Lock-up clause in a shareholders' agreement

What is a lock-up clause?

Legal definition

A lock-up clause prohibits one or more shareholders from transferring their shares for a fixed period. Legal doctrine also refers to it as a non-transfer clause; the term used in English-speaking jurisdictions is standstill agreement. It appears either in the company's articles of association or in an extra-statutory shareholders' agreement.

This clause directly restricts the principle of free transferability of shares. French law therefore strictly governs its drafting. In a SAS (Societe par Actions Simplifiee), article L227-13 of the French Commercial Code sets the maximum duration at ten years. In other corporate forms, article 900-1 of the French Civil Code requires a serious and legitimate justification, as well as a reasonable duration.

The clause may apply to all or part of the shares held by a shareholder. It may target all shareholders or only specific ones. It may prohibit all transfers or only transfers to third parties, leaving transfers between existing shareholders unrestricted.

Why include it in a shareholders' agreement

A shareholders' agreement without a lock-up clause exposesevery signatory to the sudden departure of a key shareholder. Three concreteobjectives justify its inclusion.

Stabilising ownership during a critical phase is the mostcommon use case. An early-stage company depends on its founders during thefirst years of operation. An investment fund depends on its sponsors during theinvestment period. Keeping the core team locked in protects the company'soperating continuity.

Reassuring incoming investors is the second objective. Abusiness angel or family office rarely agrees to invest if founders can exitthe next day. The lock-up clause materialises their commitment.

Preventing uncontrolled dilution comes third. A shareholderwho transfers their stake to a hostile third party disrupts the existingbalance. The clause prevents this scenario for its full duration.

Without a lock-up clause, nothing prevents a shareholder from  transferring their shares the day after the agreement is signed.

To understand how this clause interacts with others, see our complete guide to the shareholders' agreement.

What is the maximum duration of a lock-up clause?

In a SAS, ten years maximum. In other corporate forms, a reasonable duration assessed by the courts, generally three to five years in practice.

Ten-year cap in a SAS: article L227-13 of the French Commercial Code

Article L227-13 of the French Commercial Code sets a clear rule for simplified joint-stock companies. The articles of association may provide for the non-transferability of shares for a period not exceeding ten years. This provision is a matter of public policy.

Public policy status means that neither the articles nor a shareholders' agreement can override it. No contractual arrangement can extend beyond this cap. A clause providing for twelve years would be deemed unwritten for the portion exceeding ten years.

Automatic renewal is also excluded. Shareholders cannot tacitly renew the clause after ten years. A new formalised collective decision is required to adopt a new clause after expiry.

Beyond ten years in a SAS, the clause is deemed unwritten and the shares become freely transferable again.

Reasonable duration in other corporate forms

SARLs, SCIs, and SAs have no equivalent statutory cap. The validity of a lock-up clause in these structures rests on the court's assessment of its duration. The criterion is whether the duration is reasonable given the stated justification.

In practice, durations typically range from three to five years for standard operating companies. Some agreements provide for longer periods when the justification warrants it, for example, a structured loan repayment period or a fund lock-up period.

Courts assess reasonableness on a case-by-case basis. An excessive duration exposes the agreement to partial voidance. To secure the drafting, the serious and legitimate justification must be expressly stated in the clause.

Conditions of validity

Outside a SAS, the clause must rest on a legitimate and serious justification and remain time-limited. In a SAS, only the time limit is required.

Legitimate and serious justification (article 900-1 of the French Civil Code)

Article 900-1 of the French Civil Code sets two cumulativeconditions of validity. The first is temporal, already covered above. Thesecond requires a serious and legitimate interest justifying the clause.

This requirement applies to SARLs, SCIs, and SAs. It does notapply to SAS structures, given the contractual freedom established by articleL227-13. This distinction is essential when choosing the corporate form of theinvestment vehicle.

A legitimate justification may be ownership stability during agrowth phase. It may also be the guarantee offered to a creditor within a debtstructuring. Or it may be alignment of interests between founders and newincoming investors.

The justification must be formally stated in the clause or inthe preamble of the agreement. A clause without a stated justification isexposed to later challenge.

Proportionality of the clause

The lock-up clause must remain proportionate to the interests it protects. A clause that is too broad in scope or too long in duration may be requalified by the court.

The main risk is qualification as a leonine clause. A leonine clause is one that deprives a shareholder of all substantive rights over their shares. The court sets aside such a clause without voiding the rest of the agreement.

