Definition and meaning of the lock-up agreement
A lock-up agreement is a contractual arrangement by which parties block or restrict certain rights, assets, or actions for a defined period or until the occurrence of specific conditions. The aim of such an agreement is to effectively restrict the free availability or exploitation of the relevant objects or rights for the duration of the lock-up period and to protect certain interests of the parties involved. Lock-up agreements are particularly used in corporate law, real estate law, banking, M&A transactions, as well as contract and employment law.
Legal basis of the lock-up agreement
General legal classification
Lock-up agreements are generally civil law contracts and subject to the statutory provisions of the German Civil Code (BGB). They may contain obligations or property law aspects, depending on what the lock concerns. The legal admissibility is determined by the general provisions on contracts (§§ 305 et seq. BGB), good faith (§ 242 BGB), and the prohibition of immoral agreements (§ 138 BGB).
Distinction from related legal instruments
- Notice of restriction: A notice of restriction is a unilateral act, whereas a lock-up agreement is a bilateral agreement between parties.
- Suspensive / Resolutive Condition: In contrast, a lock-up agreement usually does not stipulate a future event as a condition, but rather a temporal or purpose-related restriction.
- Binding and standstill covenant: Lock-up agreements often overlap with binding or lock-up covenants, but differ in the scope of regulation and legal context.
Areas of application for lock-up agreements
Corporate law
In corporate law, lock-up agreements are frequently used in connection with shareholders’ voting rights or share transfers. They are, for example, directed against unauthorized sale of business interests, particularly in the context of corporate takeovers (M&A transactions; lock-up agreements) or among founding shareholders of corporations. Such restrictions can also be agreed as part of pooling arrangements to secure common interests.
Real estate law
In real estate transactions, lock-up agreements are often used to prevent disposal of a property or real estate for a specified period, for example, until payment of the purchase price is due, permits are obtained, or certain rights are registered in the land register. This also includes priority notices that are secured by a contractual lock-up.
Banking and finance
In the banking sector, lock-up agreements are used, for example, in the context of escrow accounts, security agreements, or attorney trust accounts. A common form is the so-called blocked account, in which the disbursement of funds is subject to certain conditions or periods.
Employment and contract law
Lock-up agreements can also be found in employment relationships, for example, to ensure non-competition periods, in connection with bonus payments, stock options, or until the termination of an employment relationship, such as in a so-called vesting agreement.
Inheritance and family law
Lock-up agreements occur in inheritance law in connection with estates and executorships, for example, when inheritances or assets may not be transferred, encumbered, or used for a certain period. In family law, they can be used during the division of assets.
Contractual structure of lock-up agreements
Contracting parties and subject matter
The parties to a lock-up agreement can be natural or legal persons. The subject of the lock-up can be a right (e.g., voting right, right of disposal) as well as a physical or digital asset (e.g., securities, real estate, bank balances).
Content and minimum requirements
A valid lock-up agreement generally contains the following essentialia negotii:
- Precise designation of the locked object or right
- Specific regulation of the lock-up period or the lifting condition
- Arrangement of powers and obligations during the lock-up period
- Regulations on exceptions or emergencies
- Sanctions/agreements in case of breach of contract
Formal requirements
The form of a lock-up agreement is generally determined by its principal subject matter. If notarization is required for the underlying transaction (e.g., transfer of company shares, real estate transactions), this form requirement usually also applies to the lock-up agreement. Otherwise, written form is sufficient unless a specific provision requires a stricter form.
Enforceability and sanctions
Breaches of a lock-up agreement may give rise to claims for damages under civil law, or lead to reversal or enforcement of cease and desist orders. In individual cases, a contractual penalty may even be effectively agreed to secure compliance with the lock-up obligation.
Case law and literature
The interpretation and validity of lock-up agreements in Germany are governed by established case law. Decisive factors are regularly the purpose of the agreement and its practical significance for the parties, whereby the fundamental rights of contractual freedom as well as the limitations of morality and public law provisions must always be observed.
Key court decisions on the admissibility and scope of lock-up agreements particularly concern:
- Duration of commitment and balancing of interests: Unreasonably long or excessively restrictive lock-up periods may be void under § 138 BGB.
- Contractual interest and anti-avoidance protection: In individual cases, care must be taken to ensure that the lock-up agreement is not used to circumvent mandatory legal provisions or protective rules.
International context
Lock-up agreements are not an exclusively German phenomenon. In Anglo-Saxon legal systems, they are known as “lock-up agreement”, “standstill agreement” or “escrow agreement” and perform similar functions. However, individual legal systems differ in terms of the case law as well as the civil enforcement and supervision of such lock-up covenants.
Summary
The lock-up agreement is a versatile instrument used to temporarily restrict rights of disposition or structuring rights. Under German law, its structure and effectiveness are governed by general principles of civil law, whereby attention must always be paid to the contractual purpose, duration of commitment, and the protective interests of the parties. Its applications range from corporate, real estate, and banking law to labor and inheritance law. Depending on its structure, lock-up agreements can have significant legal and economic consequences for the contracting parties and therefore play a central role in contract practice.
Frequently asked questions
What legal requirements must be met to enter into a lock-up agreement?
