Standstill: Overview, definition, and example
What is a standstill?
A standstill refers to an agreement or clause in which one party agrees to limit or refrain from certain actions for a specified period of time. These actions often involve acquiring additional shares, making a takeover bid, or engaging in competitive behaviors. Standstill agreements are commonly used in mergers and acquisitions (M&A), financing arrangements, and shareholder agreements to maintain stability and protect the interests of the parties involved.
For example, in an acquisition deal, the buyer may agree not to acquire additional shares of the target company beyond a specific percentage during the negotiation period.
Why is a standstill important?
A standstill is important because it provides protection and stability during sensitive negotiations or business arrangements. It prevents one party from gaining an unfair advantage or disrupting the process, ensuring that all parties can operate within clearly defined boundaries.
For companies involved in M&A, a standstill clause allows negotiations to proceed without the risk of one party attempting a hostile takeover. For shareholders or other stakeholders, it provides reassurance that their interests will not be undermined during the agreed-upon period.
Understanding standstill through an example
Imagine a company is negotiating a potential merger with a competitor. To facilitate open discussions, the competitor agrees to a standstill clause in which it promises not to purchase shares of the company or initiate a hostile takeover during the negotiation period. This ensures that the merger discussions can take place without undue pressure or interference.
In another example, a lender provides a standstill period during which it agrees not to enforce certain rights, such as foreclosure on collateral, while the borrower works to resolve a financial default. This temporary reprieve gives the borrower time to address the issue without immediate legal action.
An example of a standstill clause
Here’s how a standstill clause might appear in an agreement:
“The Party agrees that, for a period of [specified duration], it shall not, directly or indirectly, acquire additional shares, solicit proxies, or take any actions that could lead to a change in control of the Company without the prior written consent of the other Party. This standstill obligation shall terminate upon the occurrence of [specific event or condition].”
Conclusion
A standstill clause provides a framework for stability, fairness, and transparency in sensitive negotiations or business relationships. For businesses, it protects against disruptions and ensures that agreements can be reached without external pressure or competitive interference. For counterparties, it clarifies the scope of acceptable actions and promotes trust during the agreed period. Including a clear and enforceable standstill provision in agreements minimizes risks and enhances collaboration between parties.
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.