The Menace of the Mini-Tender

EdBattsPostImageA perfectly legal, but on its face very predatory, practice is increasingly hitting major public companies and likely confusing and taking advantage of their small individual investors: the “mini” tender offer. Thus far, the practice has hit Silicon Valley household names, particularly in the past year, such as Gilead (2011), Intel (2013), PayPal (2015), Yahoo! (2015) and AT&T (2015), all of which issued press releases recommending against these dubious tenders.

The Williams Act tender offer rules exempt any person making a tender for less than 5 percent of a company’s shares from:

  • EDGAR filings, including the extensive disclosure regime of filing a Schedule TO and thus a company responding with a Schedule 14d-9
  • treating all offerees equally and carving back offerees pro-rata if oversubscribed and
  • allowing investors to change their mind and withdraw shares prior to the close of the offer.

Instead, any such “mini-tender” is simply subject to anti-fraud provisions, a minimum offer period of 20 days and making prompt payment after closing.

The tactic adopted in the mini-tender is as follows:

  • An offeror issues a tender at below market prices – generally just under 5% below current trading price – for less than 5 percent of a given stock.
  • The terms of such tenders generally make them irrevocable – meaning that once shares are tendered, individual investors cannot change their minds, even if the tender has not yet closed. The shares then remain in limbo.
  • The terms of the tenders also provide that the offeror can indefinitely extend the deadline to close – meaning that if the share price of the subject company falls below the tender price, the offeror can hold off until the price may rebound – or simply let it expire. Another tactic is to make a mini-tender at a price slightly above market price, but to then extend the tender offer period until a company’s stock price exceeds the tender price, thereby locking in a profit for the offeror and loss (in marking-to-market) for the investor.

One firm in particular, Toronto-based TRC Capital, has created its own cottage industry of late in launching mini-tenders. While TRC Capital’s conduct appears perfectly legal, one has to wonder whether individual investors who tender fully understand and appreciate what TRC is doing.

In fact, the probable reality is that many individual investors, and likely more than a couple of stockbrokers as well, do not understand the distinction between a “legitimate” tender offer, such as one in an M&A deal in which a premium rather than discount to market price is offered, vs. the shady “mini-tender,” in which investors lose money compared to selling on the open market. In addition, the way that tenders are reflected in the Depository Trust Company system, the back-office organization for shares held in “street name” at brokerage accounts, means that investors have to scrutinize the (very) fine print. These things are complicated for well-versed securities lawyers – imagine how they appear to the legions of ordinary stockbrokers or mom-and-pop investors.

Even if only a fraction of investors fail to understand the implications of the tender, the offeror still is likely to net a tidy profit. An academic article by Russell Hirschhorn in the Hofstra Law Review in 2000 showed that average discounts were between 15-25 percent − not insubstantial. In the last decade, the zombie menace of the mini-tender has marauded through various industries, although of late, technology appears increasingly in its sights.

While we live in a free market economy, a central tenet of it is market regulation, including disclosure and procedural fairness. Mini-tender practices are antithetical to those principles. There is no rational reason why a small investor with highly liquid shares would want to sell at below-market prices and lose money – other than confusion over what the tender means.

The rise of the mini-tender was first observed in force in the boom markets of the late 1990s. While the SEC cracked down on some aspects to the extent they could, their hands were, and are, tied by the statutory carveout provided for under the Williams Act. That argues for a legislative change by Congress. In the interim, to their credit, the SEC has a useful web page on the issue.

At some level, it is valid to ask whether a public offer to purchase (such as on Nasdaq) for a hundred or a thousand shares constitutes a tender. But surely there can be exceptions from the Williams Act rules for national exchange activity, below-market price trades purely between licensed broker-dealers (to move large blocks of stock and take a discount for liquidity) or simply to prevent DTC from distributing tenders that do not comply with the regular requirements of the Williams Act. While all of these exceptions may require legislative changes, bright Congressional staffers have solved lesser problems.

Until there is a groundswell of support that pushes Congress to amend the Williams Act and eliminate this type of seedy practice, companies are well advised in the interim to continue to issue press releases citing the inherent dangers of such mini-tender offers, including pointing to the SEC website for information. Buyer (or offeree) beware.