Private Company Tender Offers

As discussed in this Cooley Go article on secondary sale transactions of private company stock, a tender offer is one of the ways in which companies can provide liquidity to their stockholders. This article will dive a bit deeper into some of the nuances involved for private companies doing tender offers.

What is a tender offer?

“Tender offer” simply means that stockholders are offered the opportunity to “tender” (i.e., sell) their stock at a fixed price. Historically, doing an initial public offering or selling the company has been the dominant method for providing liquidity – but with more companies opting to stay private for longer, tender offers have emerged as an alternative that not only creates liquidity for stockholders, but also can help investors increase their ownership in promising companies, along with helping companies simplify their capitalization table.

How are tender offers structured?

In a private company, tender offers are typically structured in one of two ways:

• Company-led tender offers: The company will offer to buy back stock owned by certain existing stockholders with proceeds from a recently closed financing or from available cash surplus. This is sometimes called a “self-tender.”
• Investor-led tender offers: An investor looking to increase its position in the company – typically, the lead investor from a recently closed financing round – will offer to purchase stock from existing stockholders.

What rules govern tender offers?

The rules for tender offers vary from jurisdiction to jurisdiction. In the US, while the Securities and Exchange Commission (SEC) does not precisely define the term “tender offer,” the SEC does prescribe certain technical requirements for private companies with respect to the offer process itself. For example, in connection with a transaction that qualifies as a “tender offer” for securities law purposes:

• The offer to purchase stock must stay open for at least 20 business days from the date of announcement of the offer.
• If there are changes to the terms of the offer, such as a decrease in the amount of stock being purchased, the offer must remain open for at least 10 business days after notice of the change is first given.
• Companies are, as you would expect, prohibited from making any material misstatements/omissions or engaging in manipulative acts.
• The offeror must make prompt payment of the purchase price after a tender offer closes.

Although there are no statutory rules in the US applicable to private companies around the extent of disclosures required, most companies work with their counsel to prepare an “offer document” or “information statement” that describes the terms of the tender offer and also includes detailed disclosures about any material interests of insiders that may be participating, financial statements, tax consequences and other risk factors associated with investing in the company, the sector and so on. Similar or other regulatory requirements may apply in other jurisdictions.

What practical considerations apply to tender offers?

From an administrative perspective, the process has evolved over the years, and there are now dedicated private market platforms that can assist with executing the process for a fee. However, there are a few things that you can consider and prepare for to ensure the process is smooth:

• “Cap table hygiene” is of paramount importance before you begin the process. Make sure your cap table is up to date and accurate, as that will be the source of truth in determining the parameters of the offer and consummating the final stock sales.
• Loop in your tax advisers early in the process so they can advise on how gains will be characterized in each relevant jurisdiction and determine other accounting effects arising from the transaction.
• Depending on where your sellers reside, there may be tax consequences or local law requirements that will require local counsel input. Build in enough buffer time to the process to run this down.
• If US tax considerations are relevant with respect to your company’s stock, consider whether there could be an impact on its qualified small business stock (QSBS) status –including potentially on future sales.
• There may be transfer restrictions – including any right of first refusal in favor of the existing investors – or prior stockholder approval requirements under your corporate documents. Depending on what those are, you will need to build in time to obtain the necessary approvals and waivers.
• Spend some time working on the messaging to your employees and allocate time to address their questions about the process and the criteria.
• Make sure you have effective legal counsel to help with not only the drafting of the offer documents, but also to advise and guide on the above and other aspects of the transaction – including insights on market practices and managing the process.