Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.
CEO and Founder of DealRoomThis post was originally published on October 19, 2022 and has been updated for relevancy on September 17, 2024.
From a purely legal perspective, mergers and acquisitions can be described as a collection of contracts. Every M&A transaction comes with a series of terms, clauses, and provisions. One such example is the standstill agreement (also referred to as the standstill provision).
This measure, which is sometimes included in a non-disclosure or confidentiality clause, is critical for both the buy-side and the sell-side to understand. In this post, we’ll review the specifics of the standstill agreement and how it affects the M&A process. Let’s jump in.
A standstill agreement is a contract provision that halts the involved parties from taking specific actions for a certain period of time. In M&A, a standstill agreement usually prevents a potential acquiring company from publicly announcing a bid for a target company, or from purchasing, selling, or voting stock from the target. In this sense, the standstill agreement helps the target company control the bidding process.
Typically, the standstill agreement is part of a non-disclosure agreement (NDA) or confidentiality agreement by a publicly traded company exploring a sale with potential buyers. However, it also appears frequently in the banking and lending worlds. For example, a lender may stop demanding repayment from a borrower for a short period if they’re restructuring their debts and liabilities, or undergoing property foreclosure.
A standstill agreement is usually in effect for 18-24 months. However, the limitation period (also known as the standstill period) can be as short as six months or as long as five years.
In addition to helping the target company manage the bidding process, the standstill agreement prevents potential buyers from leveraging confidential information obtained during due diligence to improve their bid. For instance, if research into the target company revealed some vulnerability, the standstill agreement would block any bid that takes advantage of that vulnerability.
Because the standstill agreement is put in place by the target company’s executives and board of directors, it tends to favor them, rather than the target company’s stockholders. If the target company receives a bid that its executives don’t want to consider, it can refuse the deal and hinder them from making a hostile takeover attempt (which might be in the shareholders’ interests). As a result, the standstill agreement is considered a defense mechanism against hostile takeovers.
While standstill agreements can vary significantly in terms of specifics, they usually contain the following provisions:
This clause sets the length of the standstill, which can range from six months to five years. After the specified date, the enforceability period of the agreement ends and the potential buyer is no longer held to the restrictions outlined in the contract. However, standstill agreements often set forth a list of “termination events,” which may lead to the early or immediate expiry of the entire provision.
In this section, the target company outlines the restrictions on the prospective buyer. These may include prohibitions against:
This clause also lists any exceptions to the restrictions described in the standstill agreement.
By entering into a standstill agreement, the potential acquirer gains certain benefits and incentives. For example, they typically receive access to confidential materials and standard documents, such as the target company’s financial statements. The buyer might also get the right to nominate board members or have its legal expenses paid by the target should the takeover go through. In addition, the target may agree to purchase shares in the acquirer’s company at above-market rates.
This section describes any actions or events that would lead to the termination or suspension of the standstill agreement. These typically include the sale or liquidation of a majority of the target’s securities or assets, the commencement of a proxy context, a bid by a third party, or a mutually agreed-upon end to the negotiation process.
Depending on the specifics of the potential deal, a standstill agreement might also include provisions regarding covenants, warranties, representations, arbitration and dispute resolution, legal updates, and other miscellaneous provisions.
Standstill agreements have become a popular way for company executives to fight off the advances of activist shareholders who threaten the status quo of the company’s management. They’re also useful for avoiding hostile takeovers, or any bid that the target company does not feel like pursuing right away. Plus, standstill agreements give the potential target time to slow down the acquisition process and even entertain additional purchase offers to find the one that best meets the needs of their executives, employees, and shareholders.
Standstill agreements aren’t just theory; they’re used commonly in real-world M&A transactions. Below, we’ll review a few notable examples.
In 2022, New York hedge fund Third Point LLC invested $1 billion in Disney, with the ultimate intention of forcing them to spin off ESPN. Dan Loeb, the CEO of Third Point, wrote a letter to the board of Disney outlining how he believed that this was something the company should consider—a typically passive aggressive move from an activist investor. The writing between the lines was that, if they decided not to sell ESPN, he would continue to buy up shares in the company, ultimately forcing the current board to resign.
Disney and Dan Loeb reached a compromise in September 2022. In exchange for his signing of a standstill agreement, they would appoint a Loeb-supported member to the board: Caroyln Everson, effectively giving Loeb an insider on the Disney board. The standstill agreement stipulated that he wouldn’t be able to acquire any more than 2% of Disney’s shares by April 2024, or until such time that Everson had left Disney.
Popular video game retailer GameStop entered into a standstill agreement with two investor groups, Hestia Capital and Permit Enterprise Capital Partners in 2019, after the firms had attempted to make major changes to GameStop’s governance. After the agreement went into effect, Hestia and Permit were given permission to nominate candidates for two independent director positions on the company’s board.
These two competitors in the chemical industry signed a standstill agreement after Air Products offered a $5.9B valuation bid. However, the Airgas team thought that was too low; as a result, they fought the acquisition with a standstill agreement that barred Air Products from presenting the bid to shareholders. With the deal blocked, Airgas pursued and eventually won a legal case against Air Products.
Standstill agreements are one of the many provisions in M&A that practitioners should be aware of. Although only associated with public companies, they provide useful insights into corporate behavior. This includes the agency problems that company shareholders face by appointing non-shareholder third parties as executives, as well as the lengths those same executives can go to avoid hostile takeovers and protect their roles.
