Odd Lot Tenders Primer

The following is for informational purposes only and not meant to be investment, legal, or tax advice. 

Why should I care?

Odd lot tenders give smaller investors the ability to make a relatively high return on investment in a short period of time with a relatively low risk of losing money. You won’t become a millionaire off of them, but you can make a few hundred dollars or in some rare cases more than a thousand dollars per person.

What is a tender offer?

A tender offer is a corporate action when a company buys back its own stock at a specific price or a range of prices at a fixed date. For example, in May of 2024 Monster Energy announced a tender offer for $3 Billion of stock with a price range of $53-60 per share and a tender expiration date of June 5th. Tender offers are usually made at prices that are currently higher than the current stock price to induce existing holders to sell their stock back to the company. Companies outline the basic terms of a tender offer in a press release with more details included in the “offer to purchase” which is included in SEC filings labeled SC TO-I. 

Shareholders have the option, but not the obligation to sell their shares into the tender at a price within the tender range or $53-60 in the example above. In some cases, there will be a single price such as $53 rather than a range. As the tender is usually only for a portion of the total shares, tendering shareholders will be prorated. For example, if a tender is for $100m and $1B of shares are tendered at the clearing price, each tendering shareholder will have 10% of their shares purchased and the will retain the remaining 90% of their shareholding. The stock price will largely reflect the market’s expectation of the proration, thereby eliminating the potential for arbitrage profits in most cases. 

What is an odd lot provision? 

Some tenders have an “odd lot priority or preference” provision within their offer to purchase. For example, see Red Rock Resort’s offer to purchase. An odd lot priority means that any shareholder tendering 99 or less shares will not be subject to proration, tendering shareholders will get all 99 of their shares purchased at the tender offer price. The odd lot provision is usually easily found by hitting control F in the tender offer and looking for the word “Odd Lots” or “fewer than 100 shares”. See the odd lot provision example below from Red Rock Resorts:

“first, we will purchase Odd Lots (as defined in Section 1) of fewer than 100 Shares at the Final Purchase Price from shareholders who properly tender all of their Shares at or below the Final Purchase Price and who do not properly withdraw them before the Expiration Date. Tenders of less than all of the Shares owned, beneficially or of record, by such Odd Lot Holder (as defined in Section 1) will not qualify for this preference;”

Companies put in an odd lot provision so that they can reduce the number of smaller holders that can be more administratively costly. 

Opportunity for retail 

Odd lot tenders present an opportunity for retail investors to generate an “arbitrage” profit. As mentioned above arbitrage profits are usually quickly removed by the stock market. However in this case large institutions are not able to take advantage of the odd lot provision which means you can profit from it. 

If the price of the bottom of the tender is higher than the current stock price then you can buy the stock and tender at the bottom of the tender price thereby locking in a profit equal to the difference between the two. For example, if the tender range is $50-55 and you can buy 99 shares at $49, you can lock in a $1 minimum profit per share ($50 minus $49) or receive as much as $6 per share ($55 minus $49). 

The opportunity to profit from odd lot tenders increases with the price per share. The higher the share price the greater  the potential profit opportunity. For example, a $1,000 stock with a tender range 5-7.5% above the current price or a $1,050-$1,075 range has a much greater potential profit ($50*99 = $4,950 to $75*99= $7,425) than on a $10 stock with the same price premium of 5-7.5% or $10.5-$10.75 ($.5*99=$49.5 to $.75*99=$74.25).

What determines the price of a tender offer and what is a Modified Dutch Tender? 

Tender offer prices are determined by a process called a Modified Dutch Tender (MDT). An MDT is the opposite of a Dutch tender where you start with a high price and lower the price until someone bids. Under a MDT, shareholders submit the price at which they would like to tender their shares. Anyone tendering at or below the ultimate clearing price will automatically have their shares tendered at the clearing price. Shares tendered above the clearing price will not have their shares purchased in the tender and will potentially see their shares fall in the short term after the tender offer concludes. The shareholders are thereby incentivized to bid low to ensure that their shares are tendered. 

The tendering company specifies the price range for the MDT for example $100-105 and the amount it is tendering for, in this example $100m and a bid increment, usually 50 cents. The clearing price will be the lowest price that fulfills the tender amount. The company will start at the bottom price of $100 and see if it fulfills the $100m in bids. 

