What Is a Standstill Agreement?

A standstill agreement is pretty much what it sounds like. It requires two or more parties by mutual consent to legally stop whatever process they were in the middle of. The two most common uses for the agreement are in hostile takeover bids for companies and loan agreements.

Hostile Takeover Bid

In the case of a hostile takeover, a standstill agreement allows the company about to be taken over to stop proceedings and regroup. That usually includes developing a strategy to avoid the takeover or limit the takeover.

This can happen in one of two ways.The target company can agree to repurchase the shares of stock that are being purchased by the investor group, usually at a significantly higher figure. The target company also can request that the investor group limit its purchase of shares to protect against future hostile takeover bids.

Lender and Borrower

In this standstill agreement, the lender agrees to stop demanding repayment of a loan to allow a restructuring of the debt. This can be accomplished by lowering the interest rate and thus the monthly payments. However, the length of the contract would likely be extended to allow the lending institution to recoup the full loan amount. It avoids foreclosure and potential complete loss of the borrower and a lesser loss or even money repayment by the lender under the new terms.

Hostile Takeover Standstill Winners and Losers

Usually, shareholders of a company are not pleased if a standstill agreement is reached.
If the investor buys out the shares but agrees to sell them back to the company at a higher price, the shareholders usually don't receive as much of a windfall as they might expect if they agreed to sell their shares in a hostile takeover.
The investor company experiences the windfall in buying the shares at a lesser price than what they anticipated and then sells them back at a higher price.
Even if the investor company agrees to only a partial takeover, where it retains control of the agreed amount of stock, the current shareholders again come up short because the number of shares sold to the investors is reduced. The full value of their holdings are not realized.

Loan Standstill Agreement Winners and Losers

Both parties stand to gain. The lending institution could lose everything in a foreclosure, depending where in line it stands on the debt and the debtor stands to lose his home, car or business.

Final Word on Hostile Takeovers

There are a number of legal maneuvers that a company can employ before employing a standstill agreement, which usually leaves either the target company or shareholders unhappy. The defenses all come with their own problems but the names are descriptive, even humorous. Here are just a few:
The shark repellent: A company can change its bylaws that kick in only when a company changes ownership with the idea of making the business less profitable.
The lobster trap: This prohibits anyone with more than 10 percent ownership from converting securities to voting stock.
The poison pill: This tactic allows shareholders, but not the company attempting the takeover, to purchase shares of stock at reduced prices after the takeover