Standstill Agreement

Reviewed by Annapoorna | Updated on Sep 30, 2020

What is a Standstill Agreement?

A standstill agreement refers to a contract that contains provisions that direct how a bidder of a company can buy or sell a stock of the target company. It can effectively delay or stop the process of a hostile takeover if the parties cannot settle a friendly deal. It allows parties to the agreement to maintain the ‘status quo’ about a particular matter.

The agreement is especially relevant because the bidder would have access to the target company’s confidential financial information. On receiving the pledge from the prospective acquirer, the target firm is acquiring more time to set up other defences in the acquisition. For certain situations, the target company agrees to buy back stock shares in the target at a premium in return for the prospective acquirer.

Uses of Standstill Agreements

A company that is pressurised by an aggressive bidder or investor can benefit from a standstill agreement to prevent an unsolicited approach. The agreement provides the target company better control over the transaction process by defining buy or sale terms to the bidder or investor or even the proxy contests.

Some of its application are as follows:

  1. A standstill agreement can be used between a lender and borrower. It gives the borrower time to restructure its liabilities. In contrast, the lender provides some moratorium on the payment of interest or principal on loan.

  2. A standstill agreement between a bank and borrower works on similar lines as given above. It stops the contractual repayment schedule for a stressed borrower and imposes some conditions on the borrower.

  3. A standstill agreement can practically be an agreement between parties in which both decide to suspend a particular issue for a specific time. It can be an agreement to defer scheduled payments to help a customer get over severe market conditions. It can also be agreements to pause production of a product.

  4. A standstill agreement can be made between governments for better governance.

  5. At an international level, it can be an agreement between countries to sustain the present state of affairs, in which a liability owed by one to the other is suspended for a specified period.

Example of the Standstill Agreement

A standstill agreement was negotiated between India and Pakistan’s newly formed dominions and the British Indian Empire’s princely states before their incorporation into the new territories. It was a bilateral form of the agreement.

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