Toehold purchase

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Toehold purchase

Often used in risk arbitrage. Accumulation by an acquirer of less than 5% of the shares of a target company. Once 5% is acquired, the acquirer must file with the SEC and other agencies to explain its intentions and notify the acquiree. See: Rule 13d.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Toehold Purchase

A purchase of less than 5% of the stock of a publicly-traded company. This is called a toehold purchase because one is not required to register and explain one's purchase to the SEC until one meets the 5% threshold. This allows one to begin the process of a potential hostile takeover by accumulating stock quietly, though one eventually would have to disclose one's intent.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

toehold purchase

The purchase of less than 5% of the outstanding common shares of a target company before establishing a much larger stake. A toehold purchase allows a party to buy stock in a company without filing a notice with the SEC and with the target company.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

Toehold purchase.

A toehold purchase is one in which an individual investor or investment firm caps holdings in a potential target company at less than 5% of the company's outstanding stock.

Presumably that's because once an investor has acquired 5% or more of the stock, the investor must notify the company, the market where the company is listed, and the Securities and Exchange Commission (SEC). That notification must explain the next steps the investor intends to take, such as a possible takeover bid.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
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That is, in most cases, the incentive to tip decreases with increases in the bidder's toehold.
The incentive for bidders to tip arbitrageurs depends on the amount of dilution the legal system will allow, the increase in the back-end price that occurs due to pre-announcement informed trading, the private tendering costs of the share that grants a controlling interest, and the size of the bidder's toehold. These factors create several testable empirical implications.
Finally, in most cases, the incentive to tip investors with low private costs of tendering increases with decreases in the bidder's toehold. As a result, one would expect more tipping to occur after the 1968 enactment of the Williams Act, which imposed limits on the size of the toehold a bidder may acquire before revealing its intentions to the public.
3 In theoretical models developed by Chowdhry and Jegadeesh (1994) and Hirshleifer and Titman (1990), the probability of success of a tender offer is positively related to a bidder's toehold. Walkling (1985) presents empirical evidence consistent with this hypothesis.
8 Note that for some targets, [t.sub.i] could equal zero for some (or all) of the shares not in the bidder's toehold. Here, [t.sub.i], i = [Alpha]N + 1, ..., N, is assumed to be greater than zero to illustrate the advantages of informing arbitrageurs.
11 This analysis is at variance with an argument by Stulz, Walkling, and Song (1990) that increases in the bidder's toehold or increases in institutional ownership always cause the reservation price of the pivotal share to decline.