Toe Hold Collaborations Beyond Insider Trading

Abstract

With the proliferation of the new practice of wolf packing, the incidence of toehold (TH) collaborations as part of a takeover campaign is likely to increase as well. In addition to affecting the size of the TH, potentially transforming the TH into a foothold, TH collaborations may include asymmetric agreements between the collaborators that distort the incentives of the bidders and lead to inefficient results. For example, the asymmetric agreement may include contingent distribution rights that make losing the takeover bid to a rival bidder, even to a higher-value use bidder, undesirable. Losing may become so prohibitively expensive that the bidder may continue to bid beyond its reservation-value. As a result, ex-ante, asymmetric TH collaborations are likely to deter potential rival bidders, which may motivate the collaborators to enter into such agreements. Bidders may use TH collaborations to present a credible threat of winning determination in order to curb competing bids, including efficient bids, which will negatively affect both shareholder value and social wealth. This Article demonstrates and analyses potential distortions caused by TH collaboration agreements.