Leveraging Legends to Enforce Investor Lockups

Issuers of securities will sometimes require an investor to agree to a “lock up” or “leak out” provision that restricts or limits the public resale of shares for a certain period of time. This is very common among insiders and control persons, but can also be required of a non-affiliate investor. These special  restrictions serve many functions, chief among which is to prevent downward pressure on the stock caused by large shareholders attempting to sell their holdings at once, or to stabilize the stock price after an IPO or large liquidation event.

However, a signed lock-up agreement might not be enough. If the legend is not clearly printed on the share certificate or share statement, it might not be enforceable.

Title 8 of Delaware Law states: “Unless noted conspicuously on the certificate or certificates representing the security or securities so restricted or, in the case of uncertificated shares, contained in the notice or notices given pursuant to § 151(f) of this title, a restriction, even though permitted by this section, is ineffective except against a person with actual knowledge of the restriction.” [Italics added.]

Other states have laws echoing the same.

While issuers have long assumed that a signed lock-up agreement is sufficient to prove the current investor has actual knowledge of a restriction, this is still not enough to ensure a lock-up will be enforced. A key reason is that brokers and clearing firms will ultimately play critical roles in the public sale of the shares, and they cannot (and will not) honor a lock-up they don’t know about.

As a transfer agent, ClearTrust helps its issuer clients protect themselves and ensure lock-up agreements are effective with our comprehensive record-keeping capabilities:

  • At the direction of the issuer, we typeset a special lock-up legend on the share certificate or share statement at the time of issuance.

  • We customize the legend to specifically reference the investor’s lock-up agreement, removing any doubt that brokers, clearing firms, or other third parties handling the shares in the future have “actual knowledge of the restriction.”

  • Investors and issuers can view evidence of these special legends by logging into their respective online ClearConnect accounts.

  • Our robust recordkeeping system can design the lock-up legend to automatically transfer along with share transfer, and/or to expire on a certain date.

  • ClearTrust can also help issuers properly communicate lock-ups to brokers and clearing firms even when the shares are moved into a nominee (or “street”) name.

If ClearTrust is your transfer agent, all you need to do is let us know that shares you need issued are subject to a lock-up agreement. Based on the nature of the lock-up, we will craft an appropriate course of action to ensure it is documented and communicated through the lifetime of the lock-up.

If ClearTrust is not yet your transfer agent, contact me at 813-235-4490.

DISCLAIMER: ClearTrust LLC, its owners and employees are not licensed attorneys and this article is not to be construed as legal advice.