ABI recommendation on lock-up arrangementsPrint publication
On an IPO or secondary placing, the underwriters will generally require the company’s key management and shareholders be restricted from selling their shares without the underwriters’ consent for a set period. Such lock-up arrangement may also include a subsequent orderly marketing period during which shares may be sold but with the relevant shareholders only able to trade through the investment bank managing the IPO. The terms of the lock-up may permit one-off transfers in certain circumstances (e.g. to immediate family members or a family trust, subject to the provision that the transferee agrees to adhere to the lock-up or the acceptance of a takeover offer).
The Association of British Insurers (the ABI) has published its recommended best practice in relation to lock-up agreements. It notes that increasingly banks are, at their sole discretion, waiving the lock-up before the stated expiry date. The ABI considers this to be an unwelcome development but accepts that it is driven by a perceived need on the part of banks to retain flexibility in this area.
In its recommendations, the ABI distinguishes between lock-ups which may be broken at the sole discretion of the bank – soft lock-ups – and those in which the shareholder may not sell further shares at all or only in very limited, objectively definable, circumstances – hard lock-ups.
The ABI recommends that:
- the period of the lock-up and the circumstances in which any sale may take place prior to its expiry (in particular the extent to which any period of the lock-up is soft) 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 banks. However, in general, (i) soft lock-ups are only appropriate for periods of relatively short duration; (ii) for periods of longer duration, it is appropriate for the lock-up arrangement to specify an initial period of hard lock-up; and (iii) any waiver at the sole discretion of the banks should only be given after careful consideration and after full account has been taken of the overall merits from the perspective of investors and of the need to maintain market integrity. Any such waiver would generally only be expected to be granted at a time close to the stated expiry of the lock-up.
The ABI’s intervention is unsurprising. It can be misleading to the market for an announcement that shares are subject to a lock-up arrangement only for the bank to waive that arrangement.
Whilst not legally binding, quoted companies will be expected to follow the ABI recommendations. We can therefore expect the ABI’s recommendations to become standard market practice.