Early this year, I opened my mail to find an intriguing offer: A company wanted to buy stock that I held.
I noted the proposal — $14.40 per share in cash — and searched online for the current price, which was almost $20. Reading further, I saw that the offering document disclosed that the price was about 27 percent less than the stock’s market price.
Why would anyone sell shares at a discount?
Welcome to the strange world of “mini-tender” offers.
Unlike traditional tender offers, which are typically higher than the stock’s price to encourage holders to sell, mini-tenders are usually made for a price that’s less than the stock’s market value.
Why? The goal of the buyers is to purchase shares at a discount, usually so they can make a bigger profit when they sell the shares, said Brian V. Breheny, a partner at Skadden, Arps, Slate, Meagher & Flom in Washington and an authority on mergers and acquisitions.
“I’m at a loss as to why people respond” to such offers, he said. Some people simply may not read the offer document, he said, and assume the offer is a good deal.
Bidders “frequently use mini-tender offers to catch shareholders off guard,” the Securities and Exchange Commission says in an online investor tipsheet, and “count on investors jumping to the conclusion” that the price offered includes a premium to the market price, as in a traditional tender offer. (A tender offer means the bidder is asking shareholders to “tender” their shares, or offer them for sale.)
The offers generally fly below the regulatory radar because the buyers are seeking to amass less — often, far less — than 5 percent of a company’s shares, even after completion of the tender offer. That’s intentional. According to the S.E.C., bidders limit the offer “so that they do not have to comply with many of the investor protections” in place for larger offers. Those protections include requiring bidders to file offering documents with the S.E.C. and disclose detailed information about themselves.
The only rules that apply to mini-tenders, according to the S.E.C., require that bidders “not engage in fraud or deceptive practices,” that they hold the offer open for minimum periods of time and that they make “prompt payment” to investors after the offer closes.
More than two decades ago, concerned that such offers were misleading to investors, the S.E.C. took enforcement action against some bidders and issued guidelines for mini-tender offers. As a result, bidders now typically disclose to shareholders if the offer is a discount to the market price. And while the bidders aren’t required to notify target companies, the rules “encourage” them to, so the companies can advise shareholders about the offer, according to the S.E.C.
It’s not clear if such offers are increasing. The S.E.C. says that because mini-tenders don’t have to be filed with the agency, it doesn’t have statistics. But numerous companies have issued statements over the past year, cautioning shareholders about such offers.
The offer I received, from a company called Obatan, was sent to investors of Manulife, a Canadian financial services company. (I generally stick to mutual funds and don’t invest in individual stocks, but I had inherited fewer than 200 shares of Manulife from my mother.)
Manulife issued a news release on Feb. 3 cautioning investors that the company “is in no way associated with Obatan and does not recommend or endorse acceptance of this unsolicited offer.”
The offer included an address for Obatan in Glendale, Calif., but few other details about the company. Peter F. Lindborg, who identified himself as company secretary and outside counsel to Obatan, said in an email that the company had targeted Manulife because it had a large retail investor base, and he framed the offer as a way for shareholders to sell stock with less hassle.
“The strategy is to provide retail shareholders with a convenient way to sell their shares when they do not have a stockbroker,” he said. Even setting up an online trading account, he said, involves filling out a form and verifying your identity.
“It is a matter of choice,” Mr. Lindborg said. “You can buy your groceries at the corner store or you can travel to the supermarket, where prices are lower.”
The offer is open for a long period, he said, so investors “do not feel pressured to act immediately.” They are also advised that they can sell their shares on the open market through a broker at the market price, he said, and can withdraw any shares they tender up until the offer’s expiration date.
Another company, Tutanota, has made a spate of mini-tender offers since last summer, soliciting shareholders of companies including PayPal, Adobe, Disney, Microsoft, Alibaba and Bank of America.
Its offer for PayPal was $125 per share — as long as the stock was trading above that price on the last day of the offer period. The offer also noted that Tutanota expected to extend the offer several times, “until the market price exceeds the offer price,” and that the offer was dependent on Tutanota’s “obtaining all financing necessary” to fund it.
PayPal, whose stock closed at $102 on Thursday, advised shareholders in a Feb. 25 statement to reject the offer. “PayPal does not endorse Tutanota’s unsolicited mini-tender offer and is not affiliated or associated in any way with Tutanota, its mini-tender offer or its mini-tender offer documents,” it said.
Tutanota, which describes itself as “a private investment company that specializes in investing in publicly traded securities whose value it expects to appreciate over a 12-month period,” couldn’t be reached for comment. No one responded to an email address provided in the offer, or to messages left at a phone number that was answered by a recording.
(A spokeswoman for Tutao, a German company that provides a secure email service called Tutanota, said in an email that it had “no affiliation with Tutanota L.L.C. whatsoever.”)
Companies can be in an awkward position when shareholders receive mini-tender offers. According to the S.E.C., companies must notify their shareholders of tender offers once they become aware of them. But because bidders in mini-tender offers aren’t required to notify the target, the companies may not know about them.
Here are some questions and answers about mini-tender offers:
How do I tell if an offer is a mini-tender?
Bidders generally don’t label their offers as mini-tenders, perhaps because of their dubious reputation. The S.E.C. advises reading the offering document carefully and checking with the bidder or your broker or financial adviser, if you have one. If the bidder is seeking less than 5 percent of the company’s shares, the S.E.C. says, “you’re dealing with a mini-tender offer, and you should proceed with caution.”
What if I have questions about the offer?
The offer will typically have a number to contact a representative of the bidder, but you may not always get more details than are included in the offering document. If you don’t find any statements online from the target company, you can try calling its investor relations office to inquire if it knows about the offer.
What should I do if I get a mini-tender offer?
Marguerita Cheng, a certified financial planner in Washington and an “ambassador” for the Certified Financial Planner Board of Standards, recommends comparing the current market price with the price in the offer and consulting a trusted adviser before taking action.
“I have never advised clients to take advantage of a mini-tender offer,” she said. “They are generally not the best deal for investors.”
Always check alternatives for selling your securities, the S.E.C. advises. Compare the mini-tender offer with how much you would receive if you sold through a broker.
Dennis O. Garris, a partner with Alston & Bird and a former head of the S.E.C.’s office of mergers and acquisitions (and author of the agency’s mini-tender guidance), was blunt. “Throw it away,” he said, “and call the S.E.C. and complain.”
You can submit a complaint to the S.E.C. online or call the agency’s investor assistance line at 800-732-0330.
