What is a Standstill Agreement?

Standstill Agreement

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Standstill Agreement

A standstill agreement is a formalized agreement between parties to stop (or “stand still” on) a specific action for a certain period. These agreements can be used in various situations, but they are commonly associated with mergers and acquisitions (M&A) and debt restructuring scenarios. Here are the key aspects of a standstill agreement in different contexts:

  • Mergers and Acquisitions (M&A):
    • Purpose: In the context of M&A, a standstill agreement is often used to prevent a company from acquiring another company or increasing its shareholding for a specified period.
    • Scenario: Company A may be interested in acquiring Company B. Company B, however, might not be ready or willing to be acquired immediately. To ensure Company A doesn’t make a hostile takeover attempt or purchase its shares in the open market, Company B may ask Company A to sign a standstill agreement.
    • Benefits: It gives Company B time to explore other options, arrange its affairs, or even negotiate terms with Company A without the immediate threat of a takeover.
  • Debt Restructuring:
    • Purpose: Standstill agreements can also be used in situations where a debtor is having difficulty repaying its loans.
    • Scenario: A company (the debtor) might be facing temporary financial difficulties and approach its creditors to negotiate new repayment terms.
    • Benefits: Creditors agree not to take any collection or enforcement action for a specified period, allowing the debtor time to reorganize its finances, potentially secure additional funding, or negotiate new loan terms.
  • Other Situations:
    • Standstill agreements can also be used in litigation or dispute resolution scenarios, where parties agree not to advance their claims for a specific period while they negotiate or seek an out-of-court settlement.

It’s important to understand that the specifics of a standstill agreement, such as its duration, what actions are prohibited, any exceptions, and potential penalties for breach, will vary based on the particular situation and the negotiations between the parties. It’s always advisable for parties considering a standstill agreement to consult with legal professionals to ensure their interests are adequately protected.

Example of a Standstill Agreement

Let’s delve into an example involving a potential merger situation.

Scenario: Potential Acquisition of Company B by Company A

Background: Company A has shown interest in acquiring Company B. While Company B sees potential benefits in merging with Company A, they’re also considering other strategic options, including partnerships with other companies or pursuing growth independently. Company B is worried that Company A might attempt a hostile takeover before they decide on their strategic direction.

Standstill Agreement:

  • Duration: The agreement stipulates that for the next 18 months, Company A will not purchase any shares of Company B in the open market or make any moves for a hostile takeover.
  • Purchase Limitation: Company A agrees not to acquire any more of Company B’s stock beyond its current holding during the standstill period. This clause ensures that Company A can’t gradually accumulate a controlling stake in Company B during this time.
  • No Public Announcements: Both companies agree not to make any public announcements or comments about potential mergers or acquisitions relating to each other without mutual consent.
  • Exceptions: If a third party makes a move to acquire Company B, Company B would be allowed to engage in discussions with that party. However, Company B must notify Company A of such an event, and Company A might have rights to match or counter the third party’s offer.
  • Breach Penalties: If Company A breaches the standstill agreement, they will have to pay Company B a set fee, often termed as a “breakup fee” or “termination fee”.

Outcome: Company B gets the breathing space to consider its strategic options without the immediate pressure of a takeover from Company A. This time allows Company B to evaluate potential mergers, partnerships, or other growth avenues. Meanwhile, Company A gets assurance in the form of a penalty clause if Company B decides to merge with a different entity or if Company B violates the terms.

This example highlights how a standstill agreement can offer protection and strategic planning time for companies in the midst of potential M&A activities. However, the specific terms and clauses can vary widely based on each situation and the negotiating power of the involved parties.

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