Tender Offer

Because the tender offer allows an acquirer to go around management and appeal directly to shareholders, it is the most powerful corporate control transaction mechanism available in the United States markets — and it is comprehensively regulated by the Williams Act of 1968, which amended the Securities Exchange Act of 1934 to add Sections 13(d) and 14(d) through 14(f) and created the disclosure, timing, and shareholder protection framework that governs every tender offer in the modern regulatory environment. 

The tender offer, its regulatory framework, the Williams Act requirements, and its distinction from open market repurchases are directly tested on the Series 7 examination.

The Williams Act of 1968 — The Regulatory Foundation

Before 1968 no federal law regulated tender offers — acquirers could launch surprise bids for target company shares with minimal disclosure, leaving shareholders with little information and almost no time to evaluate whether to accept or reject the offer. The Congress addressed this investor protection vacuum through the Williams Act — enacted July 29, 1968 and sponsored by Senator Harrison Williams of New Jersey — which added Sections 13(d), 13(g), 14(d), 14(e), and 14(f) to the Securities Exchange Act of 1934.

The Williams Act was deliberately designed to strike a neutral balance between the interests of acquiring companies and target shareholders — Congress explicitly did not want the legislation to tilt the playing field against takeovers as a matter of policy, recognising that the market for corporate control serves an important efficiency function by disciplining underperforming management and reallocating corporate assets to higher-valued uses. Instead the Williams Act sought to ensure that shareholders had the information and time necessary to make informed decisions about whether to tender their shares — without the government substituting its judgment for the shareholders' own assessment of whether the offer price was adequate.

The Williams Act achieves this neutral balance through three core mechanisms — mandatory disclosure of the acquirer's identity and intentions, minimum offering periods that give shareholders sufficient time to evaluate the offer and seek alternative transactions, and specific rights for tendering shareholders including the right to withdraw tendered shares and the right to receive any price increase paid to other shareholders.

Schedule TO — The Mandatory Disclosure Filing

Any acquirer whose tender offer would result in ownership of more than five percent of the target company's shares must file a Schedule TO — the Tender Offer Statement — with the SEC on the day the offer commences. The Schedule TO is a comprehensive public disclosure document that provides shareholders with all material information needed to evaluate the offer and decide whether to tender.

The Schedule TO must disclose the identity and background of the bidder — including the names of all persons making the offer, their business backgrounds, and any prior criminal convictions or securities law violations. It must disclose the source of financing — where the money to purchase the shares is coming from, including the terms of any debt financing arrangements and the identities of the financial institutions providing acquisition financing. It must disclose the terms of the offer — the price per share, the number of shares being sought, any conditions to the offer, the expiration date, and the procedures for tendering and withdrawing shares. It must disclose the purpose of the transaction — whether the acquirer intends to acquire the entire company, take it private, sell off assets, replace management, or pursue some other post-acquisition strategy that shareholders should understand before deciding whether to tender. It must disclose any prior dealings between the acquirer and the target — including any prior negotiations, previous share acquisitions, or other relationships.

The Schedule TO is filed simultaneously with the commencement of the offer — not before the offer begins — ensuring that shareholders receive the required disclosures at the same time they are first notified that the offer exists. The SEC has ten business days after the Schedule TO is filed to review it and request additional disclosure if material information appears to be omitted or inadequate.

Schedule 14D-9 — The Target's Response

Within ten business days of the commencement of a third-party tender offer, the target company's board of directors must file a Schedule 14D-9 — the Solicitation or Recommendation Statement — disclosing whether the board recommends that shareholders accept or reject the offer, makes no recommendation, or is unable to take a position. The Schedule 14D-9 must disclose the reasons for the board's recommendation or non-recommendation, any transactions in the target's shares by the company's directors and officers in the preceding sixty days, and any material agreements between the target and its directors or officers that might influence the board's recommendation — such as golden parachute arrangements that are triggered by a change of control.

