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On 14 April 2014, the Association of British Insurers (ABI) published best-practice recommendations in relation to lock-up agreements. These agreements are frequently made when companies are raising equity finance, and require investors with significant shareholdings not to sell shares for a given period after the fund raising. The agreement is made with the investment bank involved in the fund raising, and the new best-practice recommendations address the ABI's concern that banks are increasingly waiving lock-up agreements before the agreed expiry date.
Robert Hingley, Director of Investment Affairs, ABI commented:
"ABI members believe this development is unwelcome and damaging to market integrity. Lock-up agreements have a significant market function. In particular, they are important to investors as they regulate the supply of shares in the company and so are relevant to price formation. Investors are therefore intended to – and do – place significant reliance on them [sic]. Lock-ups should do what they say and there has to be a real difference between a lock-up for a stated long period and one for a stated short period.”
However, the ABI recognises the importance of retaining a degree of flexibility around the ability to waive a lock-up, both to minimise potential risks of distortion to trading patterns in the run-up to the fixed expiry date of the lock-up and to be able to take advantage of situations where it is in everybody’s interest for the lock-up to be waived and for an overhang to be brought forward and placed successfully.
The ABI therefore recommends:
- Both the period of the lock-up, and the circumstances in which any share sale might take place prior to its expiry, should be clearly disclosed;
- “Soft” lock-ups, which may be waived at any time at the sole discretion of the investment bank, are only appropriate for periods of relatively short duration;
- Where a lock-up is for a longer duration, the agreement should specify an initial period of “hard” lock-up in which no share sales may take place;
- Where a lock-up may be waived at the sole discretion of an investment bank, any waiver should only be given after careful consideration, taking full account of the overall merits from investors’ perspective and of the need to maintain market integrity. In this context, investors expect that any such waiver would generally only be granted at a time close to the stated expiry date of the lock-up.
The ABI recommendations give no guidance as to the sort of time frame envisaged by the phrase "periods of relatively short duration" but the intention would appear to be to refer to lock-ups of a matter of weeks, rather than months.
Jonathan Brooks is a Partner in the Corporate Group of Field Fisher Waterhouse LLP in London.