For example assuming the amounts bid at each price are as follows: 

Will have their shares purchased: 

500k shares at $100 or $50m
100k shares at $101 or $60.6m below $101
300k shares at $102 or $91.8m below $102
500k shares at $103 or $143.3m below $103

Will not have their shares purchased:

500k shares at $104 
600k shares at $105 

At a price of $100 only $50m worth of shares would be purchased which is not enough to fill the $100m offer size. At $101, 600k shares or the 100k tendered at $101 or $60.6m and the $500k shares at $100 would still be insufficient to fill the $100m tender. Adding the additional 300k shares tendered at $102 would still only result in $91.8m in tenders (900k * $102). The clearing price will end up being $103 and roughly 971k shares will be purchased. Any shareholders that bid more than $103 will not be filled. Shareholders that bid $103 or less will be subject to proration of roughly 30% (unless they have an odd lot priority) meaning they would be able to tender roughly 70% of their shares ($100m/143.3m= 69.99% or ~70%).  

Step by step guide 

1. Identify a company that is issuing a modified Dutch tender auction. 
2. Purchase 99 of the tendering company’s shares. 
3. Wait until the stock is trading below the bottom of the tender price range. For example if the tender price range is $100-105 wait until the shares are trading at $99.99 or less. The lower the stock is below the bottom of the tender offer the greater your profit, but you may miss on the opportunity, to tender if it only briefly dips below the bottom of the tender range and you wait for it to fall further. Note that if your broker charges a “voluntary actions” fee such as E-Trade (charges $38) you have to ensure that you buy at a price that takes into account the fee. Similarly you need to deduct any potential commissions. 
4. Elect the tender at the bottom of the tender range or tender at no specified price. 
5. In some cases you may want to wait until a few days out from the tender as there is always a possibility that the stock will rise above the top of the tender range. However some brokers have arbitrary deadlines for tenders so it may make sense to tender so you don’t forget and then change the instruction later if the stock exceeds the top of the range and you want to sell. When a tender is extremely popular the broker may set a far out deadline that can be a week or more out from the tender so they can deal with it administratively.  
6. You will receive the proceeds from the tender in your account as cash. 

Potential risks 

Companies have the right to withdraw a tender. Although this rarely occurs it does occur, for example MGM cancelled a tender offer in 2020. It is worth reading the Conditions of the Offer. In some cases there are provisions that will allow the company to potentially cancel the tender offer if certain events occur. For example, a company may condition a tender upon receiving financing or a minimum number of shares tendering. In other instances there could be provisions related to the performance of peer companies or the general market. For example, if our peers or the S&P 500 fall more than 10% than we reserve the right to cancel the tender. 

Brokers

Each broker has a different mechanism for electing to participate in a tender and specifying a tender price. Broadly they fall into two groups, online and phone election. Interactive Brokers and Schwab allow for online elections via a corporate actions button in their online portals. Fidelity and Wells Fargo require that you call in to make your tender election. 

Taxes

Given you are purchasing the stock and then tendering in significantly less than 1 year, odd lot tender offers will generate short term capital gains. As a result, you will pay ordinary income tax on your gains. It therefore makes sense to try to do odd lot tender offers in a tax deferred account such as an IRA whenever possible. 

A note on Canadian tender offers AKA Substantial Issuer Bids 

Canadian tender offers have unique tax considerations. Canada considers the difference between paid in capital and the tender clearing price a “deemed dividend” that requires brokers to withhold a 25% tax from US citizens with taxable brokerage accounts. In theory you can receive back the tax as a foreign tax credit, but it can complicate your tax return. US Individual Retirement Accounts  (IRAs) are supposed to be exempt from withholding based on tax treaties between the two countries, but allegedly many brokers in practice continue to withhold the tax and getting the tax refunded from the broker is a nightmare. Interactive Brokers is one notable exception to this rule. In my experience if you purchase Canadian shares on Canadian exchanges in Canadian dollars and tender in an IRA, Interactive Brokers will generally not withhold tax from the tender proceeds. However, I have heard that if you buy a US ADR of a Canadian company that is cleared in the US that they still may withhold the tax. I have not attempted the latter, but can confirm that I have received full proceeds from Canadian tender offers that were purchased in Canadian dollars on Canadian exchanges in Canadian dollars in an IRA held at Interactive Brokers. 

Legal Considerations 

This is not legal advice, please consult attorney if you have any legal related questions. 

The odd lot provision/preference is meant for holders of 99 shares or less. Each individual or legal person is a separate legal entity and can receive the odd lot preference. For example, a family of 4 with 4 separate people can each submit a tender for 99 shares each. Corporate accounts that are separate legal entities would qualify for their own odd lot preference. Each account DOES NOT count as a separate person. For example, John Smith cannot simply have 99 shares in 5 different accounts and get the odd lot provision 5 times. By tendering as an odd lot holder you are effectively attesting that you only own 99 shares period across all of your accounts. It is both illegal and unethical to receive the odd lot preference if you own more than 99 shares across your personal accounts.