Lock-up Provision
Encyclopedia
Lock-up provision is a term used in corporate finance which refers to the option granted by a seller to a buyer to purchase a target company’s stock as a prelude to a takeover
. The major or controlling shareholder is then effectively "locked-up" and is not free to sell the stocks to a party other than the designated party (potential buyer).
Typically, a lockup agreement is required by an acquirer before making a bid and facilitates negotiation progress. Lock-ups can be “soft” (shareholder permitted to terminate if superior offer comes along) or “hard” (unconditional).
In a stock lock-up, the bidder is able to either purchase 1) authorized but unissued shares of the major or controlling stockholder, or 2) the shares of one or more large stockholders. The acquirer holds the option to exercise the shares at a higher price in the event of sale to a higher bidder, or to vote in favor of the acquirer’s bid.
An asset lock-up occurs when the target firm grants an option for the acquisition of an asset. This is also known as a crown jewel lock-up
.
from acting naturally by preventing rival bids for the target company.
Courts will approve lockups if they find that the lockup was used to encourage a bidder to make an offer and not as a device to end an auction or bidding process. Asset lock-ups, however, discourage other bidders, and are generally discouraged by the courts.
Takeover
In business, a takeover is the purchase of one company by another . In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.- Friendly takeovers :Before a bidder makes an offer for another...
. The major or controlling shareholder is then effectively "locked-up" and is not free to sell the stocks to a party other than the designated party (potential buyer).
Typically, a lockup agreement is required by an acquirer before making a bid and facilitates negotiation progress. Lock-ups can be “soft” (shareholder permitted to terminate if superior offer comes along) or “hard” (unconditional).
Types of lock-up arrangements
These provisions may take the form of- (i) break-up/termination fees,
- (ii) options given to target shareholders to buy target stock,
- (iii) rights given to bidder shareholders to purchase target assets,
- (iv) force the vote provisions in merger agreements, and
- (v) agreements with major shareholders (voting agreements, agreements to sell shares or agreements to tender).
In a stock lock-up, the bidder is able to either purchase 1) authorized but unissued shares of the major or controlling stockholder, or 2) the shares of one or more large stockholders. The acquirer holds the option to exercise the shares at a higher price in the event of sale to a higher bidder, or to vote in favor of the acquirer’s bid.
An asset lock-up occurs when the target firm grants an option for the acquisition of an asset. This is also known as a crown jewel lock-up
Crown Jewel Defense
In business, when a company is threatened with takeover, the crown jewel defense is a strategy in which the target company sells off its most attractive assets to a friendly third party or spin off the valuable assets in a separate entity. Consequently, the unfriendly bidder is less attracted to...
.
Legal System vs. Lock-Up Provisions
In many cases, lock-up provisions may impede “free competition”, and thereby restrict the marketMarket
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
from acting naturally by preventing rival bids for the target company.
Courts will approve lockups if they find that the lockup was used to encourage a bidder to make an offer and not as a device to end an auction or bidding process. Asset lock-ups, however, discourage other bidders, and are generally discouraged by the courts.
See also
- Poison pillPoison pillA shareholder rights plan, colloquially known as a "poison pill", or simply "the pill" is a type of defensive tactic used by a corporation's board of directors against a takeover...
- Mergers and acquisitionsMergers and acquisitionsMergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
- MicroeconomicsMicroeconomicsMicroeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
- Industrial organizationIndustrial organizationIndustrial organization is the field of economics that builds on the theory of the firm in examining the structure of, and boundaries between, firms and markets....