The blocking agreement may contain additional clauses limiting the number of shares that can be sold for a certain period of time after the freezing agreement expires. Such clauses help to avoid a significant decline in share prices, which could result from a considerable increase in supply. 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. A blocking agreement is a contractual clause that prevents a company`s insiders from selling their shares for a specified period of time. They are often used in the IPO. From a regulatory perspective, lockout agreements should help protect investors. The scenario that aims to avoid the lockout agreement is a group of insiders who take over an overvalued corporate audience and then throw it at investors as they flee with the revenue. For this reason, some Blue Sky laws still have blockages as a legal requirement, as this has been a real problem during several periods of market exuberance in the United States. 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. The courts allow blockages when they find that the lock was used to encourage a bidder to bid, not as a device to terminate an auction or tendering process. However, asset lock-ups discourage other bidders and are generally discouraged by the courts. In many cases, locking rules can hinder “free competition” and thus prevent the market from acting naturally by preventing competing bids for the target company.
An investment freeze occurs when the target entity grants an option to acquire an asset. It is also known as the crown lock. In the event of the sale of a controlling interest, the purchaser must temporarily consent to a blocking clause. It prohibits the resale of assets or shares for the duration of the agreed suspension period. This measure is intended to maintain price stability for other stakeholders. The lockout agreement is necessary to ensure that IPO subscribers are not disadvantaged by insiders. These subscribers could be owners, executives, employees, venture capitalists or family members. The blackout periods usually last 180 days, but can sometimes last up to 90 days or a year. Sometimes all insiders are “blocked” for the same period. In other cases, the agreement will have a staggered blocking structure, in which different insider classes will be blocked for different periods. Although federal law does not require companies to use blackout periods, they can still be imposed by state blue sky laws. When a technology company goes public, its insurers generally require all directors, executives, employees and investors prior to the IPO to enter into containment agreements that they prohibit for a period of time, including the sale of shares acquired prior to the IPO.
Historically, these blackout periods have tended to last 180 days. Investors considering holding their shares or reinvesting them in the company after an IPO closes must determine when the blackout period will end, as insiders may be tempted to sell part of their holdings, putting pressure on sales in the stock market.