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 Rule 10b-4, prohibits the short sale of securities. Adopted in the early 1970s, the short tendering rule is intended to prohibit short sales of stock, because such sales benefit the broker offering more shares than he owns while working against those who offer to sell only the shares that they own.
The short tendering rule, or Rule 10b-4, prohibits the short sale of securities.
How Does a Short Tender Work?
Officially, in order to respond to a tender offer, an investor must 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 is committed to buy, reduced by any shares the investor is short in the respective 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 he or she would be selling them for more than the going rate. Short tender offers were often used during takeovers since premium share prices can make these tender offers more appealing.
However, 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 he or she can only sell 400 of his or her shares. He or she will then be stuck with 100 shares that he or she can’t sell, whereas, if broker A had not short tendered, broker B could have sold all of his shares.
For that reason, short tenders are also prohibited by the Securities and Exchange Commission (SEC) under rule 14e-4 of the Securities Exchange Act. 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.
The short tendering rule also establishes criteria for establishing who owns a tendered security. These criteria include having title to it; having entering into a binding contract for its purchase, whether or not it has yet been received; having had the option to purchase and having exercised that option; and having the right to subscribe for such security and having exercised those rights.