Lock-Up Option

What Is a Lock-Up Option?

A lock-up option is a stock option offered by a target company to a white knight for extra equity or the purchase of a portion of the company. The lock-up option is likewise called a lock-up defense. In risk arbitrage, it very well might be called "shark repellent."

Figuring out Lock-Up Option

The purpose of a lock-up option is to avoid a hostile takeover endeavor, and the holder of the option isn't free to sell the stock to any party other than those designated by the target company. Shares of the target company's stock or other alluring assets are actually locked up through the contractual option.

A lock-up option is conceded to a friendly admirer or savior assisting with defeating the endeavors made by a hostile acquirer. The option is intended to make the target company less alluring for hostile takeover by taking a large percentage of stock out of play. Lock-up options may likewise be utilized to take a portion of the target company's major and most helpful assets out of play, for example, a productive business line or significant property.

Through the lock-up option, these assets are made accessible to the friendly admirer — the white knight — on the off chance that that company doesn't win the merger. Be that as it may, it likewise repays the white knights for making those bids, with the option filling in as a breakup or termination fee.

The great conditions of the stock or asset sale made accessible through the lock-up option possibly occur on the off chance that the white knight doesn't win the merger bid.

Lock-up options are contractual, yet they are not in similar category as derivative financial options, so they are not subject to similar rules and regulations as the trading instruments.

A lock-up option or defense ought not be mistaken for a lock-up provision, which keeps a firm's shareholders from selling or transferring their shares during a defined period subsequent to getting them. This is regularly carried out with employee stock awards after a initial public offering (IPO) or other incentive awards.

Lock-Up Options and Hostile Takeovers

Lock-up options are many times considered a type of poison pill in that they endeavor to make the target company less appealing to admirers. A poison pill is a blanket term for strategies used by companies to forestall or deter hostile takeovers. A company targeted for a takeover utilizes a poison pill strategy to make shares of the company's stock unfavorable to the gaining firm.

At the point when hostile takeovers were a real threat during the 1980s, conglomerates specifically started building defenses to keep away from pillagers. Tragically, the emphasis on defense some of the time drove the companies to pursue poor business choices, harming the balance sheet however staying away from a takeover.

In spite of the fact that there are models in the two limits, the separation of conglomerates into more modest, more engaged companies was generally a positive development for their investors. Today, companies are less inclined to go through lock options or worry about looters attempting to break them up. This is on the grounds that they are the survivors of the 1980s and have taken examples about concentration and shareholder value to heart.

Features

• Lock-up options were utilized principally during the 1980s and mid 1990s when hostile takeovers were more normal and corporate plunderers targeted rambling, inefficient companies.
• Lock-up options are not options in the trading sense, so they are not subject to rules or regulations past essential contract law.
• A lock-up option is a contract that leans toward a friendly company in a takeover fight by promising it a portion of the target company's shares or best assets.