Legal Definitions - lockup option

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.