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Simple English definitions for legal terms
lockup option
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A quick definition of lockup option:
Lockup Option: A way for a company to protect itself from being taken over by another company. If someone buys a certain amount of the company's shares, a friendly party can buy parts of the company for a set price. This is sometimes not allowed if it doesn't help the shareholders. Lockup is short for lockup option.
A more thorough explanation:
A lockup option is a defense mechanism used by a corporation to prevent a hostile takeover. It involves an agreement between the corporation and a friendly party, where the friendly party is given the option to purchase parts of the corporation at a set price if a person or group acquires a certain percentage of the corporation's shares.
For example, let's say Company A is worried about a hostile takeover from Company B. Company A enters into a lockup option agreement with Company C, a friendly party. The agreement states that if Company B acquires more than 50% of Company A's shares, Company C has the option to purchase 10% of Company A's shares at a set price.
Lockup options can be controversial because they may not always serve the best interests of the shareholders. However, they can be an effective way for a corporation to protect itself from a hostile takeover.