19.3 Toehold, Creeping Takeover, Major Holdings 525benefits of control following a successful takeover.^29 Disclosure could also attract
competing bidders, and speculators such as hedge funds might try to drive the
share price up. For those reasons, early notification can cause the bid to fail.
The toehold strategy is customary in hostile takeover contests. First, the toehold
reduces the number of shares that must be purchased at the full takeover premium.
Second, the toehold may also be sold at an even greater premium should a rival
bidder outbid the potential acquirer and win the takeover battle. Third, such toe-
hold benefits can enable the bidder to raise its valuation of the target and pay a
higher price for the remaining shares.^30
In some cases, the benefits of a friendly bid (speed of execution, lack of take-
over defences) can outweigh the potential benefits of the toehold strategy.
The toehold strategy is subject to legal constraints under Community law. The
most important of them increase costs^31 by laying down an obligation to disclose
major holdings (the Transparency Directive) and restricting exit (the Second
Company Law Directive).
Although the acquirer of a major holding does not have a duty to disclose its
plans under the Transparency Directive,^32 the disclosure of a toehold can de facto
reveal its intentions. There are also other disclosure obligations.
Disclosure of plans to buy shares, pre-announcement trading. A party’s deci-
sion to buy or sell shares can be inside information^33 as market information can in-
fluence share price.^34 Can that party buy or sell shares knowing that its own trans-
actions are likely to have a significant effect on share price when made public?^35
Should it disclose its plans to buy or sell?
Although there is an obligation to disclose major holdings, there is no similar
obligation to disclose plans to buy or sell. The mere fact that a party plans to buy
or sell shares issued by another company does not trigger a disclosure obligation
under the Directive on market abuse.
On the other hand, an issuer must disclose inside information “which directly
concerns” the issuer itself.^36 If the prospective acquirer’s shares have been admit-
(^29) See Betton S, Eckbo BE, Thorburn KS, op cit.
(^30) See ibid.
(^31) A similar strategy was adopted in Germany in the government bill for the Risk Mitiga-
tion Act (RegE Risikobegrenzungsgesetz, BR-Drucksache 763/07). See also Fleischer
H, Finanzinvestoren im ordnungspolitischen Gesamtgefüge von Aktien-, Bankaufsichts-
und Kapitalmarktrecht, ZGR 2008 p 186.
(^32) This can be contrasted with US law. According to Section 13(d)(1) of the Securities Ex-
change Act of 1934, the statement must contain detailed information concerning the
identity and background of the purchaser, its interest in the securities, the source and
amount of funds or other consideration, the purpose of the transaction and any contracts,
arrangements, understandings or relationships with respect to such securities.
(^33) Article 1(1) of Directive 2003/6/EC (Directive on market abuse).
(^34) See Davies PL, The Take-over Bidder Exemption and the Policy of Disclosure. In: Hopt
KJ, Wymeersch E, European Insider Dealing - Law and Practice. Butterworths, London
(1991) p 248.
(^35) See Recital 18 of Directive 2003/6/EC (Directive on market abuse).
(^36) Article 6(1) of Directive 2003/6/EC (Directive on market abuse).