Market stand-off agreement: Overview, definition, and example
What is a market stand-off agreement?
A market stand-off agreement is a contractual provision that restricts shareholders from selling or transferring their shares for a specified period after a company goes public, typically following an initial public offering (IPO). This restriction helps stabilize the stock price by preventing a sudden influx of shares into the market, which could lead to price volatility.
For example, if a company goes public, its pre-IPO investors and executives may be required to hold onto their shares for 180 days after the IPO before they can sell them.
Why is a market stand-off agreement important?
A market stand-off agreement is important because it helps maintain market stability and protects the company’s stock price from sudden declines caused by mass sell-offs. It ensures that early investors, executives, and insiders remain committed to the company’s long-term growth rather than cashing out immediately.
For businesses, including a market stand-off agreement in IPO contracts reassures new investors that the stock price will not be destabilized by large insider sales. For pre-IPO shareholders, compliance with this agreement is often a condition for participating in the IPO.
Understanding a market stand-off agreement through an example
Imagine a technology startup is preparing for an IPO. Before going public, the company requires its founders and early investors to sign a market stand-off agreement stating that they cannot sell their shares for 180 days after the IPO date. This restriction prevents early investors from flooding the market with shares, which could negatively impact the stock’s value.
In another scenario, an executive of a newly public company owns a large number of shares. A market stand-off agreement prevents them from selling immediately after the IPO, giving the stock time to stabilize. After the lock-up period expires, the executive can sell their shares in the open market.
An example of a market stand-off agreement clause
Here’s how a market stand-off agreement clause might appear in a shareholder agreement:
“The Shareholder agrees that, in connection with the Company’s initial public offering, they shall not sell, offer to sell, or otherwise transfer any shares of the Company’s stock for a period of [X] days following the effective date of the IPO, unless otherwise approved by the Company or required by applicable law.”
Conclusion
A market stand-off agreement helps prevent stock price volatility by restricting insider sales for a set period after an IPO. This stabilizes the market, protects new investors, and signals long-term commitment from pre-IPO shareholders. Businesses include these agreements to maintain confidence in their stock value and avoid market disruptions caused by early share liquidations.
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.