The various news articles are terribly written (esp. the original nypost article), so here's what I can tell as someone with some knowledge of Lyft stock:
* Lyft's market standoff agreement is written loosely. Often such agreements enumerate a wide range of prohibited behaviors with the underlying stock during the lockup, banning all sorts of direct or indirect sells, hedges, hypothecation, etc. of the underlying stock. Lyft merely bans "selling or otherwise disposing" the company stock.
* Lyft has claimed (in emails to investors) that any transaction that transfers "economic interest" of the stock are prohibited.
So:
1. Via "https://nypost.com/2019/04/05/lyft-threatens-morgan-stanley-..., It looks like Morgan Stanley might have created a vehicle/security that inversely tracks Lyft. So the Lyft investors aren't per se shorting Lyft; MS is. This toes the line (as it is an indirect short), but I'd love to see legal experts weigh in.
2. Even then, I'm finding Lyft's position hard to rationalize. How does an agreement to ban sales bar any form of economic interest reduction? (e.g. buying puts, writing calls, hypothecating, etc.) I would think investors could execute equity collars on their Lyft position all they want per the agreement (and Morgan Stanley could be their counter-party), but Lyft is claiming otherwise.
From https://www.bloomberg.com/opinion/articles/2019-04-04/token-...
Update: Note that it is carefully worded: "Our directors, executive officers and holders of a substantial portion of our capital stock and securities convertible into our capital stock".
What probably happened is that the company required holders of only a "substantial portion" of stock to sign updated agreements with the underwriters. Neither I nor any of my Lyft stockholding friends ever entered into such an agreement (and Lyft isn't claiming that we, as minor shareholders, did). So as far as I can tell, nothing blocks us from hedging with Morgan Stanley or otherwise.
(Original post was thinking the S1 is wrong; it is not)
The issue (and, yes, the drafting of the agreement you point to may make this murkier than would generally be the case) sounds like tortious interferenxe. Supposing MS did create a shorting product for Lyft pre-IPO investors, and supposing that the pre-IPO investors are, as a class, prohibited from engaging with that product by contract with Lyft, and supposing MS knew about that prohibition, that would seem to be the issue.
Also short selling is far more risky than taking the long side. On the long side, your downside is the money you invested (if the price goes to zero). On the short side, your downside is infinite (if the price keeps going up).
Companies complain about short sellers when they’re having cash flow problems and are dependent on the public markets to raise $ (by issuing new shares or in a bond offering), dto fund their operations. Short sellers can increase the cost of the company to raise money (eg if the company has a bond offering they may have to pay a higher interest rate if tons of shorts effectively lower the share price of the company).
But what possible charge could Lyft bring against ms?
It’s not illegal for an investment bank to short a company nor is it illegal for them to write a bespoke contract that let The holder lock in a price for ther shares as long as they weren’t the ipo underwriter.
It’s also not uncommon for a hedge fund to buy a bespoke put on a company Colton an investment bank, I mean writing this type of instrument is a part of their trading desks business.
Also this fails a simple occam’s razor test once MS denied this.
> tortious interference with the lock-up agreements
https://nypost.com/2019/04/05/lyft-threatens-morgan-stanley-... https://techcrunch.com/2019/04/05/morgan-stanley-which-is-un... https://www.theinformation.com/articles/lyft-threatened-morg...
The NYPost story includes the detail "We bought stock in a special acquisition vehicle and then the individual investors in the special acquisition vehicle shorted shares through Morgan Stanley ... Pre-IPO investors are contractually barred from reducing their “economic interest” in Lyft for six months, which includes shorting the stock. But sources say Lyft investors worked around the lock-up language by positioning the bets so that they won’t benefit from a decline or a rise in the stock. Instead, they simply lock in their IPO gains, which were significant."
Sounds like they were reducing their economic interest.
Obviously, if the investor engages in a transaction that leads to them to not benefiting from a rise in the stock, they've reduced their economic interest!
The answer (as I note elsewhere) is that the investors believe Lyft's lock-up language does not per se bar them from reducing "economic interest". The loose agreement only bars selling and presumably short-selling shares.
You've put your finger on the core of the legal dispute, what "reducing economic interest" means. The reporter did an excellent job explaining that. Now it'll be up to a court to figure it out.
If Lyft IPO price had been lower (... or more reasonable) this problem would not exist.
