TOWARD UNLOCKING LOCKUPS

When faced with a possible takeover, target boards often enter into lockup agreements with a favored bidder, agreeing to compensate that bidder some specified amount in the event a merger agreement is not consummated. Courts and scholars have approached these lockup arrangements with great suspicion, viewing them as a means by which target boards discourage higher valuing hostile bidders and protect their own jobs at the expense of target shareholders. Stephen Fraidin and Jon Hanson critique the courts' approach to lockups, as well as previous proposals for reforming that approach. Hanson and Fraidin then offer a new view of lockups. Drawing on law and economics insights, they argue that, for reasons that courts and scholars have not previously understood, lockups are unlikely to threaten, but may well serve, the goals of ensuring that corporate assets are transferred to their highest valued use and that target shareholder revenues are maximized Courts, Fraidin and Hanson conclude, should enforce all lockups, subjecting them only to the business judgment rule.