Analyzing Stock Lock-Ups: Do Target Treasury Sales Foreclose or Facilitate Takeover Auctions?

Abstract

In negotiating his controversial takeover of the Trans Union Corporation (Trans Union), Jay A. Pritzker proposed an initial offer of $55 per share. The Chief Executive Officer of Trans Union, Jerome W. Van Gorkom, responded that: to be sure that $55 was the best price obtainable, Trans Union should be free to accept any better offer. Pritzker demurred, stating that his organization would serve as a "stalking horse" for an "auction contest" only if Trans Union would permit Pritzker to buy [treasury] shares of Trans Union at market price which Pritzker could then sell to any higher bidder. Ultimately, Pritzker entered into an agreement with Trans Union in which Pritzker agreed to make a $55 cash offer to Trans Union stockholders and in return Trans Union agreed to sell Pritzker one million treasury shares at the premerger market price of $38 per share. While some members of Trans Union's senior management initially objected to the deal, claiming that it amounted to a "lock-up" which "would inhibit other offers," the deal eventually went on to fruition, and ultimately, litigation. In a "lock-up" merger agreement, a bidder's tender offer is conditioned upon the bidder's receiving the option to purchase treasury shares of the target corporation at a price below the tender offer. The term "lock-up" seems to derive from the perception that such agreements "lock-out" other potential bidders that find it economically infeasible to enter competing bids for the diluted stock.