Three parameters determine proportionality: the duration must match the stated justification; the scope must target the shares and transactions genuinely concerned; and exceptions must allow for legitimate family or estate transfers.

A disproportionate lock-up clause is qualified as leonine and set aside by the court.

Articles of association or shareholders' agreement: where to place the clause?

In the articles of association for maximum protection, where violation renders the sale void. In the shareholders' agreement for confidentiality, at the cost of a weaker sanction limited to damages.

Statutory clause: sale is void in case of violation

A lock-up clause inserted in the articles of association produces the strongest legal effects. The articles are binding on third parties through their publication at the commercial and companies registry. Any person may consult the articles and verify the clause.

The sanction for non-compliance is the most severe available in company law. A sale made in violation of a statutory lock-up clause is void. The transaction never legally existed, the shares remain the property of the transferor.

This legal force comes at a cost: loss of confidentiality. The contractual terms between shareholders become public. The statutory option suits structural clauses that shareholders accept making public.

Extra-statutory clause: confidentiality and damages

A lock-up clause appearing only in the shareholders' agreement operates under a different regime. The agreement is not published; its binding force rests on article 1103 of the French Civil Code between its signatories alone.

Confidentiality is total. No third party has access to the agreement's content. This discretion is valued by founders, institutional investors, and family offices.

The sanction for non-compliance is weaker. The sale is not voided; a good-faith buyer retains the shares. Only damages may be claimed from the breaching transferor, under article 1231-1 of the French Civil Code.

The loss is often difficult to quantify. The injured party must prove the damage suffered and its causal link to the violation. This difficulty weakens the practical protection of an extra-statutory clause.

The choice between articles of association and shareholders' agreement depends on the level of protection sought and the degree of confidentiality required.

Lock-up clause vs other shareholders' agreement clauses

Lock-up clause vs approval clause

Both lock-up and approval clauses protect the composition of the share capital, but through opposite approaches. The lock-up clause outright prohibits the transfer of shares for a fixed period. The approval clause conditions any transfer on the prior consent of the other shareholders.

The lock-up blocks; the approval filters. The first is more protective but more rigid. The second allows shareholders to exit, provided a new entrant is collectively accepted.

The two clauses are not mutually exclusive. A well-drafted shareholders' agreement combines both in sequence: a lock-up for three to five years to stabilise the core group, followed by an approval clause thereafter.

For a detailed analysis of the second mechanism, see our article on the approval clause in shareholders' agreements.

Lock-up clause vs pre-emption clause

A pre-emption clause gives existing shareholders a priority right to purchase. If a signatory wants to transfer their shares, the others have a period to buy them back first.

The two mechanisms work together. The lock-up prevents any transfer during a defined period. The pre-emption right activates once the transfer becomes permitted again. This combination locks the evolution of the share capital over time and organises internal transfers when they become authorised.

Sanctions for violation of the clause

Sanctions by clause location

The sanction for a transfer made in violation of a lock-up clause varies depending on where the clause appears.

The statutory SAS clause remains the most effective. Voidance of the sale restores the parties to their prior position. The third-party buyer loses the shares, the transferor recovers them, and the sale price is returned.

The extra-statutory clause is limited to financial compensation. The third-party buyer retains the shares, unless their complicity in the breach can be proven. The injured party's loss remains to be demonstrated precisely.

The sanction depends on the clause location: sale voidance for a statutory clause, damages for an extra-statutory clause.

How to lift a lock-up clause before its expiry

A lock-up clause may be lifted before its term in certain situations. Lifting may occur through a collective decision of shareholders in accordance with the procedures set out in the articles or agreement. If no procedure is specified, unanimity of all signatories is required.

Judicial lifting remains possible if the original justification has disappeared. A court may order the lifting when the protected interest no longer exists, for example, after full repayment of a loan initially secured by the clause.

The lifting must be formally recorded in a written document. This formalisation secures any subsequent transfer of the shares.

Lock-up clause in an investment vehicle

SPV and club deal: locking the sponsor core

An SPV (Special Purpose Vehicle) pools co-investors around a single asset. A club deal brings together a small group of investors on a specific project. In both cases, sponsor stability is a strong signal for incoming co-investors.

Consider a real estate developer who structures an SPV to acquire an asset and brings in five private co-investors. Without a lock-up clause, nothing prevents the developer from transferring their shares the day after closing.

