Chapter 6.3

Question 1

Tender Offers

Answer 1

A formal proposal to stockholders to sell their shares in response to a large purchase bid. The company initiating the tender offer normally assumes all costs and reserves the right to accept all, none, or a specific number of shares presented for acceptance.

Question 2

In order for a person to legally tender shares, they must own the security to be tendered. Under SEC rules, a person is deemed to own a security if the investor:

Answer 2

• Investor or agent has title to it
• Has purchased the security, or has entered into an unconditional contract to purchase it but has not yet received it
• Owns a security convertible into or exchangeable for it and has tendered such security for conversion or exchange
• Has an option to purchase or acquire it and has exercised such option
• Has rights or warrants to subscribe to it and has exercised such right and warrants

Question 3

If a person is short-against-the-box and wishes to sell the long side of the position, what must the investor do?

Answer 3

They would have to execute the sale as a “Short” sale.

-Shorting against the box means that the individual is long and short the same amount of the same stock at the same time.

Question 4

If a person is short-against-the-box and wishes to tender the long side of the position, he would be required to do what?

Answer 4

First cover the short. The same rule would be true if the person was long the stock and had written call options against the long stock position.

**Only net long positions may participate in tender offers.

Question 5

The following types of tenders would be legal

Answer 5

• A custodian tendering shares from an account managed under the UGMA
• A trustee tendering shares from a trust account
• A person tendering his own shares either fully paid or from a margin account, even if the margin account is restricted. By tendering shares from a margin account, a person is reducing the risk associated with the account by turning shares into cash.

**Illegal tender would occur when an investor tenders shares that were borrowed through a short margin account. The person does not own the shares and, therefore, cannot tender them.

Question 6

Tender offer Disclosure

Answer 6

A company that is the target of a Tender offer must disclose to its shareholders its position on the Tender Offer no later than 10 business days from the date of the Tender Offer.

Question 7

When member firm obtains a list of a company’s bondholders or shareholders due to a Tender Offer, the list can be used for what?

Answer 7

Can only be used in relation to the Tender Offer and not for any other purpose, unless the member firm receives permission from the issuer.

Question 8

How long must a tender offer remain “Open”?

Answer 8

For at least 20 business days from the day the tender offer is announced.

• If the bidder changes any of the terms of the offer, the offer must remain open for 10 business days from the date of the revision.
• When a tender offer is changed or extended, a public announcement is required no later than 9 a.m. on the business day after the date the original offer is due to expire.

Question 9

An insider of a company which has initiated a tender offer of another company’s common stock would only be allowed to purchase what in their own personal account?

Answer 9

Purchase non-convertible bonds of the target company for their own personal account?

Question 10

What happens when one B/D is owed securities by another B/D and those securities are subject to a corporate action such as a Tender Offer, what will happen?

Answer 10

The owed B/D will send a liability notice to the other B/D which holds the owing B/D liable for the delivery of the securities in time for the owed B/D to participate in the tender or corporate action.

Question 11

Fairness Opinions

Answer 11

A “fairness Opinion” written by a member firm expresses a conclusion as to whether the consideration offered in a transaction such as a merger, sale, or purchase of assets is “fair”. Disclosures required by a member firm in a fairness opinion include:

• If the firm acted as financial advisor to any party to the transaction subject to the opinion
• If the firm will receive any significant payment or compensation contingent on successful completion of the transaction
• If the firm has any material relationships that existed during the last 2 years or that are mutually understood in which any compensation was or is to be received as a result of the relationship between the firm and any party to the transaction
• Whether or not the firm has independently verified information received with regard to the transaction and the procedures followed in arriving at their findings
• Whether or not the firm’s fairness committee approved or issued the fairness opinion
• Whether or not the fairness opinion expresses an opinion about the fairness of compensation to insiders
• *Fairness opinions do not have to disclose if the firm is a market maker in the security
• *Fairness opinions cannot give advice about how shareholders should vote or what action should be taken by the shareholders.