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Standstill Agreement

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A standstill agreement is a legal document that puts restrictions on a bidder's ability to acquire, sell, or exercise voting rights over target company stock. Suppose the parties cannot agree; a standstill agreement can effectively block or end the hostile takeover process. The agreement is crucial because the bidder will access the target company's private financial data. Standstill agreements are frequently utilized in mergers and acquisitions in the United States because they stabilize the negotiating process. The main components, the drafting process, and the advantages of a standstill agreement are given below.

Steps to Draft a Standstill Agreement

When drafting a standstill agreement, it has to be precise to include all key legal details for the agreement to be thorough and binding. The following are essential components of a standstill agreement.

  1. Identify Parties and Purpose. Clear identification of the parties to the agreement, such as the business, shareholders, or potential investors, as well as the agreement's purpose, is essential. Give a brief explanation of the standstill agreement's goals and purpose.
  2. Define Standstill Period. Describe the period, usually measured in months or years, during which certain acts are prohibited. The agreement's time frame specifies when it goes into effect and when it expires.
  3. Outline Restrictive Provisions. Outline the acts or activities not permitted while the standstill is in effect, such as selling shares, buying more shares, or initiating a hostile takeover effort.
  4. Describe Voting Rights and Support. Describe any restrictions or requirements regarding voting rights during the standstill period. Indicate whether shareholders are expected to support specific initiatives or board candidates.
  5. Specify Details of the Agreement. The agreement's specifics are frequently the longest. All legally binding clauses negotiated by the parties may be included in these details. The agreement details expand on the summary and explanation of expectations. All parties must meet specific standards.
  6. Explain Termination Conditions. When constructing a standstill document, the termination conditions define when the standstill loses enforceability. It implies it specifies when the contract no longer applies to the real-life circumstances being regulated by the parties.
  7. Sign the Paper. To secure the agreement, representatives sign the paper. A company may have numerous signatories or a single person sign on its behalf. It confirms that both parties have read the contract and agree to its terms.
  8. Include Term and Scope. The agreement specifies the length of the standstill period and the activities or actions that shareholders are prohibited from engaging in during that time. It could include selling, acquiring, or mounting a hostile takeover effort.
  9. Handle Voting Rights. During the standstill phase, the agreement may handle voting rights. It can prevent shareholders from voting on certain issues or compel them to support specific proposals or board nominees.
  10. Spell Out Termination and Extensions Clauses. The agreement should spell out the terms and processes for ending the standstill period. If appropriate, it may also include measures for prolonging the standstill agreement.
  11. Contain Debt Collection Measures. Standstill agreements can also include restrictions that limit or delay debt collection actions. A lender, for example, may agree to temporarily postpone debt collection operations or refrain from pursuing legal action against the borrower for a set length of time.

Benefits of a Standstill Agreement

  • Provides Stability and Control: During talks, a standstill agreement provides stability by prohibiting disruptive actions by shareholders and possible investors, allowing the company to preserve control and focus on strategic decisions.
  • Protects from Hostile Takeovers: Standstill agreements can dissuade hostile takeover efforts by banning some activities and compelling shareholders to support the company's strategic ambitions.
  • Maintains Confidentiality: By containing confidentiality restrictions, a standstill agreement aims to prevent sensitive information from being exposed to competitors or the general public during the negotiation process.
  • Leverages in Negotiations: Standstill agreements can give the company negotiating power since shareholders or potential investors may be more receptive to conversations if they see benefits or opportunities after the agreement expires.
  • Gives Time for Evaluation: Standstill agreements give all parties more time to consider a proposed transaction's repercussions and long-term strategic fit.
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Applications of a Standstill Agreement

There are numerous occasions in which agreeing to a halt may be advantageous. The most typical types of stoppage circumstances are as follows. Some of its applications include.

  • Lender and Borrowers: It allows the borrower to renegotiate its liabilities over time. In contrast, the lender grants a moratorium on interest or principal payments on the loan.
  • Deferred Payment Standstill Agreement: A standstill agreement is between two parties to suspend a specific issue for a set period. In the context of a stressed borrower, a deferred payment may be agreed upon to provide some relief or flexibility to the borrower in meeting their repayment obligations.
  • International Standstill Agreement for Liability Suspension: At the international level, it can be an agreement between countries to maintain the current condition of things, in which a liability owed by one to the other is suspended for a certain period.
  • Acquiring Shares: If a firm believes a shareholder is attempting to buy enough shares to influence corporate decisions, it may seek to negotiate a halt. In this case, the corporation receives assurances that the shareholder will not purchase additional shares or will not surpass a certain threshold.
  • Loan Agreement: A borrower could seek to come to a halt with a lender to ease financial worries in the following ways. The borrower might get the time they need to fix their finances so they can make payments and make sure their loan is in good standing.
  • Debt Restructuring: In this situation, the borrowing firm may wish to prevent the lending company from requiring them to make the required payments. Thus, a standstill agreement can prevent litigation by preventing the borrowing firm from having the necessary time to develop the restructuring strategy.

Key Terms for Standstill Agreements

  • Non-Disclosure: The standstill agreement could have clauses that forbid the bidder from sharing any private information they may have learned during the negotiations.
  • No Solicitation: For a predetermined amount of time, the bidder may agree to refrain from actively contacting the shareholders or staff of the target company.
  • Voting and Tendering Restrictions: During the standstill period, the bidder may not acquire additional shares or exercise voting rights, depending on the terms of the standstill agreement.
  • Standstill Period: The length of the standstill period, during which the bidder is prohibited from executing certain acts, will be specified in the agreement.
  • Termination Rights: The standstill agreement will specify the circumstances in which any party may end the contract before the predetermined time.

Final Thoughts on Standstill Agreements

A standstill agreement, which enables parties to delay specific activities or responsibilities temporarily, is useful in some business circumstances. It offers a time of steadiness and inaction, frequently amid discussions or uncertain times. Standstill agreements can aid parties in preserving a cooperative atmosphere, exploring options, avoiding legal problems, or taking assertive moves. While the particulars of each standstill agreement may differ, the overall objective is to offer a brief pause so that parties can work towards a win-win solution. It is important to ensure that the parties expressly agree on the standstill's intended outcome and that the agreement's language accurately and consistently reflects that objective.

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