Tender Offer Processing

Tender offer processing is the operational work carried out by custodians, brokers, depositories and agents when a company or bidder publicly offers to buy securities from their holders. It covers capturing the terms of the offer, notifying every holder, collecting each holder's decision, delivering the tendered securities to the offeror's agent and distributing the cash or new securities paid in return. The offer itself is a commercial and legal event; processing is the chain of steps that turns holders' choices into settled positions.

A tender offer is a voluntary corporate action: nothing happens to a holding unless the holder instructs. The work therefore centres on elections and deadlines. It applies to a takeover offer for a company's shares, an issuer's share buyback by tender, a bond tender in which an issuer repurchases its debt, and variants such as the Dutch auction tender and the odd-lot offer.

The offeror appoints a tender agent, also called a receiving or depositary agent, to accept tendered securities and pay holders, and often an information agent to answer holder questions. The central securities depository announces the event to its participants and usually provides the mechanism through which securities are tendered electronically. Custodians and brokers stand between the depository and the investors, passing information down the custody chain and instructions back up it. Registered holders outside the depository deal with the tender agent directly, using a letter of transmittal.

Processing follows a fixed order, although the timing differs between markets:

1. Event capture. The offer document is read and its terms recorded: price or exchange ratio, conditions, minimum and maximum acceptance levels, expiry time and withdrawal rights. This is the first stage of corporate action event capture, and the details are checked against data vendors and the depository's announcement.
2. Notification. Each holder with a position receives a corporate action notification setting out the options and the custodian's own response deadline, which falls before the market deadline to leave time for processing.
3. Election. Holders reply with an election instruction stating how many securities they tender and, where there is a choice, which form of consideration they want. Holders who do not reply are treated according to the default option, which for a tender offer is to take no action.
4. Blocking and delivery. Tendered securities are blocked in the client's account so they cannot be sold or lent, then delivered to the tender agent's account or to a contra position at the depository. Shares out on loan must be recalled in time.
5. Expiry and results. At the election deadline the agent counts acceptances. If conditions are met the offer becomes unconditional; if not, it lapses and securities are returned.
6. Payment. Accepted securities are removed from holders' accounts and the proceeds credited. Custodians confirm the outcome to clients and reconcile cash and stock received against instructions sent.

Three features make tender offers harder to process than fixed-date events. First, an offer for a limited number of securities may be oversubscribed, in which case acceptances are scaled back pro rata and the unaccepted balance is returned to holders, sometimes with rounding rules and priority for small holdings. Second, holders often have the right to withdraw a tender before expiry, particularly when the terms change or a competing bid appears, so instructions must be reversible until the last moment. Third, offers are frequently extended or amended. Each change produces a revised notification and may reopen the election, and custodians must make sure that late instructions are applied to the current terms.

In the United States, tender offers must generally remain open for at least 20 business days, and extensions are announced publicly. Other markets set their own timetables through takeover codes or securities law.

Between institutions the process is largely automated using securities messaging standards carried over SWIFT. Under the ISO 15022 standard, the notification is an MT564, the holder's instruction an MT565, the status reply an MT567 and the confirmation of payment an MT566, with equivalent messages defined in ISO 20022. A tender offer carries the event code TEND.

The main risks are missed deadlines, instructions keyed for the wrong quantity or option, and tendering securities that are not available because they are on loan, pledged or pending settlement. Controls include independent checking of instructions, daily reports of unanswered events, position reconciliation before each deadline and a final corporate action reconciliation of proceeds. Errors can be costly, because a holder who missed an offer at a premium price may claim the difference from the intermediary responsible.

• U.S. Securities and Exchange Commission
• SWIFT