Same buyback, different procedures
A company can buy back its own shares in two main ways: buying gradually at market prices on an exchange like any other investor, or making a tender offer that sets a price and period and invites shareholders to sell. Both are called buybacks, but what shareholders can do and what they end up with differ a great deal.
This guide explains the procedural differences, then calculates with a hypothetical scenario how proration works when a tender offer is oversubscribed and only part of each holder's shares are accepted. It also covers why an open-market buyback announcement may differ from what is actually bought and what to check in the filings.
How a tender offer works
Investor.gov describes a tender offer as a public offer to shareholders to sell their shares at a set price during a set period, usually at a price above the current market. U.S. rule 17 CFR 240.13e-4 governs disclosure and procedures when an issuer tenders for its own shares.
Tender documents set out the price, the offer period, the minimum and maximum number of shares sought, financing, conditions for amendment or withdrawal, and how shares will be allocated if more are tendered than sought. Shareholders decide whether to tender, how many shares, and whether to withdraw during the period.
A hypothetical tender scenario
The table assumes a company trading at 10,000 won offers to buy 10 million shares at 12,000 won. The proration ratio depends on how many shares are tendered in total, and so does how many shares a holder tendering 3,000 actually sells.
| Total shares tendered | Proration ratio | Shares the company buys | Cash the company spends | Shares sold by a holder tendering 3,000 |
|---|---|---|---|---|
| 8 million | 100% | 8 million | 96 billion won | 3,000 |
| 10 million | 100% | 10 million | 120 billion won | 3,000 |
| 15 million | ≈ 66.7% | 10 million | 120 billion won | 2,000 (1,000 returned) |
When a tender is oversubscribed, holders sell only part of their tendered shares at the offer price and get the rest back to hold at market prices.
What proration means
In the third row, even though the offer is 20% above market, a holder can sell only part of their shares at that price. After the offer closes, the market price may return to its earlier level, so the 1,000 returned shares are worth whatever the market says, regardless of the offer price.
Applying the offer price to all your shares therefore overstates the benefit. Some tender offers accept all shares from small holders below a set number without proration, an "odd-lot" provision, so read the allocation terms carefully.
How open-market buybacks work
In an open-market buyback, the company buys shares at market prices within an authorized limit and period. U.S. rule 17 CFR 240.10b-18 provides a safe harbor from manipulation liability if the company follows conditions on the manner, timing, price, and daily volume of its purchases. Shareholders do not need to take any action.
An announcement that the company may buy up to 10 million shares does not mean it will. Daily volume limits, price movements, and the company's finances can leave actual purchases below the authorization, and programs can be extended or suspended.
Comparing the authorization with what the company reports buying each quarter is the clearest way to see how a program is actually being carried out. A large authorization with little reported buying says more about intentions than about results.
Reading the filings
For U.S. companies, check tender offer documents and quarterly and annual reports on SEC EDGAR; for Korean companies, treasury share acquisition decisions and result reports on DART.
- For a tender offer, check the price, period, target number of shares, proration method, and withdrawal conditions.
- For an open-market program, check the limit, period, executing broker, and actual shares bought in the result reports.
- See whether purchases are funded with cash on hand or borrowing, and estimate the effect on financial flexibility.
- Check whether repurchased shares are cancelled or held to be resold or used for compensation.
- Look for whether major shareholders or executives are tendering their shares.
Questions after the buyback
Cancelling repurchased shares reduces the share count and can lift per-share figures, but the company's cash falls by the same amount. Shares held in treasury rather than cancelled may later be sold or used for employee compensation, undoing the reduction.
If a major shareholder does not tender, only other holders' shares shrink and the major holder's percentage rises. It is worth considering how the method and outcome affect control as well.
Limits of the analysis
The prices and share counts here are hypothetical. Tender offer and buyback rules differ by country, and Korean and U.S. procedures and disclosure formats are not the same.
When looking at a real company, check its latest filings with their dates. This guide does not recommend tendering shares or trading any security.