Lockups and the Market for Corporate Control

Stanford Law Review, Vol. 48, No. 6, 1996.

Posted: 26 Jun 1998

See all articles by Marcel Kahan

Marcel Kahan

New York University School of Law; European Corporate Governance Institute

Michael Klausner

Stanford Law School; European Corporate Governance Institute (ECGI)

Abstract

This paper analyzes the effect of lockups on the market for corporate control. We demonstrate that lockups can affect the outcome of bidding contests and that judicial leniency toward lockups would have detrimental effects on the disciplinary influence of the takeover threat and on the number of value-enhancing acquisitions that occur. Scholarship to date on lockups has argued that lockups are generally ineffective in allowing target managers to influence who acquires a target firm. Accordingly, scholars who have taken this position have advocated leniency in judicial review of lockups. We explain that this prior analysis has failed to take full account of the impact that the legal treatment of lockups has on the ex ante willingness of potential bidders to enter an auction, and thus fails to take full account of the ultimate influence a lockup can have on who acquires a target. We then examine the proper legal treatment of lockups from the perspectives of shareholder wealth maximization and social wealth maximization, and we propose an alternative to the current legal standard.

JEL Classification: G34, K22

Suggested Citation

Kahan, Marcel and Klausner, Michael D., Lockups and the Market for Corporate Control. Stanford Law Review, Vol. 48, No. 6, 1996., Available at SSRN: https://ssrn.com/abstract=10008

Marcel Kahan (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
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212-998-6268 (Phone)
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European Corporate Governance Institute ( email )

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Belgium

Michael D. Klausner

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-6433 (Phone)
650-725-0253 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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