Uber and Pinterest pore over their IPO lock-up agreements

Some big US companies poised to go public including Uber and Pinterest are poring over agreements with their shareholders, amid rising concern over the performance of Lyft following a splashy stock market debut late last month.

Lyft, whose shares initially jumped but have since stalled well below the offer price, last week threatened Morgan Stanley with legal action over a report that the investment bank arranged so-called short sales for investors who had bought shares before the initial public offering, according to a letter obtained by the Financial Times.

Typically, such investors are constrained from selling or hedging their positions for a set period of time after public listings, often six months. Short sales are bets that the price of a stock will fall.

As a result of Lyft’s rocky performance, Wall Street bankers, lawyers and their clients are making sure that companies’ “lock-up” agreements are airtight, according to several people with knowledge of the matter.

The list includes Uber, Lyft’s ride-hailing rival, which is aiming to raise $10bn when it lists on the New York Stock Exchange next month, and Pinterest, the image-sharing platform that is set to debut on the NYSE next week.

Uber and Pinterest declined to comment.

“Everybody is taking a fresh look at these agreements and making sure they have the desired effect,” said one Wall Street banker. “[Lock-up language] is now just part of the discussion, at the top of the list.”

Speculation over the high volume of short-selling interest in Lyft has gripped Wall Street since the stock’s March 29 debut on Nasdaq.

Short-selling interest totalled the equivalent of almost 40 per cent of the float by the end of the second day of trading, according to S3 Partners. That is roughly double the share of negative bets that Snap saw in its first few days, and much higher than older-school companies such as Levi Strauss, where shorts held less than 2 per cent.

On Wednesday in New York shares in Lyft closed at $60.12 each, down more than 16 per cent from the IPO price.

In an April 2 letter to Morgan Stanley, Lyft accused the bank of marketing a product allowing Lyft investors who held shares before its IPO to get returns from shorting the stock in public trading. Lyft said that would violate the terms of its lock-up agreements.

Lyft declined to comment. Its letter cited an April 1 article in the New York Post that claimed Morgan Stanley was among brokerages pitching a short product to Lyft investors. If those claims were true, Lyft said, the bank would be intentionally interfering in Lyft’s and its underwriters’ contracts with shareholders. Lyft demanded the bank stop marketing any such product or transaction and said it reserved the right to take legal action.

Morgan Stanley, which is the lead underwriter for rival Uber, denied the allegations.

“Morgan Stanley did not market or execute directly or indirectly a sale, short sale, hedge, swap or transfer of risk or value associated with Lyft stock or any Lyft shareholder identified by the company or otherwise known to us to be the subject of a Lyft lock-up agreement,” a spokesperson said about last week’s article.

“Our firm’s activity has been in the normal course of market making and any suggestion that Morgan Stanley has engaged in an effort to apply short pressure to Lyft is false.”
Such lock-up agreements were long considered to be standard, even though the precise language may differ slightly bank to bank and deal to deal.

“Lock-ups serve a very important function in the IPO process: signals of commitment that the company is not dumping its stock on the public market at an inflated price,” said Joseph Grundfest, a professor at Stanford Law School and a former commissioner at the US Securities and Exchange Commission.

“Investors and employees covered by the agreement commit to hold . . . and to take that market risk as a signal of commitment. If it is possible to hedge your exposure through derivatives or other transactions that would defeat the purpose.”