The Association of British Insurers’ guidelines recommend greater transparency in disclosures relating to lock-up agreements.
On 14 April, the Association of British Insurers (ABI) published best practice recommendations for its members about their approach to lock-up agreements. The statement follows concerns in the market regarding lock-ups being frequently waived by investment banks before the stated expiry date.
In an initial public offering (IPO), it is common practice for underwriters and the company’s directors, officers, and certain significant shareholders to enter into a lock-up agreement to provide that there will be no further sales of shares by such persons for a certain period. The lock-up agreement plays a significant market function both in regulating the supply of shares in the company and in reassuring investors at the time of the IPO that key insiders are tied in to the company for a period of time post-IPO. The lock-up agreements are, therefore, relevant to price formation, and, as such, investors place significant reliance on them. The ABI has noted (reflecting comments from other market observers) that there appears to be an increasing trend for investment banks to waive the lock-ups, in some cases a significant period of time before the stated expiry date. The ABI has acknowledged the arguments of vendors and investment banks that there is merit in retaining a degree of flexibility in the ability to waive a lock-up (in particular, to seek to avoid potentially dangerous overhangs that distort the market in the run-up to a lock-up period’s expiry). However, the ABI has noted that such a practice may be potentially misleading to the market.
Against this background, the ABI has recommended the following approach, discerning between a “soft” lock-up, which can be broken or waived at the sole discretion of the investment bank, and a “hard” lock-up, where no sales can take place at all or where sales can take place only in very limited and defined circumstances:
- The lock-up period and the circumstances under which any sale may occur prior to its expiry must be clearly disclosed (in particular, whether any part of the lock-up is a soft lock-up).
- Soft lock-ups are only appropriate for relatively short periods.
- Where a longer duration of lock-up is used, it is appropriate for the lock-up to specify an initial period of hard lock-up.
- Where a lock-up may be waived by an investment bank, the investment bank must give careful consideration and take account of the overall merits of such a waiver from investors’ perspectives and of the need to maintain market integrity. Consequently, investors should be able to expect that any waiver will only be granted close to the lock-up expiry date.
Whilst the ABI recommendations have no legal enforceability, they do influence market practice because of the buying power of ABI members. In addition, given the UK market’s tendency to adopt market guidance issued by the ABI in other areas as best practice (for example, disapplication of statutory pre-emption rights on new issues of shares), it is expected that there may be some changes in market practice to seek to address the ABI's concerns.