What Does Lock Up Provision Mean?
A lock-up provision is when a firm's shareholders are restricted from selling or transferring their shares. This provision is usually placed on business owners that:
- Sell their business to a private equity group, but retain a portion of the equity; or
- Sell their business to a strategic buyer and accept shares of the acquirer as consideration.
Divestopedia Explains Lock Up Provision
The lock-up provision is in effect until an exit event has occurred or the aquirer approves a sale or transfer of shares. If there is approval, in the case of a private equity partner, they are usually offered these shares first and if they do not want these shares, they may be offered to a separate approved party. The length of time for a lock-up provision can vary, but is typically for the duration of the investment.
Lock-up provisions are mechanisms used to keep the selling shareholders committed to the successful transitions of the business to new owners. They are important because if shares were allowed to be traded openly, potentially harmful or unapproved investors could enter the company.