Posted: February 1st, 2023

Repurchase of Equity Shares before Tender Offer

Tender Offers are regulated by the U.S. Securities and Exchange Commission (SEC), and the primary legislation is the Securities Exchange Act of 1934, along with other rules and regulations. The Williams Act was adopted in 1968 as an amendment to the Act of 1934, which was designed to establish a fair capital market by introducing significant requirements for any individual, group, or business entity that wishes to acquire stock or takeover another company. It also provides for a period of consideration for the board of directors who can deliberate over the benefits of the offer received and allows them to block any harmful transactions. A standout regulation introduced by the SEC is Regulation 14E, which sets requirements for parties wishing to acquire stock in bulk and taking over control – such as, a party must prove that they have the financial capacity to seal the deal at the time of making an offer. Many other situations are also covered, such as – securities transactions based on material, non-public information, and prohibitions on additional transactions or partial tender offers.

Repurchase of Equity Shares before Tender Offer:
Certain prohibitions related to insider trading have been put in place under the U.S. securities law, particularly under Rule 10b-5 under the Exchange Act. If the issuer of shares purchases any such shares as a part of an established program or in an isolated transaction before a public announcement on any material change in the company’s ownership that might have a positive effect on the value of such shares, then it may be alleged to be insider trading. To avoid such charges, disclose any relevant non-public information before repurchasing shares and also fulfill the disclosure requirements under Form 20-F by filing periodic or annual reports that record such repurchase of equity shares along with the quantity and price paid. A few other measures available to the issuer are:

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Verified internal compliance and risk management procedures under which designated officers/committees can monitor when repurchase may be conducted or suspended.

Limiting the repurchase of shares to specific “window periods” attached to the release of interim and annual earnings reports.

Establishing a repurchase plan under Rule 10b5-1, which lays down certain conditions related to such transactions.

Liability Management:
It refers to a family of transactional tools which can be used to handle any ongoing contractual obligations related to existing debt securities at the time of making a tender offer, which can be in the form of consent solicitations, open market purchase programs, cash tender offers, and exchange offers. The issuer may prepare a consent solicitation form for majority shareholders to obtain consent for any modifications to ownership structures and circulate the same for their acceptance. In some cases, the holders may seek a consent fee or demand an exit cash tender or a debt exchange offer. An open market purchase program may also be initiated by the purchasing party, which is treated as a “creeping tender offer” where a broker places bids on a screen-based trading system to purchase a limited percentage of shares.

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