Deal protection or deal preclusion? A business judgment rule approach to M&A lockups

In negotiated transactions, two to four months may pass between the time a merger agreement is reached and final shareholder approval. During this time, the deal is vulnerable to third parties who often attempt to disrupt the merger by making a competitive bid. This danger prompts attempts by parties to protect the arrangement. Lockups are an important method of providing this protection and are increasingly common in mergers and acquisitions (M&A) transactions. There are essentially three kinds of lockups: 1. Stock lockups give the acquirer a call option on a specified number of shares of the target at a specified strike price. 2. Asset lockups give the acquirer a call option on certain assets of the target at a specified price. 3. Breakup fees give the acquirer a cash payment from the target if a specified event occurs. Like any tool, lockups can be abused. It is argued that the perceived dangers inherent in lockups - that they are preclusive or coercive - do not necessarily lead to the conclusion that courts should depart from the business judgment rule standard in evaluating them.