Short Tender

What Is a Short Tender?

A short tender is an investing practice that involves using borrowed stock to respond to an offer made during an attempted acquisition of some or all of a company's shares. Basically, a short tender offer amounts to an offer to sell more stock than is owned. The purchase price of the offer is usually at a premium to the market price.

The short tendering rule, or Exchange Act Rule 14e-4, prohibits short sales of tendered stock because such sales benefit the broker offering more shares than they own while working against those who offer to sell only the shares that they own.

Key Takeaways

  • A short tender involves borrowing shares in order to respond to a tender offer—a bid to purchase some or all of the shareholders' stock in a corporation.
  • One who responds to a tender in this way is able to sell more stock than is currently owned.
  • This practice has been illegal since the 1970s.

How Does a Short Tender Work?

Officially, in order to respond to a tender offer, an investor must already have a net long position that is equal to or greater than the sum of the tender offer made. A net long position refers to the number of shares an investor owns, reduced by any shares the investor is short in the same security.

Basically, a short tender is an offer to sell more stock than one owns; the person making the short tender is trying to pay the purchase price of the stock in the offer (which is usually at a premium to the market price) with borrowed shares.

Before the short tendering rule was adopted, brokers could take the risk of selling more shares than they owned, usually at a price exceeding the market rate. If the short sale offer were accepted, the broker could then purchase the remaining needed stocks on the open market for the going rate, and still make a profit, since they would be selling them for more than the current market price.

Although borrowing shares is allowed in short selling, any attempt to borrow shares in response to a tender offer will lead the SEC to take legal action against the participants.

Example of a Short Tender

Say that broker A, who owns 500 shares, offers 600 shares as a short tender offer and has that offer accepted. Broker B, who owns 500 shares and offers 500 shares, eschewing the short tender offer, might find that they can only sell 400 of their shares. They will then be stuck with 100 shares that they can’t sell, whereas, if broker A had not short tendered, broker B could have sold all of their shares.

Special Considerations

The short tendering rule also establishes criteria for who owns a tendered security. These criteria include:

  • Having full legal title to it;
  • Having entered into a binding contract for its purchase, whether or not it has yet been received;
  • Having had the option to purchase, having exercised that option, and having the right to subscribe for such security and having exercised those rights.
Article Sources
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  1. The Securities and Exchange Commission. "SEC Interpretation: Commission Guidance on the Application of Certain Provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and Rules thereunder to Trading in Security Futures Products." Accessed Aug. 24, 2021.

  2. Cornell Law School. "17 CFR § 240.14e-4 - Prohibited Transactions in Connection With Partial Tender Offers." Accessed Aug. 24, 2021.

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