Fleecing the Family Jewels

Abstract

Crown jewel lock-up options, a common deal protection device during the 1980s mergers and acquisitions boom, are back. During their popularity in the 1980s, these options took the form of agreements between a target company and a buyer pursuant to which the buyer was granted the right to purchase certain valuable assets, or crown jewels, of the target corporate family in the event the merger did not close. After both state and federal courts questioned the validity of these lock-ups in the 1980s, lock-ups lost their luster and dealmakers stopped using them. But as the saying goes, “everything old becomes new again,” and crown jewel lock-ups have made a return in recent transactions. This time around, dealmakers have been quick to distinguish the modernized crown jewel lock-ups from their predecessors. Although there has been limited case law addressing the validity of these lock-ups, courts appear more likely to uphold the lock-up if the lock-up can be attributed to a business purpose other than the merger and if the lock-up could be a standalone agreement, separate and apart from the merger. This Article argues, however, that today’s lock-ups are not significantly different from their predecessors. Practitioners and courts should not lose sight of the 1980s jurisprudence that closely scrutinized the sale process preceding the lock-up as well as the deterrent effects of the lock-up on potential bidders. Failing to consider these factors and not giving these factors proper weight potentially results in companies and their shareholders being fleeced of their corporate family jewels and their value. At the same time, however, dealmakers should not be as quick to shy away from lock-ups as they have done in the past. As the 1980s jurisprudence made clear, lock-ups can be used to enhance shareholder value. In particular, this Article argues that dealmakers may use lock-ups after an extensive sale process to incentivize bidders and extract additional value for shareholders.

Keywords: crown jewel lock-ups, deal protection devices, Revlon, Unocal, asset lock-ups, lockups, fiduciary duties, board of directors, change of control

JEL Classification: K22, K12, K2