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Tender Offers & Control Premiums

   

Geometric shapes on a wooden background.The tender offer mechanism is designed to prevent a situation where control of a public company is acquired without sharing the financial value of control with the other shareholders.

This week saw a public takeover bid for one of the few TASE companies that does not have a controlling shareholder, which happened to involve one of our clients, making it a perfect occasion to briefly explain the logic behind tender offers.

When a takeover is being attempted, the bidding party will generally offer existing shareholders a higher price per share than the going price on the stock exchange, accounting for the financial value that is inherit to control. The “control premium” is the excess price the controlling shareholder is willing to pay for the shares conferring control, reflecting the financial value of the benefits the controlling shareholder expects to gain from controlling the company.

In Theory

It is plain to see why, in theory, the price per share of a company is lower when it has a controlling shareholder directing its affairs, as such controlling shareholder will inevitably pursue his personal interests through his ability to direct the affairs of the company, regardless whether such activity may be adverse to the interests of the minority shareholders.

The control premium is therefore a means to compensate the minority shareholders for the risk caused by introducing a controlling shareholder. Section 328 of the Companies Law prohibits acquisition of control by casually buying shares on the stock exchange, or buy off-market transaction without the knowledge and consent of the shareholders, in order to protect the rights of the minority shareholders, which, again in theory, are at the risk of being prejudiced by the controlling shareholder.

In Practice

The practice of corporate law includes numerous legal structures and mechanisms designed to protect minority shareholders from the unfair advantage and influence of large shareholders and interested parties. In this respect, prohibiting the acquisition of control in a public company without compensating the minority is just one example of many.

 


Ran Dimant 300Ran Dimant is a Founding Partner of Katzenell Dimant and provides strategic and practical legal advice to corporations, institutions and business initiatives, addressing all aspects of their activity.

More posts by Ran here.

ran@kdlaw.co.il   +972.9.9500555   LinkedIn


DISCLAIMER: Blog posts are not designed to provide legal advice or create a lawyer-client relationship. You should not take action based on this content.

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