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A tender offer entails that a firm repurchases a number of shares through a one-off
offer. The offer specifies the number of shares a firm wishes to repurchase, the particular
price at which shares are to be repurchased and when the offer expires. A firm may also
specify the minimum number of shares that must be tendered for the offer to not be cancelled.
Upon notification of the tender offer shareholders decide whether the pre-specified
repurchase price is deemed acceptable, and therefore whether they want to participate in the
tender offer and how many shares they want to tender. A tender offer might oversubscribe,
hence the number of shares tendered by shareholders exceeds the number sought by a firm. If
this is the case the firm repurchases shares at the pre-specified price from the tendering
shareholders on a proportional basis. Alternatively, if the number of shares tendered is below
the number of shares a firm wishes to repurchase (undersubscribed) a firm may choose to
cancel the tender offer altogether or to extend the duration of the offer. One of the key
attractions of a tender offer for firms is that the repurchase price is fixed.
A Dutch auction resembles a fixed-price tender offer. Under a Dutch auction
repurchase method the repurchasing firm determines a price range from which each tendering
shareholder must select one particular price within the specified range (Gay, Kale, & Noe,
1996). At the end of the auction period the firm repurchases its shares in an ascending order
based on the shareholders’ tender price until the required number of shares has been
repurchased. The same price is paid to all shareholders, rather than the share price selected by
the tendering shareholder. This price corresponds to the clearing bid or to the highest
accepted bid price. Like tender offers, it is possible that the number of shares originally
tendered exceeds the number of shares required by the firm. In that case the firm repurchases
the amount of shares required at or below the clearing price from all shareholders that
selected a value in the range below the clearing price. If the number of shares tendered is
smaller than required by the firm, it can decide to cancel the offer altogether or it buys back
all the tendered shares at the maximum price (Bagwell, 1992).
A privately negotiated share repurchase is the least common method of buying back
shares. In a privately negotiated transaction a firm decides to repurchase shares from a major
shareholder. There are two key motives why a firm might engage in a privately negotiated
7
repurchase. First, a firm might fear that a major shareholder wishes to acquire the firm and
replace its management. In such a case, the firm approaches the major shareholder to acquire
its shares often at a significant premium above market price (Peyer & Vermaelen, 2005). This
type of transaction is called “greenmail”. Second, a major shareholder might want to sell a
large number of a firm’s shares, however the market for the firm’s shares is insufficiently
liquid. If the market is illiquid, selling such a large portion of a firm’s shares might induce a
substantial impact on the share price. To avoid such a disruptive impact the shareholder
might approach the firm and negotiate the repurchase of shares via a private transaction.
An open market repurchase (program) is most commonly used to repurchase shares.
According to Busch and Obernberger (2016) and Grullon and Ikenberry (2000) more than
90% of all share repurchases are conducted in the open market. In an open market repurchase
program a firm announces its intention to repurchase a predetermined number of shares or
Euro (Dollar) volume within a particular timeframe. It is not mandatory for a firm to buy the
total amount of shares (or Euro volume) announced under a program nor is a firm required to
complete the program within that particular timeframe. A firm may instead decide to
terminate the program prematurely or to extend it past the initially announced completion
date. In most EU countries including the Netherlands firms intending to repurchase shares
must first seek approval from its shareholders via a shareholders meeting. The shareholder
meeting further establishes the maximum amount of shares to be repurchased under the
program and the repurchase price range. In EU countries shareholder approval expires after
18 months, which implies that firms must either regain approval or complete the program
within the 18-month timeframe2. In the United States regulators do not require shareholder
approval (Busch & Obernberger, 2016).

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