A lock-in agreement, also known as a lock-up agreement, is a legally binding contract between two parties that restricts an investor or shareholder from selling their shares for a specific period of time. This agreement is usually entered into when a company goes public, and its purpose is to prevent a sudden flood of shares hitting the market, which could lead to a drop in share price.
However, the question of at what point a lock-in agreement becomes binding is a crucial one for both parties involved. In general, a lock-in agreement becomes binding once it has been signed by both parties, and the lock-up period has started.
The lock-up period is the time span during which the investor or shareholder cannot sell their shares. This period is usually 180 days after the initial public offering (IPO). During this time, the investor or shareholder may only sell their shares with the permission of the underwriters or through a pre-approved trading plan.
It is worth noting that while a lock-in agreement is a legal contract, it does not prevent the investor or shareholder from selling their shares entirely. It simply restricts the sale of those shares for a specific period of time. Once the lock-up period has expired, the investor or shareholder is free to sell their shares on the open market.
In addition to the lock-up period, there are also certain conditions under which a lock-in agreement may become binding. For example, if the company fails to meet certain financial targets or breaches certain covenants, the lock-in agreement may be triggered, and the investor or shareholder may be prevented from selling their shares.
It is also worth noting that lock-in agreements are not always standard across all companies going public. Some companies may have shorter lock-up periods, while others may have longer lock-up periods. The terms of the lock-in agreement will be outlined in the company`s prospectus, which is made available to investors prior to the IPO.
In conclusion, a lock-in agreement becomes binding once it has been signed by both parties, and the lock-up period has started. It is important for both investors and shareholders to understand the terms of the lock-in agreement before entering into it, as there may be certain conditions that could trigger its enforcement.