A company acquires a toehold position when it purchases a small amount (typically less than 5%) of another company's stock. A toehold is usually less than 5% because companies in the U.S. must file Schedule 13D with the SEC when they acquire 5% or more of another company's stock.
A toehold can precede a takeover attempt, and provides the following benefits:
--the buyer acquires shares without having to pay a premium
--the buyer obtains the rights of a shareholder and can thus have more influence over the company
--if a rival bidder ends up acquiring the target, the the company that purchased the toehold will receive a premium for its shares
The main disadvantage of acquiring a toehold is that the target company might become defense and adopt antitakeover measures (e.g., its board of directors might approve a poison pill).—
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