What Is a Standstill Agreement?

A standstill agreement is a contract that contains provisions that govern how a bidder of a company can purchase, dispose of, or vote stock of the target company. A standstill agreement can effectively stall or stop the process of a hostile takeover if the parties cannot negotiate a friendly deal.

The agreement is particularly important because the bidder will have had access to the target company's confidential financial information.

Key Takeaways

  • A standstill agreement is a contract that contains provisions that govern how a bidder of a company can purchase, dispose of, or vote stock of the target company.
  • A standstill agreement can effectively stall or stop the process of a hostile takeover if the parties cannot negotiate a friendly deal. 
  • A company that comes under pressure from an aggressive bidder or activist investor finds a standstill agreement helpful in blunting the unsolicited approach.

Understanding Standstill Agreements

A company that comes under pressure from an aggressive bidder or activist investor finds a standstill agreement helpful in blunting the unsolicited approach. The agreement gives the target company more control over the deal process by prescribing the bidder or investor's capacity to buy or sell the stock of the company or launch proxy contests.

A standstill agreement can also exist between a lender and borrower when the lender stops demanding a scheduled payment of interest or principal on a loan in order to give the borrower time to restructure its liabilities.

A standstill agreement is a form of anti-takeover measure.

In the banking world, a standstill agreement between a lender and borrower halts the contractual repayment schedule for a distressed borrower and forces certain actions that the borrower must undertake.

A new deal is negotiated during the standstill period that usually alters the loan's original repayment schedule. This is used as an alternative to bankruptcy or foreclosure when the borrower can't repay the loan. The standstill agreement allows the lender to salvage some value from the loan. In a foreclosure, the lender may receive nothing. By working with the borrower, the lender can improve its chances of getting repaid a portion of the outstanding debt.

Example of a Standstill Agreement

A recent example of two companies that signed such an agreement is Glencore plc, a Swiss-based commodities trader, and Bunge Ltd., a U.S. agricultural commodities trader. In May 2017, Glencore made an informal approach to buy Bunge. Shortly after, the parties reached a standstill agreement that prevents Glencore from accumulating shares or launching a formal bid for Bunge until a later date.

In 2019, the video game retailer GameStop signed a standstill agreement with a group of investors who wanted changes in the company's governance, believing the company had more intrinsic value than the stock's price reflected.

Other Standstill Agreements

In other areas of business, a standstill agreement can be virtually any agreement between parties in which both agree to pause the matter at hand for a specific length of time. This can be an agreement to postpone scheduled payments to help a business weather difficult market conditions, agreements to stop producing a product, agreements between governments, or many other types of arrangements.