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:

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:

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: