This practice note discusses recent market trends regarding lock-up agreements, which are usually negotiated between the underwriters or placement agents and the issuer and its directors, officers, and control persons in connection with offerings of securities.

For additional information on lock-up agreements, see Top 10 Practice Tips: Lock-Up Agreements and IPO Key Documents. For a form of a lock-up agreement, see LockUp Agreement (IPO). For other market trends articles covering various capital markets and corporate governance topics, see Market Trends.

Pursuant to the terms of the lock-up agreement, the issuer agrees that it will refrain from issuing for the agreed lock-up period securities of the same class as the offered securities and securities convertible or exchangeable into the same class as the offered securities. The issuer also will agree to refrain from filing any registration statement relating to the offer of securities, subject to certain exceptions as discussed further below. Similarly, the issuer's directors, officers, and control persons will enter into lock-up agreements. The lock-up agreements provide the underwriters or placement agents some assurance that new securities will not be sold immediately following the proposed offering which might disrupt the trading market for the securities that have been offered.

Length of Lock-Up Period

In the case of an initial public offerings (IPO), the underwriters will seek to obtain lock-up agreements from all, or substantially all, the existing securityholders for a period of 180 days, subject to some limited carve-outs. In the case of a follow-on offerings (i.e., an offering following an issuer's IPO), the lock-up period may vary from 30 days to 90 days depending on a number of factors, including the company's maturity and the liquidity of its stock.

In almost all recent IPOs other than those involving special purpose acquisition companies (SPACs), which generally include a 365-day lock-up period, the lock-up period has been 180 days. To the extent that any IPO in recent years has not had a 180-day lock-up period, the lock-up period has been tiered with different parties subject to different lock-up periods. For example, directors, officers, and majority shareholders are subject to somewhat longer lockup periods than option holders.

During 2019, even the most high-profile IPO issuers agreed to 180-day lock-up periods; however, there was some speculation in the press that short-selling trading schemes were implemented that allowed shareholders to circumvent the lock-up restrictions in at least one or two instances.

In the case of Lyft, Inc., Pinterest, Inc., and Peloton Interactive, Inc., directors, officers, and holders of a substantial portion of the capital stock of the companies agreed to 180-day lock-up periods; however, in each case, the lock-up period would come to an end earlier than the 180-day period in order to allow such holders to effect sales prior to the company's earnings related blackout period commencing near the end of the 180-day period.

For example, in the case of Lyft, Inc., the lock-up period would have been shorten if (1) at least 120 days had elapsed from the date of the prospectus, (2) the company had publicly released its earnings results for the quarterly period in which the offering took place, and (3) the lock-up period would ordinarily have been scheduled to end during or within five trading days prior to a blackout period before the blackout period. In that event, the lock-up period would end 10 trading days before the start of the blackout period.

In the Pinterest Inc. IPO, there was a similar acceleration of the end of the lock-up period in order to allow holders to sell prior to a quarterly blackout occurring at least 150 days from the date of the prospectus. Also, holders of restricted stock units (RSUs) and option holders were permitted to sell shares in the public market in order to meet tax withholding obligations resulting from the settlement of RSUs or the exercise of stock options as early as four months following the IPO in the case of RSUs and 31 days in the case of option holders.

In 2019, those companies with multiple lock-ups followed a tiered structure. Typically, these lock-up arrangements provided for 180-day lock-up periods for officers, directors, and certain stockholders and 365-day lock-up periods, or longer, for majority shareholders and executive officers, such as CEOs. In the IPO of Canadian issuer Sundial Growers Inc., the lock-up period varied, with different periods applying to holders of common shares and holders of various classes of convertible notes. Holders of certain classes of convertible notes were subject to staggered lockups, with releases from 90 days to 180 days.

Lock-Up Parties

In almost all IPOs, the prospectus will disclose either that substantially all the pre-IPO shares have been locked up or will specify the percentage of the pre-IPO shares that have been locked up. An IPO lock-up also will apply to shares acquired through a directed share program.

