Are lock-up agreements worth the paper they are written on?
The Association of British Insurers (ABI) has published its recommended best practice approach to lock-up agreements. Click here to read the guidance.
What is a lock-up agreement?
On an IPO or a secondary market placing, investors with significant shareholdings are asked to enter into an agreement not to sell, or to 'lock-up' their shares, for a defined period, except in certain circumstances. These circumstances may be specified, or it may be left to the sole discretion of the investment bank to waive the lock-up obligation.
What has triggered the new guidance?
The ABI considers that lock-up agreements have a significant market function by helping to regulate the supply of shares and stabilise the company's share price. The ABI considers that lock-up agreements are being waived increasingly by investment banks before the stated expiry date, which it considers to be an'unwelcome development'. Consequently, it has recently published its recommended best practice approach in relation to lock-up agreements.
The ABI's recommended approach
The ABI recommends that:
both the lock-up period and the circumstances in which any sale may take place prior to its expiry (in particular, the extent to which it may be broken at the sole discretion of the investment bank, which is known as a 'soft lock-up') should be clearly disclosed,
the appropriate period and terms of a lock-up will depend on the circumstances and are a matter for the vendor and the banks. However, in general:
- 'soft lock-ups' are only appropriate for periods of relatively short duration,
- in respect of longer lock-ups, it is appropriate for the lock-up agreement to specify an initial period of 'hard' lock-up (that is, where a sale may not take place at all, or only in 'very limited, objectively definable circumstances'), and
- a lock-up may only be waived by the investment bank following careful consideration, taking full account of the overall merits from the investors' perspective and of the need to maintain market integrity. Consequently, investors expect that a waiver would generally only be granted at a time close to the stated expiry date of the lock-up agreement.
Impact of the guidance
Whilst not binding, any guidance issued from the ABI always attracts due attention from the market. However, whether there will be a significant shift in practice remains to be seen. Investment banks may argue that they have not taken lightly any decisions to waive lock-ups. In general, we have seen that where investment banks have elected to waive these agreements, they have done so days in advance of the expiry date, rather than weeks or months - so there should not be any significant impact for investors. In an era where 'long-termism' culture is being cultivated amongst the global investor community, it could be argued that investors should focus on whether there is a positive long-term outlook, rather than be concerned with short term price fluctuations.
Investors will argue, however, that there must be some certainty with regard to what they should expect from the lock-up arrangements. Non locked-up investors are likely to welcome longer 'hard lock-ups' in transactions, although we expect to see some push-back on their duration in order to give some flexibility. Additionally, the Financial Conduct Authority is expected to announce new Listing Rules which provide that shares subject to lock-up periods of greater than 180 days must be excluded from the free-float calculation of listed companies - which strengthens the argument for certainty around these arrangements.