Share buybacks: Tender is the offer

In a share buyback scenario, a general mandate given by shareholders to the company is normally for up to 15% of the issued share capital.

Yet there may be occasions when a company wishes to buy back more than this amount, which opens the possibilities of payment of a special dividend or a tender offer.

A tender offer is a way in which a company can return excess cash to all shareholders who take up the proposal, as opposed to the smaller buyback programmes, which cannot do this.

This might be relevant if a company has disposed of a part of its business or a subsidiary company, or if an investment company has sold a large part of its portfolio.

If the directors have determined that they wish to return many of the proceeds of a sale to members, rather than using them to invest in business growth, then a tender offer is a good option.

“If the directors wish to return the proceeds of a sale to members, rather than invest in business growth, a tender offer is a good option”

It allows those who wish to reduce their holdings to do so, but for those who wish to remain fully invested, it is not compulsory. It can also allow shareholders with a few shares to sell all their holding, and ‘clean up’ the register.

For companies on the Main Market, the relevant provisions of Listing Rule 12 (LR12) in the Financial Conduct Authority (FCA) Handbook must be followed. There are also requirements in LR13 for shareholder circulars about share buybacks. A sponsor may be required too, as per LR8.2.

There are different ways to structure a tender offer, among them a fixed price method or a maximum price method. It is also possible to structure a return of cash to members by combining a tender offer and a special dividend.

Fixed price

With this method, a price is fixed at which shareholders may choose to tender for sale some or all of their shares, usually at a premium to the market price. There is an upper limit on the total number of shares to be bought back and therefore on the amount of cash to be returned to shareholders.

The company may also set a minimum number of shares that must be tendered for the tender offer to go ahead. If the tender offer is oversubscribed there will be a scaling back exercise and shareholders may therefore not end up selling all of the shares which they tendered.

This process is simple to understand and to operate. It also makes certain the number of shares to be bought back.

Maximum or variable price

In this case, shareholders may tender their shares at one or more prices within a range set by the company, and can tender different batches of shares for different amounts. In the same way as for a fixed price tender, the company sets a total amount of money to be returned to shareholders.

The ‘strike price’ – the actual price at which shares are bought back – is set following responses to the tender offer so that the company can buy back the maximum number of shares in order to return the total amount to shareholders.

Shares tendered at or below the strike price will be bought, subject to any scaling back due to oversubscription. Shares tendered above the strike price will not be bought.

This method allows the company to purchase the maximum number of shares by creating a ‘price tension’, while shareholders have flexibility on price. However, it is less certain for the company and shareholders, and is more complicated to explain to shareholders and to manage.

Unsurprisingly, most tender offers are fixed price rather than maximum price.

Combined offer

This allows shareholders to choose whether to tender their shares or to receive the return of cash as a dividend. Therefore, shareholders can take income or capital – whichever best suits their tax position.

In summary, the process means that each ordinary share is split into one new ordinary share and one B share; or one new ordinary share and one C share. If shareholders do not make a choice, they will be defaulted to one option, most likely the C share one.

“This process is long and complex, so advisors and the registrars will be closely involved”

The B shares are bought back and cancelled and a special dividend is paid on the C shares. Once the special dividend has been paid, the C shares convert to deferred shares which are effectively valueless and should be cancelled.

The new ordinary shares continue to trade and effectively become the ordinary share capital of the company. The other shares are simply a mechanism to achieve the return of cash to members.

The amount of the special dividend will be the same as the amount paid per share under the tender offer, so all shareholders receive the same amount of cash. There is no need for any scaling as in a regular tender offer.

For such an exercise, shareholders will receive an election form with the shareholder circular, rather than a tender form.

Tender offer process

This process is long and complex, so advisors and the registrars will be closely involved. A timetable and list of responsibilities should help things run smoothly. Regular update calls can also be useful to highlight any issues before they become problems and ensure things stay on track.

The process starts with a board meeting to agree to proceed with the tender offer. A circular is then prepared for shareholders with details of the offer and notice of a general meeting to approve it, plus a proxy form and tender form, or an election form for a combined offer.

For listed companies, the circular may need to be approved by the FCA. This can take a bit of time and should be factored in to the overall timetable. The tender offer will then be announced and the circular and forms will be posted to shareholders.

General meeting

During the notice period for the general meeting, shareholders will consider if they wish to tender their shares, and if so will return the completed tender form. This may be done online, via the securities depository CREST, or on paper.

For a combined offer they will be able to elect to sell shares or receive the special dividend.

There will usually be an offer to buy back a ‘basic entitlement’ of someone’s holding – say 10%. Shareholders can tender their basic entitlement, or more shares than their basic entitlement, or no shares at all.

If the resolutions are passed at the general meeting, the basis of the shares to be bought back will be calculated, once the tender offer period has closed. This can be complicated, especially if scaling back is needed.

If there are fewer shares tendered than the company offered to buy, it simply retains the balance of the cash. However, this would be unusual. It is more likely that more shares will be tendered than the number which the company is buying back.

“If any directors have tendered shares, as soon as they know the number of shares they have sold they should notify the company”

The board or a committee will confirm that the buyback is to go ahead and resolve to cancel the shares after the buyback. The result of the tender offer will then be announced, and the company will transfer funds for the shares to the broker.

The registrars will dematerialise any shares tendered that were held in certificated form. The shares are transferred in CREST to the broker who puts through a stock withdrawal to take them out of the depository and sends a form of discharge to the registrars for the shares to be cancelled.

The broker then sends the funds to the registrars. The registrars will update the register and transfer funds or send cheques to those who have sold shares. Holdings in CREST will be updated and balance share certificates sent to shareholders whose shares are still in certificated form.

Further matters

The company will also need to announce its new issued share capital and total voting rights. This will probably trigger new substantial shareholding announcements (TR1s). Care should be taken that investors have the right figures for both their new holding, if they tendered shares, and the new total voting rights.

If any directors or other people discharging managerial responsibilities have tendered shares, then as soon as they know the number of shares they have sold, they should notify the company and an announcement must be made.

As many people now hold shares in nominees there may be a short delay in them finding out the result, but the company secretary can remind them to do this. The online FCA notification should also be made for these dealings.

Forms SH03 and SH06 have to be prepared and filed at Companies House, together with a copy of the resolutions passed at the general meeting. For Main-Market companies, stamp duty will be payable on the purchase and the SH03 form should be sent to the HMRC stamp office before submission to Companies House.

If the shares are traded on the London Stock Exchange’s Alternative Investment Market (AIM), the purchase should be exempt from stamp duty and the form can be sent to Companies House straight away.

Lorraine Young is a partner at Shakespeare Martineau

Her previous article on share buybacks can be found here.