A takeover offer, also called a takeover bid, is an offer by one party, the bidder or offeror, to the shareholders of a company, the target, to acquire their shares on stated terms with the aim of obtaining control. Each shareholder decides individually whether to accept. If enough do so, the bidder gains control and, above certain levels, may be able to buy out those who declined. In the United States the same transaction is generally called a tender offer.
The offer is one of the two main ways of acquiring a listed company. The other is a transaction approved by a shareholder vote, such as a statutory merger in the United States or a scheme of arrangement in the United Kingdom. Because an offer is addressed to shareholders and not to the company, it can be made without the support of the target's board. Both routes belong to the field of mergers and acquisitions.
Types of offer
Offers are classified in several ways:
- Recommended or hostile. A recommended offer has the backing of the target's board of directors; a hostile offer is made over its objection.
- Voluntary or mandatory. A voluntary offer is made at the bidder's choice. A mandatory offer is required by law when a person's holding crosses a control threshold.
- By consideration. Shareholders may be offered cash, shares in the bidder, other securities or a mixture, sometimes with a choice between them. An offer paid in securities is also known as an exchange offer.
- Full or partial. Most offers are for all the shares; a partial offer seeks only a stated proportion.
The price normally exceeds the market price before the approach, the difference being the acquisition premium paid for control.
Conditions and thresholds
An offer is usually conditional on a minimum level of acceptances. In the United Kingdom, an offer must be conditional on the bidder ending up with more than 50 per cent of the voting rights, and bidders often set the level higher. Other common conditions are competition and regulatory clearances and, where the bidder is issuing shares, approval by its own shareholders.
Two thresholds shape the end of the process. If the bidder acquires 90 per cent of the shares to which the offer relates, UK company law allows it to buy the remaining shares compulsorily on the same terms, a procedure known as a squeeze-out; minority holders have a matching right to be bought out. Most European countries have equivalent rules at 90 or 95 per cent. In the United States, a bidder that reaches the necessary level after a tender offer completes the acquisition through a second-step merger, which in Delaware can often be done without a further vote.
Regulation
Takeover rules aim to ensure that shareholders are treated equally, have enough time and information to decide, and are not denied the chance to consider an offer.
In the United Kingdom, offers are governed by the Takeover Code, administered by the Takeover Panel. Among its main provisions, a person who acquires 30 per cent or more of the voting rights must make a mandatory cash offer to all other shareholders at the highest price it has recently paid; a potential bidder that has been publicly named must, within 28 days, announce a firm offer or withdraw; and the target's board may not take action to frustrate an offer without shareholder approval. The European Union's Takeover Directive of 2004 applies similar principles across member states, leaving each to set its own mandatory bid threshold.
In the United States, tender offers are regulated under federal securities law by provisions added by the Williams Act of 1968. The bidder must file disclosure documents with the securities regulator, keep the offer open for at least 20 business days, pay all tendering holders the same price and allow withdrawal while the offer is open. There is no mandatory bid rule, and target boards have wider scope to defend, for example with a shareholder rights plan. In both systems, building a stake triggers beneficial ownership disclosure, and dealing on unpublished knowledge of a bid is insider trading.
Processing for investors
For holders of the target's shares, a takeover offer is a voluntary corporate action. Custodians and brokers notify holders of the terms, and a holder who wishes to accept sends an election instruction before the intermediary's deadline, choosing between forms of consideration where a choice is offered. Accepted shares are blocked or moved to an escrow balance at the depository until the offer becomes unconditional or lapses. If it succeeds, the consideration is paid within a set period; if it lapses, the shares are released.
Offers are often extended, revised or met by a competing bid, each of which requires new notifications and may reopen withdrawal rights. Holders who do nothing keep their shares unless the bidder later exercises squeeze-out rights, at which point the event becomes mandatory. Once control passes, the target is usually removed from the exchange through the delisting process. The operational steps are described under tender offer processing and merger consideration processing.