Standstill agreement: Overview, definition, and example
What is a standstill agreement?
A standstill agreement is a legal arrangement between parties where one party agrees to refrain from taking certain actions for a specified period. In the context of mergers, acquisitions, or business negotiations, a standstill agreement often prevents one party from acquiring additional shares, making hostile bids, or taking other competitive actions against another party. This type of agreement is used to maintain the status quo and allow time for negotiations, restructuring, or resolution of specific business issues without the risk of aggressive actions or changes.
For example, a company may enter into a standstill agreement with an investor to prevent the investor from increasing their stake in the company for a certain period while the company and investor negotiate potential terms for a strategic partnership.
Why is a standstill agreement important?
A standstill agreement is important because it provides stability and protects parties from unwanted or aggressive actions during a critical time in negotiations or transactions. It allows for a cooling-off period, giving both sides time to reach an agreement, assess options, or make strategic decisions without external pressures or disruptions. In the context of corporate transactions, such agreements are often used to prevent hostile takeovers or to ensure that a company can negotiate with potential acquirers or partners without the fear of an imminent hostile action.
Understanding standstill agreement through an example
Imagine a company is in the middle of negotiations to be acquired by a larger competitor. To prevent the competitor from acquiring additional shares or making an unsolicited offer, the company and the competitor may enter into a standstill agreement. This agreement might stipulate that the competitor agrees not to increase its ownership in the company for six months while both parties negotiate the terms of the acquisition. During this time, the company can focus on negotiating without the pressure of the competitor gaining more control.
In another example, an investor who holds a significant amount of shares in a company may agree to a standstill agreement with the company, ensuring that they will not attempt to buy out more shares or launch a takeover bid for a specific period while both parties work on a potential investment deal.
An example of a standstill agreement clause
Here’s how a standstill agreement clause might appear in a contract:
“For a period of [specified period], the Investor agrees not to acquire, directly or indirectly, any additional shares of the Company, nor take any actions that may result in a change of control of the Company, including making any tender offers or proxy contests. The parties further agree to negotiate in good faith towards a mutually agreeable transaction during this time.”
Conclusion
A standstill agreement is an essential tool for managing business negotiations, mergers, acquisitions, and corporate disputes. By temporarily freezing certain actions, it allows parties to focus on reaching a mutually beneficial agreement without the threat of hostile actions or external disruptions. Whether in the context of preventing takeovers or securing time for strategic discussions, standstill agreements provide a valuable safeguard in complex business dealings.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.