A tender offer is an initiative by an individual, business, or corporate group to purchase a large quantity of non-public company stock. Initial investors and employees gain liquidity for their equities, making money available for other investments or expenses. By doing so, management rewards early investors, helps employees realize personal financial goals (incentivizing loyalty and dedication), and attracts new investors.
There are two main types of tender offers:
- Share buyback (repurchase)—An organization buys back shares from investors (which may include present and former employees)
- Third-party tender offer—Investors acquire shares from existing shareholders.
Tender Offer Processes
While details can vary, the process of a tender offer generally includes the following steps:
- The prospective buyer proposes a purchase price and (if a third party) gets approval from the company.
- With the board's consent, the company collaborates with its legal team and investors to prepare the necessary documents.
- Existing shareholders review the transaction details. They have up to twenty business days to respond, indicating whether they will sell and if so, what percentage of their shares they will make available.
- If the terms of the offer are met, the deal moves forward.
- If more shares are offered for sale than the buyer wishes to purchase, then the offer is oversubscribed. In this case, the buyer may decide to increase their purchase, or sales may be rationed using a formula to determine which shares will be included in the sale.
An example can help illustrate the process:
Let’s say an employee owns 1,000 shares that are currently valued at $50 each, and a buyer offers to pay $70 per share if they can receive a specified percentage of the company in the deal. The company owners agree to allow this buyer to purchase 80% of its shares. The purchaser may intensely lobby employees to sell, but individual employees may decline the offer and retain all their shares. If they accept, however, they must confirm their acceptance and specify the number of shares to be sold prior to the deadline. Missing the deadline means missing out on the tender offer.
If enough employees agree to sell enough shares to satisfy the terms of the offer, then employees will receive $70 for each share they sell (for example, our hypothetical employee could receive up to $70,000 for 100% of their shares). If not, the deal falls through and existing shareholders retain their shares. The buyer may come back with another offer, either to purchase shares they failed to secure on the first attempt or to buy additional shares after a successful deal.
In some situations a company can force employees to sell their stock. While this is uncommon, be sure to look over your shareholders' agreement for language regarding forced sales or corporate acquisitions. If your company is acquired by another, your shares of the original company will be sold.
Tender Offers & Taxes
Before agreeing to sell shares, it’s important to understand the tax obligation that will accompany the liquidity you receive from a tender offer. If you receive incentive stock options (ISOs), then selling the shares prematurely will negate their favorable tax treatment. Also consider that for both ISOs and nonqualified stock options (NSOs), shares must be held for longer than one year before profits from their sale can qualify for long-term capital gains tax; selling before that time subjects them to short-term capital gains, which is essentially the same as the regular income tax rate.
How to Win as an Employee in a Tender Offer
To make the most of your company’s tender offer, follow these tips:
- Attend the information session. Be attentive, ask all your questions, and get all the necessary details.
- Thoroughly read all the documents you receive.
- Work with a trusted fiduciary financial advisor to create a comprehensive strategy to meet your financial goals. This overarching strategy will inform individual decisions like whether and how much to sell in a tender offer.
- Consider the expected performance of your company in the near and long term. Are there still chances of growth?
- Consider the financial impact of waiting to sell and when the next opportunity is likely to be.
- If you have unexercised stock options, understand the financial impact of exercising and selling them in the tender offer.
The fiduciary advisors at WRP Wealth Management specialize in helping employees make the most of their equity compensation. We’re experts in the IPO process and can help you navigate its complexities to minimize taxes, maximize gains, and create the financial security you need to live your dreams. For more tips on managing your employee options and shares, subscribe to our blog or browse our free resource library.