A buy-side model of M&A lockups: Theory and evidence

Lockups are an increasingly important element of M&A deals in the United St ates. We present, for the first time, descriptive data on lockup incidence, trends, and their relationship with Delaware case law. Prior commentators have used theoretical models to argue that lockups should have little or no impact on allocational efficiency in the market for corporate control. We use data from twelve years of M&A activity in the United States to show tha t prior models have little predictive power in real-world transactions. We then offer a new theoretical model of lockups that includes six "buy-side" distortions: agency costs, tan effects, informational effects, switching co sts, reputational effects, and endowment effects for bidders. The implicati ons of this new model suggest that courts and corporate boards should scrut inize lockups more closely than prior commentators have advocated.