Final answer:
In a takeover scenario, 2) a lockup agreement occurs when a targeted corporation agrees with a suitor to protect management by selling significant assets or shares to them, acting as a defense against a hostile takeover.
Step-by-step explanation:
When a targeted corporation makes a deal with the suitor in order to protect the management of the target, this is often referred to as a lockup agreement. A lockup agreement is a defensive tactic against a takeover bid, where the target company agrees to sell a substantial amount of its shares or assets to the suitor, or another friendly party, making the company less attractive or more expensive for other potential acquirers.
It is typically used as a means to fend off a hostile takeover, ensuring that the current management of the company remains in control. This practice contrasts with greenmail, where the target company buys back its own shares at a premium to eliminate the threat of an unwelcome takeover bid. Greenmail is often viewed negatively as it can benefit the potential acquirer at the expense of the target company's shareholders.
In businesses with a large number of shareholders, important considerations include:
- How and when the company obtains money from the sale of its stock
- What rate of return the company promises to pay when it sells stock
- Who makes the decisions in a company owned by a large number of shareholders
These questions highlight the relationship between capital acquisition, shareholder returns, and corporate governance, which are central to understanding the dynamics of publicly held companies.