What Is the All-Holders Rule?

In finance, the term “all-holders rule” refers to a regulation stipulating that any tender offer must be made available to all shareholders within the particular class of shares being solicited for purchase. 

This rule is especially important during takeover bids, ensuring that any tender offers made by the acquiring company cannot be directed to only those shareholders in favor of the takeover.

Key Takeaways

  • The all-holders rule is a shareholder-protection provision applying to publicly traded companies.
  • It is designed to secure the interests of retail investors in the context of mergers and acquisitions.
  • The all-holders rule is applied in combination with a second provision, known as the best-price rule.

How the All-Holders Rule Works

When seeking to purchase a controlling share of a publicly traded company, would-be acquirers will issue a tender offer outlining their proposed terms. This offer will almost always include a premium relative to the then-prevailing market price of the company’s shares, in order to incentivize the existing shareholders to approve the transaction. 

Oftentimes, tender offers will be made with the cooperation or tacit approval of the existing management team, who may have been actively courting prospective buyers. In those instances, the managers will issue a letter expressing their approval of the tender offer and recommending its acceptance by shareholders. In other cases, however, the tender offer may form part of a hostile takeover attempt in which the acquirer appeals directly to the company’s shareholders, against the wishes of its existing management team.

In either case, retail investors are at a disadvantage to institutional investors, in that they lack the ability to easily coordinate with one-another about whether or not to approve the proposed transaction. For this reason, the Securities and Exchange Commission (SEC) oversees a variety of policies intended to protect retail investors from manipulation by larger and more influential investors.

One such provision is the all-holders rule, which requires that any tender offer must be extended to all of the holders of the particular class of shares to which the tender offer refers.

Real World Example of the All-Holders Rule

Derived from Rule 14d-10 of the Securities Exchange Act of 1934, the all-holders rule is one of many provisions designed to protect the rights of shareholders. It is applied in combination with another investor-protection rule, known as the “best-price rule.”

Under the best-price rule, the price paid to all security holders in a tender transaction must be the “highest” or “best” price available to any of the security holders involved in that transaction. Taken together, these two rules prevent any shareholders from being ignored in the course of the tender offer, while also preventing certain shareholders from being offered a less favorable price than others.