Imagine receiving an unsolicited offer that bets on you to make a bad deal. Shareholders in Truist Financial can relate.
Last month, an obscure Canadian investment firm called TRC Capital Investment Corp. tendered an offer to purchase up to 5% of the $545 billion-asset bank's common stock for $46.14 per share. The offer was below market price and small enough to avoid regulatory protections for securities transactions.
Welcome to the world of mini-tender offers.
On July 23, TRC made its tender offer, which was 4.15% lower than Truist's closing share price the day before. Nearly a month later, the company's shares were trading at $49.35, or 7% higher than TRC's tender the day before the offer expired.
In response to the offer, the Charlotte, North Carolina, bank released a statement advising shareholders to "reject this unsolicited offer because the offer price is below the market price." A Truist spokesperson declined to comment further.
Lorne Albaum, the CEO of TRC, a firm that has solicited mini-tender offers for more than two decades, also declined to comment.
Mini-tenders are used to lure investors to "surrender their securities without investigating the offer," the Securities and Exchange Commission wrote in 2008 investor notices. The solicitors' apparent aim is for a small portion of shareholders to accept their bids without noticing the below-market value.
Because the tender offer is for less than 5% of a company's shares, investors "later learn that they cannot withdraw from the offer," the SEC wrote.
Dennis Garris, a partner at the law firm Alston & Bird, called mini-tender offers "deceptive" and criticized the firms that solicit them.
"They're trolling around for investors that aren't paying attention," said Garris, who in the early 2000s led the SEC's first enforcement action against a mini-tender offer.
The rules regulating tender offers have not changed since Garris worked at the SEC. But in recent years, firms that use the strategy have become smarter about including language to remain on the right side of regulations, he said.
"We saw a bunch of shenanigans with respect to very misleading offers," Garris said. "And they're still operating based on the fact that a lot of investors aren't reading these things very closely."
In recent years, banks and fintechs including Bank of America, Synchrony Financial and PayPal have seen mini-tenders offered to their investors. However, according to Garris, "it's close to impossible to figure out what their investment thesis is."
"My money is on them choosing targets based on where they think investors are likely to make uninformed decisions," he said.
One rationale for targeting certain firms could be that they are in sectors where investors are eager for a quick exit after months of falling stock performance. In 2022, Truist and the banking sector broadly fit that category.
Truist's stock price is down 27% from a high in February of $67.41, which is worse than the Nasdaq Bank Index's 19% drop this year.
James Moloney, a partner at the law firm Gibson Dunn, said that mini-tender solicitors seemingly use an "elephant gun approach" to send offers to a wide range of corporations. Solicitors use the same "75-page boilerplate document to target everybody in their Rolodex," he said.
The North Carolina bank bought technology from Zaloni in an effort to boost data collection, metadata management, advanced analytics, artificial intelligence and machine learning.
"I think they're just going through the phone book," Moloney said. "It's like getting spam calls to your house phone. Most people hang up, but one out of every 1,000 answers and hands out personal information."
Mini-tender offers have been on the SEC's radar for years, but little has been done because the solicitors are seeking to purchase a small volume of shares, Moloney added.
"Unless you bring the enforcement guns, these people are not going to stop doing what they're doing to make money," he said.
The most that target companies are empowered to do in response is to issue statements — as Truist did — recommending that investors reject the offer.
