A standstill agreement, also known as a lock-up agreement or a freeze-out agreement, is a legal contract between two parties that aims to restrict one party from taking actions that could harm the other party during the negotiation or merger and acquisition (M&A) process.
In a typical M&A deal, the acquiring company may want to limit the target company's actions to prevent it from seeking other suitors while the acquisition is being negotiated. A standstill agreement is used to prevent the target company from taking certain actions, such as entering into new contracts or making major investments, that could negatively impact the acquisition deal. The agreement is also designed to ensure that confidential information exchanged between the two parties remains confidential and is not used by the target company to gain an unfair advantage.
The standstill agreement usually has a specified time period during which the target company agrees to abide by the restrictions outlined in the agreement. It may also include provisions for penalties if the target company violates the terms of the agreement.
Standstill agreements are commonly used in hostile takeovers or when a company is in financial distress and is seeking a buyer. In these situations, the target company may be vulnerable to takeovers or may be in a weak bargaining position, making it essential to have an agreement in place that protects its interests.
An example of a standstill agreement is when two companies are considering a merger, but they are not yet ready to finalize the deal. In this case, the companies may enter into a standstill agreement to prevent any hostile takeovers or other disruptions during the negotiation period. The agreement may include provisions that prevent either party from acquiring more shares in the other company, making certain business decisions without the other party's approval, or disclosing confidential information to third parties. The standstill agreement may have a specific duration or remain in effect until the parties reach a final agreement or terminate the negotiations.
A standstill agreement helps to establish a more level playing field between the parties involved in an M&A deal or negotiation, allowing both sides to negotiate in good faith without fear of retaliation or sabotage.
Elements of a Standstill Agreement
A standstill agreement usually contains the following elements:
- Parties Involved: The agreement identifies the parties involved, including the company and the creditor(s).
- Effective Dates: The effective dates of the agreement, including the start and end dates, are specified.
- Terms and Conditions: The terms and conditions of the agreement, such as the specific obligations and responsibilities of both parties, are defined.
- Payment Terms: The payment terms, including the amount of debt owed, interest rates, and payment schedules, are typically included.
- Confidentiality: The agreement may contain confidentiality provisions to protect the sensitive information exchanged between the parties during negotiations.
- Duration and Termination: The duration of the agreement is specified, along with the conditions under which it may be terminated or extended.
- Governing Law: The agreement is governed by a specific jurisdiction's laws to ensure that both parties adhere to legal requirements.
- Consequences of Default: The agreement outlines the consequences if the debtor fails to meet the obligations outlined in the agreement.
Benefits and Drawbacks of a Standstill Agreement
A standstill agreement can have both benefits and drawbacks.
- Provides more time for parties to explore their options and find common ground.
- Can help to prevent a hostile takeover.
- Helps to protect the target company from aggressive moves by the acquiring company.
- Provides a more stable environment for the target company to continue operating during the negotiation period.
- The target company may lose potential gains that it could have received from a more aggressive bidder.
- It may limit the competitive bidding process, which could ultimately lead to a lower offer.
- It may provide the acquiring company with a tactical advantage in the long run, especially if the target company is in a vulnerable position.
- It may delay the resolution of the takeover process, which could lead to uncertainty and instability for both companies.