The target board's Schedule 14D-9 is the primary vehicle through which incumbent management communicates its view of the offer's adequacy to shareholders — arguing that the offer price undervalues the company, that superior alternatives are available, that the acquirer's financing is uncertain, or that the business combination is not in shareholders' interests. In a friendly transaction, the target board recommends acceptance — in a hostile transaction, the target board typically recommends rejection and may simultaneously pursue defensive measures and alternative transactions.

The Minimum Offering Period — The Twenty Business Day Rule

Regulation 14E, Rule 14e-1 requires that every tender offer remain open for at least twenty business days from the date it is first published or sent to shareholders — the minimum offering period that gives shareholders sufficient time to evaluate the offer, seek professional advice, compare the offer to the market price and any alternative transactions under negotiation, and decide whether to tender their shares.

The twenty business day minimum period is not negotiable — a bidder cannot shorten the offering period below twenty business days even if the target's board has recommended acceptance and shareholders want to close the transaction more quickly. The minimum period ensures that shareholders who might otherwise react impulsively to an attractive premium or who need time to gather information have an adequate window for deliberate decision-making.

If the bidder increases the offer price or the percentage of shares being sought at any point during the offering period, the offer must remain open for at least ten additional business days following the announcement of the change — ensuring that shareholders who tendered at the original price and might want to reconsider in light of changed terms have a meaningful opportunity to do so.

Shareholder Rights — Withdrawal, Pro-Ration, and Best Price

The Williams Act framework establishes three specific rights for shareholders who tender their shares in a tender offer — rights that protect shareholders from pressure tactics and ensure they are treated fairly relative to other tendering shareholders.

The withdrawal right allows shareholders who have tendered their shares to change their minds and withdraw those shares from the offer at any time before the expiration of the offer. This withdrawal right prevents the acquirer from using a countdown clock to pressure shareholders into tendering before the shareholders have made a fully informed decision — shareholders can tender and observe how the offer develops, then withdraw if they decide the offer is inadequate or if a superior offer emerges, without losing the option of ultimately accepting the original offer if no better alternative materialises.

The pro-ration right protects shareholders when the acquirer seeks fewer than all outstanding shares. If the tender offer is for less than all shares and more shares are tendered than the acquirer seeks, the acquirer must purchase shares from tendering shareholders on a proportional basis — if forty percent more shares are tendered than sought, the acquirer purchases forty percent fewer shares from each tendering shareholder than they tendered, returning the unsought portion. This prevents the acquirer from selectively choosing which shareholders to purchase from and ensures that all tendering shareholders participate proportionally in the offer.

The best price rule under Rule 14d-10 requires that the acquirer pay every shareholder the highest price paid to any shareholder during the tender offer period — if the acquirer increases the offer price during the offer period, every shareholder who tendered at the original lower price must receive the higher price. This prevents the acquirer from making side payments to favoured shareholders while paying others the stated offer price.

Friendly Versus Hostile Tender Offers

Tender offers are classified as friendly or hostile based on whether the target company's board of directors supports or opposes the offer — a distinction with profound practical implications for the transaction's complexity, likelihood of completion, and the defensive measures available to the target.

A friendly tender offer is one in which the target's board has negotiated the transaction with the acquirer in advance, agreed on the offer terms, and recommends that shareholders accept — filing a supportive Schedule 14D-9 and cooperating fully with the acquirer's due diligence and regulatory approval processes. Most large acquisitions in the modern market are structured as friendly transactions in which the board negotiates the best possible price and then recommends acceptance, because the acquirer gains access to private due diligence information and can secure regulatory approvals more efficiently when management cooperates.

A hostile tender offer is one in which the acquirer bypasses the target board — either because preliminary negotiations with management failed to produce an agreed transaction, or because the acquirer made a direct approach to shareholders without any prior negotiation — and the target board opposes the offer. Hostile tender offers are less common in the contemporary market than in the takeover waves of the 1980s because of the proliferation of defensive measures that make hostile acquisitions extremely difficult and expensive to complete.

