Definition - What does Lockup Transaction mean?
A lockup transaction is a contractual device that the buyer and seller negotiate in an acquisition agreement. Without such an agreement, an initial bidder would be unwilling to expend its resources to bid, knowing that others would take advantage of the initial bidder’s efforts. Lockups are important to protect the expectancy interest of the bidders.
Divestopedia explains Lockup Transaction
Merger and acquisition transactions face the risk of non-consummation as a number of approvals and formalities are required and the target is not bound to the deal.
A buyer would typically wish to lock up a deal with a letter of intent, giving him or her an exclusivity period of 30 to 60 days. These are generally not in the best interest of the seller unless the terms are set forth in detail in respect to price, escrow, representations, warranties, indemnities, etc. The exclusivity period should also be kept to the minimum possible. This compensates the buyer for the costs invested in making an initial bid for the target and makes a second competing bid more expensive. Lockups can thus change bid outcomes.
Lockups are generally of three types:
- Stock lockups
- Asset lockups
- Breakup fees
In the context of a mid-market private company deal, lockup transactions or exclusivity agreements are almost always included in the initial draft of a letter of intent. Compensation is rarely paid by the potential buyer in exchange for the exclusivity. In a highly competitive auction process, an exclusivity would not normally be granted. In the event that exclusivity is given, the sellers should limit the exclusivity period to a short period so that a prospective buyer is more motivated to push the deal ahead quickly.