San Jose Business Lawyers Blog
A market standoff agreement – also known as a lock-up agreement – is a legal contract which prevents company insiders from selling their shares in the company on the stock market for a certain period of time following an initial public offering (IPO). In most cases, the specified period of waiting time (i.e., the term of the market standoff) is typically 180 days. However, in some cases, the term can be anywhere from 90 days to one year.
The primary purpose of a market standoff agreement is to give the market time to “absorb” or “catch up” to the sale of recent new stock shares which are issued as part of the IPO. Otherwise, if company insiders or other individuals who hold stock in the company begin to sell their shares immediately, the stock’s value will more than likely decline quickly.
In most cases where company stock is issued to company employees, there is a standard clause in the written agreement which allows for insider sales to be locked during the IPO period. For more information about whether you or your company need a market standoff agreement, you should contact the corporate attorneys at Structure Law Group as soon as possible.
Reasons for a Market Standoff Agreement
There are many reasons why a market standoff agreement can be beneficial for a corporation. One of the most important reasons to have such an agreement in place is because of the risks associated with a massive selloff by corporate insiders. Such a sell-off would be very likely to turn off prospective new buyers of the company’s stock, which would, in turn, lead to a sharp decline in the value of the company’s stock.
In fact, the majority of brokerage houses actually require market standoff agreements when they underwrite and market an IPO. The brokerage house, in turn, receives a fee for its underwriting services and typically provides the stock issuer with a guarantee (i.e., regarding the number of shares likely to be sold during the IPO period). Since the brokerage house would almost certainly lose money if the stock declines sharply during the IPO period, most brokerage firms will restrict these immediate sales by way of a market standoff agreement.
Market standoff agreements also have flexible expiration dates associated with them and have been revised in recent years because of the changing rules which govern the publishing of brokerage research reports.
Call Structure Law Group to Speak with a Silicon Valley Business Attorney Today
Having a proper market standoff agreement in place can be extremely important when it comes to safeguarding the value of a corporation’s stock. At Structure Law Group, our experienced attorneys can review your corporate circumstances and explain to you the benefits of a market standoff agreement. We can also address any legal questions that you may have about these agreements and can assist you with drafting the agreement. To schedule a consultation and case evaluation with a Silicon Valley business attorney, please call us at 408-441-7500 or contact us online today.