Question

Most IPOs feature share lockup agreements. a. What is the purpose of IPO lockup agreements? b. Why is it important for Alibaba Group’s shareholders to know about the lockup agreement and when it expires?

Answer 1

1) A lock-up agreement refers to a legal agreement signed by all the shareholders of a company that prohibits them from selling the shares of the company's stock for an agreed period of time. The primary purpose of an IPO lock-up agreement is prevention of the flooding of the market with too much of a company's stock supply too quickly. The agreement is an attempt to ensure the stability of the issuing company and also aligning the incentives of insiders' with the goals of the company. It helps for the newly issued shares to stabilize without additional pressures of selling from insiders

2) The lockup expiration day represents the first opportunity for a company’s founders and other initial investors to cash out their ownership stake in the company. As soon as the lockup period expires, insiders are permitted to sell. It important for shareholders to know about the lockup agreement and when it expires because when the lock-up expiration date nears; traders usually anticipate a sudden price fall due to the additional supply hitting the market. The price decline anticipation can result in an increase in short interest as trader’s short-sell stock into the expiration