Crown jewel lock-up options, a deal protection device common during the 1980s mergers and acquisitions boom, are back. My forthcoming paper, Fleecing the Family Jewels,[1] is the first scholarly paper to examine the reemergence of crown jewel lock-ups in M&A transactions and to compare recent lock-ups to those used in the 1980s.

Crown jewel lock-ups became popular in the 1980s, a period which saw a significant number of hostile transactions. Lock-ups were defense du jour – employed to deter hostile bidders. These lock-ups 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’s corporate family at a preset price that was generally less than the assets’ market value. Although the target and buyer would typically enter into the lock-up agreement at the same time as the merger agreement, the lock-up would generally be a separate, stand-alone agreement. The lock-up would usually become exercisable if a third party were to acquire the target or if the target otherwise withdrew from the proposed transaction. If the frustrated buyer exercised the option, the target would no longer own those crown jewel assets. Accordingly, the lock-up would serve to make the target significantly less appealing, often to the extent that it would no longer be a desirable acquisition. Thus, the lock-up is a deal protection device protecting the target and buyer’s transaction.

Because of their deterrent effects, target shareholders and frustrated third parties challenged the validity of lock-ups and courts across the country examined the impact and validity of lock-ups as a deal protection device. One of the earliest and most well-known cases addressing lock-ups was the Delaware Supreme Court’s decision in Revlon, Inc. v. Macandrews & Forbes Holdings, Inc. [2] In that case, the court determined that the lock-up had been entered into at precisely the time when the board had an obligation to maximize stockholder value.[3] Although the court made clear that lock-ups were not per se illegal, the court found that Revlon’s board had not used the lock-up as a way of incentivizing existing bidders to bid more or to attract new bidders.[4] Instead, the board had used the lock-up to favor one bidder over another.[5] Accordingly the lock-up had fleeced Revlon’s shareholders because it shut down an active bidding process and left money on the table. Other cases examining lock-ups followed much in the same vein as Revlon, making clear that lock-ups are not per se illegal and that they can be used to enhance the bidding process, but at the same time critiquing the sale process preceding entry into the lock-up. In the wake of these cases, lock-ups lost their luster and dealmakers all but stopped using them.

But as the saying goes, “everything old becomes new again,” and crown jewel lock-ups have made a return in recent years. These modern crown jewel lock-ups are different in some minor respects from their 1980s counterparts. First, these modern lock-ups have thus far arisen in the context of negotiated rather than hostile transactions. Second, unlike the 1980s lock-ups that often involved physical assets or divisions, today’s lock-ups often involve intangible rights. For example, in Apple’s recent acquisition of AuthenTec, Inc., AuthenTec granted Apple the right to acquire “non-exclusive, perpetual, irrevocable, worldwide license[s]” in AuthenTec hardware and software technology and sensor patents.[6] Once AuthenTec received the one-time payments for these licenses, Apple did not owe any other payments. The impact of the agreement was to take a potentially significant stream of income off the table; thereby reducing the value of AuthenTec in the eyes of third party bidders.

Practitioners have been quick to distinguish the modernized crown jewel lock-ups like the Apple-AuthenTec lock-up from their 1980s predecessors. Practitioners argue that the lock-up can be attributed to a business purpose other than the acquisition and that the lock-up could be a standalone agreement, separate and apart from the acquisition. Currently there is limited case law addressing the validity of modern crown jewel lock-ups.

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. 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, dealmakers may use lock-ups after an extensive sale process to incentivize bidders and extract additional value for shareholders.

ENDNOTES

[1] Completed work to be published in 90 Tul. L. Rev. (2016).

[2] 506 A.2d. 173 (Del. 1985).

[3] Id. at 182.

[4] Id. at 183.

[5] Id. at 178-79.

[6] AuthenTec, Inc., Intellectual Property and Technology Agreement (Form 8-K, Exhibit 10.1) at 1, 2 (Jul. 27, 2012).

This post comes to us from Christina M. Sautter, Professor of Law at Louisiana State University’s Paul M. Hebert Law Center.  The post is based on her forthcoming paper, entitled “Fleecing the Family Jewels” (completed work to be published in 90 Tul. L. Rev. (2016)) and is available here.