What Is a Lock-Up Agreement?
A lock-up agreement is a contractual commitment by shareholders not to sell, transfer, or otherwise dispose of their shares for a defined period. In M&A, lock-ups serve as deal protection mechanisms — an acquirer may receive a lock-up option over a key shareholder’s stake or over the target’s crown jewel assets. In IPO contexts, lock-ups prevent insiders from selling shares during the initial post-listing period, ensuring price stability.
Lock-up agreements address a fundamental timing problem in M&A: between signing and closing, shareholders could sell to a competing bidder or the market, undermining the deal. Lock-ups contractually prevent this by freezing share positions during the critical transaction period.
Types of Lock-Up Agreements
Share Lock-Ups
A shareholder agrees not to sell, transfer, hedge, or pledge their shares for a specified period:
| Context | Typical Duration | Purpose |
|---|---|---|
| M&A (pre-closing) | Signing to closing | Prevents tendering to competing offers |
| M&A (post-closing, stock deals) | 6-18 months post-closing | Prevents selling acquirer shares received |
| IPO | 90-180 days post-listing | Prevents insider selling during price discovery |
| PE exit (secondary) | 12-36 months | Prevents immediate selling by rollover investors |
Asset Lock-Ups (Crown Jewel Options)
The target grants the acquirer an option to purchase the target’s most valuable assets (the “crown jewels”) if the deal is terminated. This deters competing bidders because acquiring the target without its key assets is far less attractive.
Asset lock-ups face heightened legal scrutiny. In Revlon, Inc. v. MacAndrews & Forbes Holdings (1986), the Delaware Supreme Court invalidated a lock-up option granted by Revlon’s board to Forstmann Little, finding that the board’s fiduciary duty in a sale context required it to maximise value for all shareholders rather than favour one bidder.
Voting Lock-Ups
A shareholder agrees to vote their shares in a specified manner — typically in favour of the proposed transaction and against any competing proposals. Voting lock-ups are functionally equivalent to irrevocable undertakings and provide deal certainty by committing a known block of votes.
Lock-Ups in M&A Transactions
For Acquirers
Lock-ups benefit acquirers by:
- Securing committed support for the transaction before announcement
- Creating obstacles for competing bidders
- Providing certainty that key shareholders will not disrupt the deal
Enforceability Considerations
Courts evaluate lock-ups under the business judgment rule, with heightened scrutiny in Revlon situations:
- Reasonable lock-ups — those that encourage initial bidders without foreclosing competitive auctions are generally upheld
- Preclusive lock-ups — those that effectively prevent any competing bid may be struck down as a breach of fiduciary duty
- Context matters — a lock-up negotiated as part of a competitive auction process receives more deference than one granted to the only bidder
According to Practical Law, approximately 40-50% of US public M&A transactions include some form of share or asset lock-up beyond the standard termination fee, with the prevalence higher in private equity deals.
IPO Lock-Ups
In IPO contexts, underwriters require company insiders (founders, directors, officers, pre-IPO investors) to agree to lock-up periods:
- Standard duration: 180 days in the US
- Coverage: All shares held by insiders and pre-IPO investors
- Exceptions: Underwriters can waive the lock-up early (though this typically causes negative market reaction)
- Expiry impact: Lock-up expiration dates are closely watched by investors, as the sudden availability of new shares can create selling pressure
APAC Context
Australia — ASX listing rules require mandatory escrow for certain shareholders of newly listed companies (directors, promoters, seed investors). The escrow periods are 12-24 months and are more restrictive than typical US IPO lock-ups. In M&A, lock-up arrangements in schemes of arrangement are subject to Takeovers Panel scrutiny under Guidance Note 7.
Hong Kong — HKEX listing rules impose a 6-12 month lock-up on controlling shareholders following an IPO. In the M&A context, lock-ups on offeror shares received as consideration in share-for-share offers are governed by the Takeovers Code.
Japan — lock-up agreements in Japanese IPOs typically run 90-180 days. In M&A, lock-up provisions are used in share exchange transactions to prevent immediate selling of acquirer shares received by former target shareholders.
“Lock-ups are the glue that holds M&A transactions together between signing and closing,” observes Daniel Bae, founder of Amafi. “In APAC public M&A, securing share lock-ups from major shareholders often determines whether a deal can be announced with confidence.”
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