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Fair Price Amendment

A provision requiring potential bidders to pay a fair price to acquire the shares held by minority stockholders

What is a Fair Price Amendment?

A fair price amendment is a provision contained in a public company’s charter, and it requires that potential bidders for the target company’s majority stock should pay a fair price in order to acquire the shares held by minority stockholders. The formula for calculating the fair market price that bidders should pay is provided for in the company’s charter, and it is calculated based on the historical prices.


Fair Price Amendment


The goal of the fair price provision is to discourage hostile takeovers by making the acquisition more expensive. The provision also protects minority stockholders who may get a lower value for their shareholding in the company.



  • A fair amendment price is a provision contained in a public company’s charter.
  • The amendment requires bidders to offer a fair market price for all the stocks tendered for sale.
  • It protects minority stockholders from getting a lower price per share than what the other stockholders of the company received.

How the Fair Price Amendment Works

A fair price is defined as the highest price that is paid by an acquirer in order to acquire a majority stake in the target company. The price must exceed an amount determined by the board of directors of the target company, relative to the book value of the company’s shares or recent annual earnings.

The fair price amendment deters acquirers from offering varied prices for stocks at different stages of acquisition. It protects stockholders from two-tier tender offers that discriminate against a section of the stockholders.

In a two-tier takeover attempt, the stockholders who tendered their stocks in the first tier receive a different offer price from the stockholders who submitted their shares in the second tier. The fair price amendment protects the stockholders from such discrimination by requiring a uniform offer for all shares tendered for purchase in both tiers. The provision can only be reversed by the board of directors of the target company through a supermajority decision exceeding 95% of the voting rights.


Two-Tier Tender Offer: How Does it Work

A two-tier tender offer is an offer where the acquirer starts by offering an attractive offer (higher price per share or a higher proportion of cash) for a limited number of shares in the target company. The first tier is designed to give the acquiring entity greater control in the decision-making process of the target company, and it is followed by another offer to acquire the remaining batch of stocks at a reduced price per share. The goal of completing an acquisition through a two-tier system is to reduce the overall cost of acquisition.

For example, an acquirer may present a premium offer of $60 per share in the first tier, so that a majority of the stockholders may agree to dispose of their shareholding. The first offer is designed to provide the company with an upper hand in the control of the target company.

After gaining majority ownership of the target, the acquirer offers a $40 per share for the remaining shares at a later completion date. The strategy benefits the acquirer by reducing the overall cost of the acquisition compared to offering a single tender offer at a higher price.

A two-tiered tender offer is not always beneficial to the stockholders of the target company since it forces them to accept an offer immediately or else risk getting a reduced offer during the second tier. It means that more stockholders would be forced to tender their stocks for purchase in the first tier to avoid getting a lower value for their shareholding at a later date.


Calculating the Fair Market Value

The most commonly used criteria for calculating the fair market price of stocks is the P/E ratio. The P/E ratio can be computed as a multiple of the historical earnings reported by the target company or by looking at the P/E ratio for all the stocks in the same industry category as the target company. The acquirer can also use a combination of both to get guidance on what the P/E multiple should be.

An alternative to the option above is to use Enterprise Value to Revenue ratio. The EV to Revenue ratio calculates the offer price as a multiple of the company’s historical revenues. The acquirer may also consider the price-to-sales ratio of other companies that are in the same industry as the target company.


Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

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