The most effective anti-takeover defence is the poison pill — formally called a shareholder rights plan — under which the target's board grants existing shareholders the right to purchase additional shares at a substantial discount if any single acquirer accumulates more than a specified threshold of the target's shares — typically fifteen to twenty percent — without board approval. The poison pill makes hostile acquisition prohibitively dilutive and expensive, effectively forcing any potential acquirer to negotiate with the board rather than going directly to shareholders. Poison pills are adopted by the board without shareholder approval and can be implemented very quickly — making them the most commonly deployed anti-takeover measure in the modern corporate governance environment.

The Issuer Self-Tender — The Repurchase Application

While the third-party tender offer in an acquisition context is the most discussed application, tender offers are also used extensively by companies repurchasing their own shares — the issuer self-tender. An issuer self-tender allows a company to repurchase a specific number of its own shares at a fixed price within a defined acceptance period, governed by Exchange Act Rule 13e-4 rather than Regulation 14D.

Rule 13e-4 requires the company to file a Schedule TO with the SEC disclosing all material terms of the repurchase offer, provide the offer document to all shareholders of the class of shares being repurchased, keep the offer open for at least twenty business days, and comply with the same best price and pro-ration requirements that apply to third-party tender offers. The issuer self-tender is one of the three primary methods of share repurchase alongside open market repurchases and accelerated share repurchases — it is particularly useful when the company wants to execute a large repurchase quickly and with certainty of completion at a defined price, rather than gradually through open market purchases over an extended period.

The Tender Offer and Regulation M — Anti-Manipulation During Distribution

Regulation M Rule 105 — which prohibits short selling of a security during the five business days before the pricing of a public offering and then purchasing shares in that offering — applies in the context of tender offers in a specific way. An investor who acquires shares through a tender offer at a discount to the prevailing market price and then sells those shares at market prices in effect in a distribution — a situation that can arise in exchange offers or certain restructuring transactions — may trigger Regulation M concerns depending on the specific transaction structure and the timing of any short selling in the relevant securities.

Examination Relevance and Key Takeaways

The tender offer is tested on the Series 7 examination in the context of corporate acquisitions, the Williams Act regulatory framework, the Schedule TO filing requirements, shareholder rights, and the distinction between friendly and hostile transactions.

The key points to retain are these.

A tender offer is a public bid made directly to shareholders to purchase some or all of their shares at a specified premium price during a defined acceptance period — bypassing board management to deal directly with shareholders. The Williams Act of 1968 — amending the Securities Exchange Act of 1934 to add Sections 13(d) and 14(d) through 14(f) — is the foundational legislation governing all third-party tender offers for more than five percent of a company's shares. Any acquirer whose offer would result in ownership exceeding five percent must file Schedule TO with the SEC on the day the offer commences — disclosing identity, financing source, offer terms, purpose, and prior dealings with the target.

The target board must file Schedule 14D-9 within ten business days — recommending acceptance, rejection, or expressing no recommendation — with reasons and disclosure of any management conflicts. Regulation 14E Rule 14e-1 requires the offer remain open for a minimum of twenty business days — the mandatory minimum offering period that cannot be shortened. Any price increase requires the offer to remain open for at least ten additional business days. The three core shareholder rights are the withdrawal right — tendering shareholders may withdraw at any time before expiration; the pro-ration right — when more shares are tendered than sought, each tendering shareholder receives proportional participation; and the best price rule under Rule 14d-10 — every shareholder receives the highest price paid to any shareholder during the offer period. Friendly tender offers have board support and Schedule 14D-9 recommendation to accept. Hostile tender offers face board opposition and defensive measures — the poison pill or shareholder rights plan is the most effective defence, making hostile acquisition dilutive and forcing negotiation with the board. Issuer self-tenders for share repurchase are governed by Rule 13e-4 with the same twenty business day minimum and best price requirements.