A Buy-Side Model of Lockups: Theory and Evidence

Abstract

Lockups are an increasingly important element of M&A deals in the United States. We present, for the first time, descriptive data on lockup incidence, trends, and their relationship with Delaware case law. Prior commentators have argued that lockups should have little or no impact on allocational efficiency in the market for corporate control. We offer a new theoretical model of lockups that includes several "buy-side" distortions, such as agency costs, informational effects, switching costs, reputational effects, and endowment effects for bidders, and show that lockups can in fact change bid outcomes. We find strong support for this "buy-side" model of lockups from a large sample of M&A deals over the past twelve years. We also find that the type, size and structure of lockups affect deal outcomes. These results suggest that courts and corporate boards should scrutinize lockups more closely than prior commentators have advocated.