Company lock-up: Overview, definition, and example
What is a company lock-up?
A company lock-up refers to a period during which insiders—such as executives, employees, and major investors—are restricted from selling or transferring their shares in the company. This is typically applied after a company goes public through an initial public offering (IPO) or secondary offering. The lock-up period is designed to prevent large amounts of shares from flooding the market immediately after the IPO, which could drive down the stock price. The length of the lock-up period can vary, but it typically lasts anywhere from 90 to 180 days.
During the lock-up period, insiders are not allowed to sell or trade their shares unless certain conditions are met, such as the expiration of the lock-up or specific regulatory exceptions. The goal is to provide market stability and prevent the stock from being manipulated or destabilized by large share sales from insiders who might have more significant holdings.
Why is a company lock-up important?
A company lock-up is important because it helps maintain market stability after an IPO. Without a lock-up, insiders could sell large amounts of stock immediately after the IPO, which could cause the stock price to drop sharply due to the sudden increase in supply. By imposing a lock-up period, companies help ensure that the market remains orderly and that investors have time to assess the true value of the company based on its performance and fundamentals.
For investors, the lock-up period also provides some confidence that the initial offering price will not be immediately undercut by insider sales. However, once the lock-up period ends, there may be volatility as insiders may decide to sell their shares, which can impact the stock's price.
Understanding company lock-up through an example
Imagine a technology startup that has just gone public with an IPO. The company has set a lock-up period of 180 days, during which the company's executives, employees, and early investors are prohibited from selling their shares. This restriction ensures that the stock price does not experience a sharp drop after the IPO due to a large amount of shares being sold in the open market.
Once the lock-up period expires, insiders are free to sell their shares, which may lead to increased trading volume and, in some cases, fluctuations in the stock price. For instance, if many insiders decide to sell their shares as soon as the lock-up period ends, it could create downward pressure on the stock price. Conversely, if insiders hold onto their shares or the company performs well, the stock price might continue to rise.
An example of company lock-up clause
Here’s how a company lock-up clause might appear in an IPO prospectus or shareholder agreement:
"The Shareholders agree that they will not, without the prior written consent of the Lead Underwriters, sell, transfer, or otherwise dispose of any shares of the Company for a period of 180 days following the date of the IPO. This lock-up period is designed to prevent the immediate sale of shares by insiders and will help maintain the stability of the Company's stock price following the public offering."
Conclusion
A company lock-up is a critical provision that helps ensure market stability after a company goes public. By restricting insiders from selling their shares for a defined period, typically 90 to 180 days, it prevents the stock price from being negatively impacted by large insider sales. While the lock-up period helps maintain investor confidence and market stability, it can also lead to volatility once it expires, as insiders may choose to sell their shares. Understanding the dynamics of a company lock-up is important for investors, executives, and stakeholders involved in or considering an IPO.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.