Entering into a lock-up agreement regularly requires that both parties agree on the subject matter of the agreement and the legal consequences of the lock-up. Legally, it is usually a contract of obligation designed in accordance with the general provisions of the German Civil Code (BGB). According to §§ 145 ff. BGB, two matching declarations of intent (offer and acceptance) are required. When drafting the contract, it is important to ensure that the lock-up agreement does not violate legal prohibitions (§ 134 BGB) or public policy (§ 138 BGB). Furthermore, it must be clearly defined which subject (such as real estate, shares or business interests) is affected by the lock-up and how the modalities of the lock are structured. If there are special formal requirements, such as in relation to real estate transactions (§ 311b BGB), notarization must be observed. The possible need for third-party consents, for example, a shareholders’ meeting, must also be taken into account. Special laws (e.g., the Reorganization Act or the Securities Trading Act) may impose further requirements or stipulations on the lock-up agreement.
How long is a lock-up agreement effective, and are there statutory maximum periods?
The effectiveness of a lock-up agreement is generally based on the duration agreed upon in the contract. There is no blanket statutory maximum duration, but the period must not contravene statutory provisions, especially public policy or the prohibition of excessive contractual restraints (§ 138 BGB). Excessively long lock-up periods can, in individual cases, be invalid if they place the contractual partner at an unreasonable disadvantage or unduly restrict their economic freedom. In certain areas of law, such as lock-up periods during IPOs or under reorganization law, statutory or regulatory maximum periods must be observed. If no term is defined, the lock-up is generally considered to be “for an indefinite period,” regularly implying an ordinary right of termination for both sides. In any case, a clear contractual definition of the duration and modalities of early termination of the lock-up is recommended.
What are the legal consequences of breaching a lock-up agreement?
Breach of a lock-up agreement – that is, violating the agreed lock – regularly gives rise to civil claims. The injured party can generally assert claims for injunctive relief and, if necessary, removal (§§ 280, 249 BGB). If a demonstrable loss occurs due to the breach, there is a claim for damages. Especially in transactions with restrictions on disposal, such as the sale of locked shares or real estate, the legal validity of the prohibited disposal may be affected; transfers may under certain circumstances be voidable or null and void, if so provided by contract or law. In the event of serious breaches, contractual penalties may also be threatened if agreed upon in the lock-up agreement. In some cases, extraordinary termination of the contract may also be possible.
Are lock-up agreements effective and enforceable against third parties?
As a rule, obligations arising from lock-up agreements are only effective between the contracting parties (inter partes). There is typically no direct effect against third parties, especially buyers of locked assets. If the lock-up agreement is violated and the locked asset is nonetheless transferred to a third party, the transaction generally remains valid, provided the third party acted in good faith and there are no contrary statutory provisions. An exception exists for proprietary restrictions on disposal that are entered into the land register, commercial register, or other public registers and thus have effect against all parties (proprietary effect). In particular, shareholders’ agreements with pre-emption, advance acquisition, or restriction on disposal clauses should, where appropriate, be registered or otherwise secured by priority notices to achieve comprehensive protection against third parties.
What are the typical use cases for lock-up agreements under German law?
Lock-up agreements are found in many areas of German law. They are typical in corporate law, for example as agreements between shareholders under which specific shares may not be transferred or encumbered for a defined period (so-called lock-up clauses). In real estate law, lock-up agreements are also frequently entered into, for example, to prevent the sale of land during project development. In the securities sector, lock-up periods are common after IPOs to prevent price manipulation. In addition, lock-up agreements are used in fiduciary relationships, inheritance communities and in restructuring transactions (e.g., under the Reorganization Act). In legal disputes, lock-up agreements may also serve as a means of securing claims or as part of settlement agreements.
What provisions should a lock-up agreement include at a minimum?
A lock-up agreement should, from a legal perspective, first specify the parties and precisely describe the subject matter of the agreement. Furthermore, the start and duration of the lock-up must be clearly defined. The specific rights and obligations of the parties, the type and scope of the lock-up (e.g., prohibition of sale, encumbrance, or voting rights) as well as possible exceptions and modalities for early termination should be regulated in detail. It is also important to agree on sanctions in the event of a breach, such as contractual penalties and claims for damages. It may be advisable to stipulate registration of the lock-up in public registers to achieve third-party effect. Finally, consideration should also be given to any consent or notification requirements, severability clauses, the applicable law, and place of jurisdiction.
How can a lock-up agreement be lawfully terminated or amended?
The termination or amendment of a lock-up agreement is governed by the contractual provisions and general legal requirements. The contract should expressly specify under which conditions and with what notice a termination or modification is possible (ordinary and extraordinary termination rights). In the absence of such provisions, statutory regulations apply: If the lock-up agreement is for a fixed term, it ends automatically upon expiry of the agreed period. In the case of contracts of indefinite duration, termination is generally possible at any time subject to a reasonable notice period unless a contractual minimum term has been agreed. An amicable amendment or termination is possible at any time within the framework of contractual freedom with the consent of all parties involved; in individual cases, a certain form, such as notarization, may be required. For lock-up agreements linked to register entries or official approvals, particular attention must be paid to the effectiveness requirements of such measures.
