January 5, 2005
Consternation Over Lock-Up Agreement Provision
Todd Rolapp of Bass, Berry & Sims writes this guest blog: Many of our clients have been presented the following provision in lock-up agreements over the last year or so:
“Furthermore, the undersigned agrees that if (i) the Company issues an earnings release or material news or a material event relating to the Company occurs during the last 17 days of the lock-up period, or (ii) prior to the expiration of the lock-up period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the lock-up period, the restrictions imposed by this letter agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.”
Apparently, some underwriters and their counsel are telling companies that the paragraph is standard and that they believe it is also in the best interest of the company. The provision is obviously in response to NYSE Rule 472(f)(4) and NASD Rule 2711(f) which, roughly speaking, prohibit NASD members from publishing research or making recommendations w/in 15 days of the expiration of a lock-up agreement in an offering in which the member is a manager or co-manager.
The Rule has an exception for reports issued under Rule 139 (the report is distributed with reasonable regularity in the normal course of business, etc) if the issuer’s securities are “actively traded” as defined in Reg M ($150 million float and $1 million avg. daily trading volume).
However, in our experience, companies are having little success getting the paragraph removed or altered even if their stock is “actively traded” and the NASD member regularly distributes reports after earnings releases. From the company’s perspective this provision seems to go beyond what these Rules actually require and seems designed to make it so the underwriters do not have to do any hard Rule 139 analysis when they go to issue a report after an earnings release.
I am interested to hear whether anyone out there has had any success in dealing with this issue with underwriters (that is, narrowing or eliminating the provision) or have any ideas that might help companies and their legal advisors combat this provision before it gets “too standardized.” I can be reached at TRolapp@bassberry.com.