In follow-on offerings, which often are undertaken in an abbreviated time period, lock-up agreements usually only will be obtained from the issuer, the directors, and the officers. Other significant stockholders will not be advised about the potential offering since the fact that the issuer is contemplating a potential offering may itself constitute material nonpublic information. Existing stockholders generally would not want to receive material nonpublic information since the receipt of that information would restrict their ability to trade in the issuer's securities

Lock-Up Agreements and Carve-Outs

The customary lock-up will contain an acknowledgment and agreement that the lock-up party will not (1) offer, sell, contract to sell, pledge, or grant any option to purchase or otherwise dispose of (collectively, a disposition) any company securities or any securities convertible into or exercisable or exchangeable for, or any rights to purchase or otherwise acquire, any company securities held by or acquired by the lock-up party, or that may be deemed to be beneficially owned by the lock-up party (the lock-up shares) pursuant to the rules and regulations promulgated under the Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1934, as amended (the Exchange Act), for the lock-up period; or (2) exercise or seek to exercise or effectuate in any manner any rights of any nature that the lock-up party has or may have to require the company to register the lock-up party's sale, transfer, or other disposition of any of the lock-up shares or other securities of the company held by the lock-up party, or to otherwise participate as a selling securityholder in any manner in any registration effected by the company under the Securities Act.

The lock-up party also agrees not to engage in any hedging, collar (whether or not for consideration), or other transaction that is designed to or reasonably expected to lead or to result in a disposition of lock-up shares during the lock-up period, even if such lock-up shares would be disposed of by someone other than the holder. The prohibited hedging or other similar transactions would include any short sale or any purchase, sale, or grant of any right (including any put or call option or reversal or cancellation thereof) with respect to any lock-up shares or with respect to any security (other than a broad-based market basket or index) that includes, relates to, or derives any significant part of its value from the lock-up shares.

The underwriters generally will agree to exceptions for the following:

  1. Transfers of shares as a bona fide gift, including gifts to charitable organizations
  2. Transfers of shares to a trust for the direct or indirect benefit of the lock-up party or such party's immediate family
  3. Transfers by will or intestacy to legal representatives, heirs, or legatees
  4. Transfers pursuant to a domestic order, divorce settlement, or other court order
  5. Transfers of shares of common stock or any security convertible into or exercisable for common stock to the company pursuant to any company right of repurchase or right of first refusal over such securities, or transfers of shares of common stock to the company for the net exercise of options, transactions relating to ADSs, settlement of RSUs or warrants, or to cover tax withholding
  6. Distributions of shares to members, limited partners, or stockholders of the lock-up party
  7. Transfers to affiliates or to any investment fund or other entity controlled by or managed by the lock-up party
  8. Transfers of shares to the company as forfeitures to satisfy tax withholding and remittance obligations of the lock-up party in connection with the vesting or exercise of equity awards granted pursuant to the company's equity incentive plans or pursuant to a net exercise or cashless exercise by the stockholder of outstanding equity awards pursuant to the company's equity incentive plan

To the extent that the transactions identified in (1), (2), (3), (4), (5), (6), and (7) do not involve a disposition or transfer for value; do not require a filing with the Securities and Exchange Commission; and any donee, distributee, or transferee does not otherwise voluntarily effect any public filing or report regarding the transfer, each donee, distributee, and transferee agrees to be bound by a similar lock-up agreement. In the case of a transaction identified in (8), any filing made pursuant to Section 16 of the Exchange Act shall state in the footnotes thereto that the filing relates to the circumstances described in (8) and the lockup party shall not voluntarily effect any other public filings or reports regarding any such exercises during the lock-up period.

Often, the lock-up will apply to pre-IPO shares and will not apply to shares purchased by the lock-up party in the open market in the offering or following the offering (provided that such sales are not required to be reported in any public filing, and the lock-up party does not otherwise voluntarily make any public filing regarding the sales).

The lock-up will not restrict any grant or exercise of options pursuant to the company's stock option plans or the exercise by the lock-up party of any warrant to acquire shares provided that such shares are not transferred during the lock-up period.

Other Lock-Up Carve-Outs

From time to time, the underwriters may agree to other lock-up carve-outs to address special situations.

For example, if the lock-up party is a financial institution, which is engaged in broker-dealer, investment advisory, and other services, the lock-up is not intended to prevent the lock-up party or its affiliates from engaging in ordinary course lending or capital markets activities, such as brokerage, asset management, derivatives transactions, and other securities activities.

