What is the purpose of a lock-up agreement in financial transactions?

What is the purpose of a lock-up agreement in financial transactions?

• A. To secure better prices for larger shareholders.
• B. To prevent market manipulation by major players.
• C. To bind larger shareholders to sell at a specified price.
• D. To ensure no sales occur until after the bid is finished.

Answer: (C)

A lock-up agreement is a contract that restricts certain shareholders, typically insiders or major shareholders, from selling their shares for a specified period of time following an initial public offering (IPO) or other similar event. The primary purpose of this agreement is to instill confidence in the market by preventing large shareholders from flooding the market with shares, which could drastically affect the stock's price negatively.

By binding larger shareholders to hold onto their shares, the lock-up agreement helps stabilize the stock price during the initial trading period, as it creates a sense of assurance that there will not be sudden and significant sell-offs from these major stakeholders. This promotes a smoother transition to public trading and helps to build trust among potential investors.

While the other options might relate to different facets of market behavior or transactions, they do not capture the essential function of the lock-up agreement as effectively as the correct choice, which emphasizes the commitment of larger shareholders regarding their shares.