Standstill Agreement (Explained: All You Need To Know)

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What Is A Standstill Agreement

In corporate finance, a standstill agreement refers to a contract where a target company and a hostile takeover bidder agree on how the bidder can purchase shares, cast votes, or sell the target’s shares.

In other words, a standstill agreement is a defensive strategy used by companies that are targeted by a hostile takeover bid in an attempt to stall the takeover process or even stop it in full.

For example, a company (the acquirer) may submit a hostile takeover bid to buy the shares of another company (the target).

To protect itself, the target company negotiates a standstill agreement with the acquirer on how many stocks it can purchase, how many it can dispose of, how it can cast its votes, and so on.

This allows the target company more time to implement other defenses or take more control over the deal.

For a hostile bidder to agree on a standstill agreement, it will usually expect something in return.

Typically, the target will accept to share confidential financial information with the acquirer in exchange for the standstill or to buy back the shares at a premium (although it may not be permitted in some jurisdictions).

The ultimate objective of the standstill agreement is to give the target company more time to think about the deal, take more control over the deal, or implement additional M&A defenses.

Keep reading as I will further break down the meaning of a standstill agreement.

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Why Is A Standstill Agreement Important

Standstill agreements are quite important in business and M&A as it allows a target company to take control over the hostile takeover bid and potentially stall the process.

The main objective pursued by the standstill agreement is to prevent the acquirer from moving forward with its hostile takeover bid, at least for a certain period of time.

Very often, the acquirer will agree to limit its holding in the target company in exchange for the communication of confidential financial information.

This is a mutually beneficial agreement as the acquirer is able to access the target’s financial information to further assess the merits of the transaction and the target can win more time to adopt a strategy against the hostile takeover bid or find a way to better manage the takeover process.

In addition to limiting the acquirer’s holdings, the standstill agreement can also dictate how the acquirer will exercise its votes.

This prevents the launch of a proxy fight between different shareholder factions in the target company.

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Types of Standstill Agreements

You can find standstill agreements in different disciplines or areas such as mergers and acquisitions, banking, litigation, or others.

You can negotiate a standstill agreement in practically any area of a business or any party.

Let’s look at the three most common types of standstill agreements you may find in business.

Standstill Agreement M&A

The first type of standstill agreement that you may see in business is in the area of mergers and acquisitions.

When a Black Knight submits a hostile takeover bid to purchase the shares of a target company, the bidder and target may choose to agree on the terms of a standstill agreement for a period of time.

The Black Knight will agree not to pursue its hostile takeover bid for some time in exchange for a benefit of some kind (typically the target company’s financials or other internal records).

Standstill Agreement Litigation

A standstill agreement in litigation is an agreement between two parties where they agree to suspend or extend the statute of limitations period for some time.

Typically, a standstill agreement is reached prior to the filing of a claim or lawsuit.

The parties will outline their potential cause of action and agree to suspend the statute of limitations “clock”.

This could be a useful strategy when a party is looking to further assess the viability of filing a claim and enable the parties to limit their legal fees.

Standstill Agreement Loans

You can also have a standstill agreement in the context of a loan or mortgage.

In this context, the lender and the borrower agree to pause the borrower’s obligation to make payments allowing it to restructure its debt obligations.

Typically, the lender will accept a standstill agreement to allow distressed borrowers to restructure their liabilities but in exchange will impose certain obligations and undertakings on the borrower.

Lenders may accept to negotiate a standstill agreement as they will prefer getting some money from the distressed borrower than nothing if the borrower goes bankrupt.

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Standstill Agreement Terms

In M&A, companies will enter into a standstill agreement to pause a hostile takeover bid.

As part of the standstill agreement terms, the hostile acquirer will agree to limit the number of shares it will purchase in the target for some time.

The acquirer can also agree to restrict the manner it will dispose of its shares or how it will vote.

To agree to such restrictions, the target company will need to offer something to the acquirer in return.

In some cases, the target company will accept to pay the acquirer financial compensation, buy back shares at a premium if authorized by local laws, or share internal financial information.

The parties can agree that the “standstill” will last for a period of anywhere between a few months to two or three years.

In some cases, the parties can also agree that the standstill agreement will end if the acquirer reduces its holdings below a certain percentage, like 5%.

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Takeaways 

So there you have it folks!

What does a standstill agreement mean?

In a nutshell, a standstill agreement is a type of agreement where the parties agree to “pause” or “halt” something.

In mergers and acquisitions, the standstill agreement is used to pause a hostile takeover bid.

In litigation, a standstill agreement is used to halt the statute of limitations time period or extend it.

Take note that a standstill agreement is highly customizable and can be used in a broad range of business situations.

Now that you know what a standstill agreement is and how it works, good luck with your research!

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