Turkish lock-up undertakings in public offerings

1. General

Various mechanisms are employed in public offering processes to establish investor confidence and preserve the stability of share prices. One such mechanism is the arrangement known as a “lock-up undertaking“, which refers to the undertaking by the issuer and the existing shareholders of the issuer not to sell, transfer, or otherwise dispose of their shares for a specified period. Lock-up undertakings are essentially aimed at preventing a sudden and intensive supply of shares to the market following a public offering, thereby serving to maintain the supply-demand balance and ensure price stability.

Lock-up undertakings are of particular significance with respect to initial public offerings, as they influence market dynamics by restricting the supply of shares to the market for a certain period following the public offering. Indeed, the simultaneous release of such shares into the market after a public offering may create an oversupply, leading to declines in share prices and causing losses to investors who participated in the public offering. In this context, lock-up undertakings provide a certain degree of protection to investors participating in the public offering and contribute to maintaining the market value of the issuer at a reasonable level in the post-offering period.

2. Legal framework

 2.1. Statutory lock-up obligations

The regulations concerning lock-up undertakings are primarily set forth in the Turkish Capital Markets Board’s (the “CMB“) Communiqué on Shares (VII-128.1) (the “Communiqué“). Pursuant to Article 8 of the Communiqué, shareholders holding 10% or more of the issuer’s existing share capital as of the date of approval of the prospectus by the CMB, as well as shareholders holding management control of the issuer regardless of their shareholding ratio, may not sell their shares on  Borsa İstanbul A.Ş. (“Borsa İstanbul”) at a price below the public offering price for a period of one year from the date on which the shares commence trading on Borsa İstanbul, and may not subject the shares to any transaction that would create such result.

The Communiqué does not prohibit the sale of the relevant shares by such existing shareholders through private sale and wholesale transactions on Borsa İstanbul at a price below the public offering price, and also excludes from the scope of this undertaking the sale of shares purchased from the market following the public offering.

In addition, the CMB, through its Principle Decision numbered i-SPK.128.23 (dated 19/09/2024, decision no. 1508) (the “Principle Decision“) has, in addition to the restrictions set forth in Article 8 of the Communiqué, prohibited existing shareholders from selling their shares for a period of 180 days from the date of approval of the prospectus by the CMB, regardless of the sale price, not only through sales on Borsa İstanbul but also through private sale and wholesale transactions and even outside of Borsa İstanbul, as well as from transferring such shares to other investor accounts. Furthermore, new investors who acquired shares through the public offering have also been made subject to the same restrictions for a period of 90 days from the date the shares were credited to their investor accounts, excluding sales on Borsa İstanbul.

2.2. Contractual lock-up undertakings

In practice, the underwriting agreements entered into between the investment firms intermediating the public offering process and the existing shareholders and the issuer typically include lock-up undertakings for a period of one year. Additionally, the CMB, during the public offering application process, requests an undertaking from all existing shareholders (regardless of their shareholding ratio or management control) and from the issuer that they will not offer or sell their existing shares on Borsa İstanbul or subject them to a public offering, or carry out any transaction that would produce such a result for a period of one year from the date on which the shares commence trading on Borsa İstanbul, regardless of the sale price. Existing shareholders also undertake, in line with the Principle Decision, not to sell their shares even off-exchange, not to transfer them to other investor accounts, and not to subject them to sale transactions through private sale and wholesale transactions on Borsa İstanbul for a period of one year from the date of approval of the prospectus by the CMB. Consequently, the 180-day period envisaged by the Principle Decision, which restricts the possibility of sale or transfer of existing shares on Borsa İstanbul (through the open market, private sale, or wholesale transactions) or off-exchange, is effectively extended to one year.

On the other hand, although not stipulated in the legislation, in practice the CMB also obtains an undertaking from the issuer that no capital increase (whether rights issue, bonus, or private placement) will be carried out, and that its shares in its own share capital will not be offered for sale or subjected to a public offering on the Borsa İstanbul for a period of one year from the date on which the shares commence trading on Borsa İstanbul. However, this restriction naturally does not apply to shares that the issuer may acquire as a result of price stabilization activities or under a share buyback program.

3. Breach of the undertaking and its consequences

In the event of a breach of lock-up undertakings, both legal and practical consequences arise. From a legal perspective, breaches of statutory undertakings are subject to administrative sanctions by the CMB. Such sanctions include administrative fines, trading bans on Borsa İstanbul, and other administrative measures. In the case of a breach of contractual undertakings, sanctions such as penalty clauses, liability for damages, and termination of the agreement may come into effect.

A breach of the undertaking may also practically lead to a loss of confidence in the market, thereby adversely affecting share prices and damaging the reputation of the issuer. It should also not be overlooked that a breach may pave the way for other shareholders to seek release from their own undertakings, and that such a situation could create a domino effect, leading to selling pressure in the market.

4. Issues encountered in practice

The effects of the expiration of the lock-up period on the market stand out as a matter that requires careful assessment. The possibility that existing shareholders may simultaneously offer their shares for sale upon the expiration of the lock-up period gives rise to a phenomenon known as the “lock-up expiry effect,” which may lead to declines in share prices. In order to mitigate this effect, it is considered that actions such as publicly announcing the expiration date of the lock-up period as a reminder and informing market participants may be a viable option.

5. Conclusion

Lock-up undertakings constitute an important mechanism for the sound functioning of public offering processes and the establishment of investor confidence. These undertakings, shaped through both statutory and contractual arrangements, contribute to market stability by ensuring that the supply of shares following a public offering is carried out in a controlled manner.

Nevertheless, it is important that a fair balance be struck among the interests of the issuer, existing shareholders, and investors in determining the scope and duration of lock-up undertakings. Achieving this balance plays a decisive role in the success of public offering processes and effective functioning of capital markets.