In the event of a stock freeze, the bidder may acquire either 1) shares authorized but not issued by the principal or majority shareholder, or 2) shares of one or more large shareholders. The purchaser has the option of exercising the shares at a higher price in the event of a sale to a higher bidder or voting in favour of the purchaser`s offer. Lock-up agreements prohibit corporate promoters – including employees, friends, family and venture capitalists – from selling their shares for a period of time. In other words, the shares are “blocked.” Before a company goes public, the company and its subsystem usually enter into a lock-up agreement to ensure that the shares owned by these insiders do not arrive too early on the public market after the offer. The lockout agreement helps reduce the pressure of volatility when the company`s stock is in the first few months. It is only after the expiry of the prohibition period that insiders can sell freely. Studies have shown that the expiration of a blocking agreement is usually followed by a period of unusual yields. Unfortunately, these unusual returns are more common for investors in the negative direction. Investors need to know if there is a blocking agreement, as the likelihood of a price crash after the locking contract expires is high.
With the rise of alternative public structures – including direct listings and target acquisition companies (SPAC) and the willingness of investment banks to be more flexible to enable companies to design locking structures tailored to their needs – we have seen in recent years a change in the terms of the lock-up agreements. A lockout agreement is a provision or clause agreed between insurers and the insiders of the company that goes public with an IPO. It prohibits insiders from selling their stake in the company for a fixed period of time from the closing date of the IPO. In some cases, the agreement can only limit the number of shares that insiders are allowed to sell within the prescribed time frame. The clause could also be part of an offer to agree to sell the majority stake in a company and induce the new purchaser not to resell the interest or assets for a certain period of time. To find out if a company has a blocking agreement, contact the company`s shareholders` department to request its prospectus or to obtain it online via the SEC`s EDGAR database. There are also free commercial sites that follow the expiry of business lockout agreements. The SEC does not support these websites and does not support the information or services contained on these sites.
The Fenwick group of companies recently conducted a survey of more than 80 U.S. technology companies that have completed an IPO since January 1, 2017 to determine whether the terms of the lockout agreements have changed significantly in light of recent market developments. The investigation focused on three important conditions for blocking agreements: the length of the blockade, blackout exit provisions and price-based release rules. It is interesting to note that some of these studies have found that staggered locking agreements may actually have more negative effects on an action than those with a single expiration date. This is surprising, as staggered locking chords are often seen as a solution for post-lock-up dip. These trends, combined with the increase in direct listings and CAPCs, indicate that companies now have more flexibility to advocate for more favourable lockout terms for their directors, executives, employees and pre-IPO investors.