A lock-up clause locks the sponsor's position until project exit. The duration is typically three to five years for a real estate transaction. Co-investors obtain assurance that the original sponsor will remain committed until refinancing or disposal.

The same logic applies to a business angel who co-invests alongside their network in a start-up.

To understand which vehicle suits your profile and project, see our guide on investment vehicles and structure selection.

FPCI and SLP: alignment with fund life

FPCI (French Professional Private Equity Fund) and SLP (FrenchLimited Partnership) structures typically run for eight to ten years. Theten-year cap under article L227-13 aligns precisely with this timeframe.

The GP (General Partner) structuring a FPCI or SLP is subjectto LP (Limited Partner) expectations. LPs want a stable sponsor present fromthe first closing to the final liquidation. A lock-up clause on the GP's unitsreassures LPs and facilitates fundraising.

The clause locks the GP throughout the investment period,typically the first five years of the fund. Beyond that, transfer may becomepossible but is often still subject to LP approval. This lock-up-then-approvalsequence reflects standard European institutional fund practice.

In an investment vehicle, the lock-up clause aligns sponsor  commitment duration with fund life.

How Overlord structures your shareholders' agreement

Overlord structures turnkey investment vehicles for GPs, realestate promoters, founders, and family offices. Drafting the shareholders'agreement is an integral part of creating every vehicle.

Our legal team integrates the essential clauses from the firstversion of the agreement: lock-up clause, approval clause, pre-emption clause,drag-along, tag-along, and bad/good leaver mechanisms. Each mechanism iscalibrated to your project and corporate form.

The agreement is drafted by the legal team founded by Gaspardde Monclin, a business lawyer trained in Paris, London, and New York. AMFregulatory compliance, digital onboarding, and KYC/AML checks are integratedinto the vehicle with no need for a separate external firm.

You retain control over the strategic choices in youragreement. We handle the drafting, compliance, and vehicle creation.

To start your project, see our investment vehicle creation offering.

FAQ: lock-up clause in a shareholders' agreement

What is a lock-up clause in a shareholders' agreement?

A contractual provision that prevents a shareholder fromtransferring their shares for a defined period. It may appear in the articlesof association or in the shareholders' agreement. It aims to stabiliseownership during a critical phase of the company's development.

What is the maximum duration of a lock-up clause?

Ten years in a SAS, under article L227-13 of the FrenchCommercial Code. This duration is a matter of public policy and cannot beoverridden by the articles or the agreement. In other corporate forms, theduration must be reasonable, generally three to five years.

Is a legitimate justification required to draft a lock-up clause?

Yes, in SARLs, SCIs, and SAs, under article 900-1 of theFrench Civil Code. No, in a SAS: only the ten-year limitation is required underarticle L227-13. The justification protects shareholders against adisproportionate restriction on their right to transfer shares.

What is the difference between a lock-up clause and an approval clause?

The lock-up clause prohibits any transfer for a definedperiod. The approval clause conditions the transfer on the consent of the othershareholders. Both are complementary within the same shareholders' agreement.

What are the consequences of transferring shares in breach of a lock-upclause?

If the clause appears in a SAS's articles of association, thesale is void. If it appears only in the shareholders' agreement, the sanctionis limited to damages under article 1231-1 of the French Civil Code.

Is it better to place the clause in the articles of association or in theshareholders' agreement?

In the articles of association for maximum protection, whereviolation renders the sale void. In the shareholders' agreement forconfidentiality, at the cost of a weaker sanction. The choice depends on thelevel of protection sought.

How can a lock-up clause be lifted before its expiry?

Either through a collective decision of shareholders inaccordance with the procedures in the articles or agreement, or through a courtorder if the original justification has disappeared. The lifting must beformally recorded in writing to secure any subsequent transfer.

Is a lock-up clause useful for an SPV or an FPCI?

Yes. It locks the sponsor core during the investment periodand reassures incoming co-investors. The ten-year duration aligns with thestandard life of a private equity fund.

Conclusion

The lock-up clause remains one of the most powerfulcontractual tools for stabilising ownership. Three key points to remember:duration is capped at ten years in a SAS under article L227-13; a legitimateand serious justification is required outside a SAS under article 900-1; thechoice between articles of association and shareholders' agreement determinesthe strength of the sanction. A poorly drafted clause works against itssignatories. A well-drafted clause locks the trajectory of a project throughoutits critical phase.