Lockups and the Market for Corporate Control

Abstract

This paper analyzes the effect of lockups on the market for corporate control. We demonstrate that lockups can affect the outcome of bidding contests and that judicial leniency toward lockups would have detrimental effects on the disciplinary influence of the takeover threat and on the number of value-enhancing acquisitions that occur. Scholarship to date on lockups has argued that lockups are generally ineffective in allowing target managers to influence who acquires a target firm. Accordingly, scholars who have taken this position have advocated leniency in judicial review of lockups. We explain that this prior analysis has failed to take full account of the impact that the legal treatment of lockups has on the ex ante willingness of potential bidders to enter an auction, and thus fails to take full account of the ultimate influence a lockup can have on who acquires a target. We then examine the proper legal treatment of lockups from the perspectives of shareholder wealth maximization and social wealth maximization, and we propose an alternative to the current legal standard.

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