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Lock-in Provision

Also known as: Lock-in Agreement, Lock-in Clause

Definition

A lock-in provision is a contractual restriction preventing shareholders from selling their company shares for a specified period, typically used to ensure founders and key shareholders remain committed to the business.

Understanding lock-in provisions is critical for business owners creating wills, as these restrictions can significantly affect how and when shares can be transferred to beneficiaries.

What Does Lock-in Provision Mean?

Lock-in provisions are contractual obligations rather than statutory requirements under UK law. Under the Companies Act 2006, shares are freely transferable unless restrictions are imposed through a company's articles of association or shareholders' agreement. Lock-in provisions typically appear in shareholders' agreements when venture capital investors come on board, in investment agreements with private equity firms, or in IPO lock-up agreements. They prevent shareholders from selling, transferring, or disposing of shares during the lock-in period—typically 2-5 years for private companies or 6-12 months for companies going public.

In practice, these provisions reassure investors that founders won't abandon the company mid-growth phase or immediately cash out. When Sarah and David co-founded a tech startup and secured £500,000 from a venture capital fund, their investment agreement included a 3-year lock-in. Sarah couldn't sell her 40% shareholding to anyone—even family members—for three years. Most agreements include "good leaver" and "bad leaver" provisions specifying outcomes when shareholders leave. Death, disability, and retirement typically qualify as good leaver events with favorable terms, while resignation or termination for cause triggers bad leaver provisions with potential share forfeiture.

For estate planning, most lock-in agreements treat death as a good leaver event, allowing shares to transfer to beneficiaries or triggering buyout provisions. However, terms vary dramatically between companies. Some include call options giving remaining shareholders the right to purchase shares at predetermined prices that may not reflect current market value. If your beneficiaries inherit shares subject to remaining lock-in periods or forced buyout provisions, they may face unexpected liquidity restrictions or receive cash instead of shares. This requires careful coordination between your will and shareholders' agreement.

Common Questions

"What is a lock-in provision and why would my company need one?" Lock-in provisions prevent shareholders from selling shares for a specified period (typically 2-5 years) to ensure key founders remain committed during critical growth phases and protect share price stability for investors.

"Can a lock-in provision affect what happens to my shares when I die?" Yes, significantly. Most agreements include clauses triggering 'good leaver' provisions allowing shares to transfer to beneficiaries, but some may require remaining shareholders to purchase shares at predetermined prices. This must be coordinated with your will.

"Are lock-in provisions legally enforceable in the UK?" Yes, as contractual obligations within shareholders' agreements. They must be clearly drafted, reasonable in duration and scope, and properly executed. Courts uphold provisions protecting legitimate business interests negotiated at arm's length with proper legal advice.

Common Misconceptions

Myth: Lock-in provisions are only relevant for IPOs and don't apply to private companies.

Reality: Lock-in provisions are extremely common in private company shareholders' agreements, particularly when venture capital or private equity investors are involved. Private company lock-ins are often longer (2-5 years) and more complex than IPO lock-ins, with detailed good leaver and bad leaver provisions affecting succession planning.

Myth: My will automatically overrides any lock-in provision on my shares when I die.

Reality: Lock-in provisions are contractual obligations that survive your death and bind your estate. While most agreements treat death as a good leaver event, your beneficiaries may still face restrictions, buyout obligations, or forced sales at predetermined prices. Your will cannot override these contractual restrictions. Proper coordination is essential.

  • Shareholders' Agreement: The primary legal document containing lock-in provisions, along with other shareholder rights and obligations including good leaver and bad leaver clauses.
  • Restrictive Covenant: Lock-in provisions are a specific type of restrictive covenant that restricts share transfers rather than competitive activities.
  • Company Shares: The asset subject to lock-in restrictions, which business owners must understand when planning estate distribution.
  • Business Succession Planning: Lock-in provisions are critical considerations in succession planning because they affect when and how shares can be transferred to the next generation.

Need Help with Your Will?

If you own company shares subject to lock-in provisions, understanding how these restrictions affect your estate planning is essential. Your will must coordinate with your shareholders' agreement to ensure your family receives fair value for your shares.

Create your will with confidence using WUHLD's guided platform. For just £99.99, you'll get your complete, legally binding will plus three expert guides. Preview your will free before paying anything—no credit card required.

Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.