressure to sell their securities; and
8. The public announcement of the transaction precedes or accompanies a rapid accumulation of large amounts of the subject securities.

Typical Company/Investor Transactions That May Implicate a Tender Offer

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, set forth below 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.

• Liquidity to Shareholders – Companies may have various reasons why they would want to provide liquidity to existing shareholders. By allowing shareholders to sell their shares back to the company, the company offers an opportunity for shareholders to realize a return on their investment. Often, such transactions occur when a liquidity event (such as a sale of the company or an IPO) 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.
• 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.
• 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.
• 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.

By launching a tender offer, a company can strategically manage its financial structure and equityholder composition, helping to ensure and/or create alignment with its broader strategic objectives.

Regulatory Requirements for Private Company Tender Offers

Generally speaking, tender offers are regulated by the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”) primarily through Sections 14(d) and 14(e) thereof (colloquially referred to as Reg 14D and Reg 14E, respectively). 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. The list below sets forth a non-exhaustive list of these requirements (with an eye toward those which may introduce risk to the subject company and/or offeror):

• Disclosure – The tender offer regime is based upon the idea that, where securityholders have a choice to make, they should be provided an appropriate level of information to make a well-considered decision with an opportunity to seek advice without being unduly pressured or rushed. Securityholders must be provided a disclosure statement within 10 days of the commencement of the offer. The statement should indicate the issuer’s stance on the offer, and in the event of a material change to the facts set forth in the statement, an update must be promptly provided to the securityholders.
• Duration – There is a mandatory minimum offer period of 20 business days commencing upon the date which the disclosure information is provided to the securityholders. Note that most companies launching a tender offer provide the disclosure information at the time of the launch. If there is any change in the offering price or percentage of securities sought, the offer must remain open for an additional 10 business days.
• Withdrawal Rights – Securityholders tendering in the offer must be provided rights to withdraw their acceptance of the offer within a specified period of time.
• Pro Rata Allocation upon Oversubscription – If more securities are tendered than the offeror is willing to purchase (oversubscription), the offeror must purchase the securities on a pro rata basis from all securityholders that opted to tender during the offer period.
• Equal Treatment – All securityholders which hold the same class of securities must be treated equally.

Generally, each of these requirements is not waivable, as they are crucial for ensuring adequate and accurate disclosure and fair treatment to all tender offerees.

Documentation for a Private Company Tender Offer

Though the circumstances for each tender offer involving the securities of a private company will vary, the following documents (or a similar version thereof) are likely required at a minimum:

• A written consent of the board of directors of the company – or similar governing body, if not a corporation – approving the tender offer.
• A written consent of the requisite number and/or constituencies of shareholders required by the company’s organizational documents approving the tender offer.
• A summary “Notice of Offer to Purchase” describing the material terms of the offer.
• A more in-depth “Offer to Purchase” setting forth, in depth, the terms of the offer. This document should include, at minimum, the following information:
  • Purchase price;
  • Description of shareholders qualified to participate in the offer;
  • Number of shares subject to the offer;
  • Minimum tender conditions;
  • Length of offer period (not less than 20 business days);
  • Description of the procedure to tender securities;
  • Notice of withdrawal rights;
  • Information about the subject company; and
  • Information about the offeror(s) (including proper disclosure if the offeror is an interested party).
• A form of “Letter of Transmittal” or similar document detailing the legal procedure and mechanisms upon which the securityholders tender their securities.

Conclusion

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.

¹ This Article considers only federal securities laws, excepting state “blue sky” laws which may apply to tender offers or similar transactions.

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