Also, the underwriters may agree to exclude from the lock-up transfers pursuant to an order of a court or a regulatory agency. In recent offerings, underwriters also have been permitting a carve-out for transfers pursuant to a bona fide third-party tender offer, merger, consolidation, or similar transaction that in each case is made to all of the holders of the company's common stock involving a change of control; however, if the strategic transaction is not consummated, the shares remain subject to the lock-up agreement.

Less frequently, the underwriters may allow a carve-out for holders to enter into a trading plan established pursuant to Rule 10b5-1 under the Exchange Act provided that sales under the plan do not occur during the lock-up period and the entry into the plan is not required to be disclosed in any public filing.

Lock-Up Termination

Usually, the lock-up agreement will have a termination date such that if the underwriting agreement is terminated, the company elects not to pursue the offering, or a certain drop-dead date has passed, the parties will be released from their lock-up agreement

The Issuer's Lock-Up Agreement

The issuer also will be subject to a lock-up agreement. The issuer may negotiate limited carve-outs from its lock-up agreement. Usually, the underwriters will accept carve-outs for the following:

  • The sale of the securities to the underwriters
  • The ability to issue shares under executive compensation plans, which, may, from time to time, be subject to a share limit
  • The ability to file any registration statement on Form S-8 relating to securities granted or to be granted pursuant to any executive compensation plan in effect as of the date of the underwriting agreement or any assumed benefit plan pursuant to an acquisition or strategic transaction
  • The issuance of shares (or a specified number of shares or a percentage of the pre-transaction total shares outstanding) in connection with acquisitions or joint ventures
  • In the case of life science companies, the issuance of shares (or a specified number of shares) in connection with licensing arrangements
  • The issuance of shares pursuant to preexisting agreements

Generally, the issuer's lock-up agreement in the case of SPAC IPOs will not contain carve-outs for stock-based compensation.

Lock-Up Releases

Generally, the lead book runner will have the right to release parties from the lock-up. In recent deals, there are many instances in which there are joint book runners. Often, the book runners will make a point of negotiating that the release must be granted jointly by the two (or more) co-book or joint book runners. It is less common for a lock-up release to require the consent of all of the underwriters. The right to release the lock-up is important, especially in the context of an IPO since releasing the lockup may enable the co-book runners to secure a role for themselves as the lead underwriters in a follow-on offering by the issuer.

Under applicable Financial Industry Regulatory Authority (FINRA) rules, the release of a lock-up in the context of an IPO requires that public disclosure through a major news service be made at least two business days prior to the effective date of the release. The FINRA rules do not require an announcement for a waiver relating to a transfer not made for consideration to a transferee that has agreed to be bound by the lock-up provisions.

From time to time, the lock-up parties will negotiate for the right to be released from their agreement to the extent any record or beneficial owner of any lock-up shares is granted an early release. The release provisions may stipulate that if the maximum number of lock-up shares that could be released pursuant to such waiver in the aggregate is at least 1% of such owner's total lock-up shares, then certain significant holders of the company's securities also will be granted an early release from their lock-up obligations on a pro rata basis based on the maximum percentage of lock-up shares held by such holder. This early release provision for significant holders would not be triggered in certain instances where the underwriters released the lockup agreement of a holder as a result of an emergency or hardship affecting only such holder.

In some IPOs, the lock-up agreement may contain a release that is automatic and staggered pursuant to which a specified percentage of the locked-up shares will be released from the lock-up in the event that the issuer's stock is performing well. This is not considered typical and may be limited to IPOs involving larger companies.

Pre-IPO Private Placements

More and more often, companies are undertaking private placements in close proximity to their IPOs. Investors in these pre-IPO private placements, especially crossover fund investors (i.e., those that invest in both public and private equity), will address IPO lock-up provisions in the investors' rights agreement. Generally, a crossover fund investor will want to ensure that the IPO lock-up will be no more than 180 days in length and that it will cover only preIPO shares and not affect shares purchased by such fund in the open market. Crossover investors also will want to be certain that all company directors, officers, and 1% shareholders will be subject to a substantially similar lockup agreement. Correspondingly, crossover fund investors will want a "most-favored-nations" type of lock-up release provision, such as the one described above, which will provide that if any stockholder gets released from its lockup agreement, then the crossover funds will be released from their agreements to the same extent and in the same proportion.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.