Definition
A standstill agreement in finance refers to a contract that halts certain actions between two parties, usually for a specified period. Often used in the context of mergers and acquisitions, it can prevent a company from buying more shares in a target company. It can also stop creditors temporarily from enforcing debt payments to aid debt restructuring.
Key Takeaways
- A Standstill Agreement is a form of anti-hostile takeover measure where a target company disallows a potential bidder from increasing its large stake explicitly. This means the potential bidder agrees not to purchase any more shares for a specified period.
- This agreement mainly provides the target company with adequate time to develop strategies to resist the takeover. It can also raise funds, find a friendly takeover bid or implement a shark repellant strategy during the standstill period.
- Typically, in exchange for the bidder’s agreement to stop buying shares, the target company might issue convertible bonds to the bidder, promise not to seek any “white knight” buyers, or even compensate the bidder financially.
Importance
A Standstill Agreement is crucial in the corporate world because it generally refers to a temporary agreement reached between parties to cease any activity that may affect their contractual relationship, particularly during a financial turmoil or hostile takeover attempts.
A company can use it as a defensive strategy to buy time, maintain current operations, and prevent aggressive action from creditors or potential acquirers.
Furthermore, it gives the company more control over its trajectory during a potentially volatile situation, allowing it to restructure, negotiate better deals, or find preferable alternatives.
Therefore, understanding a standstill agreement is important because it can significantly influence the financial security and stability of a business.
Explanation
A Standstill Agreement serves a crucial purpose in the realm of finance by temporarily stopping aggressive actions taken by companies, whether it is in the context of hostile takeovers or debt repayments. This agreement, extensively used during mergers and acquisitions, ensures that the potential acquiring company halts its advances for a specified period.
This gives the targeted company time to explore alternative measures, restructure their company, or find other potential buyers who can provide a better offer. Therefore, it acts as a protective shield for one company from another’s constant or aggressive pursuit.
In debt financing scenarios, a Standstill Agreement is used to postpone or halt the creditor’s action for some time. This agreement often involves renegotiating the terms of loan repayments to stave off the looming debt default.
The pause provides the company with breathing space to reorganize its operations, dispose of assets, issue equity, or find other means to pay off its debts. In this way, it aids in maintaining the company’s solvency and avoiding bankruptcy, thereby indirectly safeguarding stakeholders’ interests.
Examples of Standstill Agreement
Deutsche Bank and Comcast Corporation: In 2001, Deutsche Bank entered into a standstill agreement with Comcast Corporation. Under the terms of the agreement, Deutsche Bank agreed not to purchase additional Comcast shares or to attempt to influence the management decisions of the corporation for a fixed period. This allowed Comcast to proceed with a critical merger without the interference from the bank as a major shareholder.
Microsoft and Yahoo:In 2008, Microsoft pursued the acquisition of Yahoo, but the companies couldn’t agree on a price. The companies ended up with a standstill agreement in which Microsoft agreed not to make an unsolicited bid for Yahoo. This provided Yahoo with the freedom to make strategic decisions without the pressure of a hostile takeover attempt.
Airgas and Air Products:In 2010, Air Products had been pursuing a hostile takeover bid for Airgas. In response, Airgas unleashed a series of defensive measures, leading to a court battle. The companies eventually agreed on a standstill agreement, ensuring that Air Products would desist from taking over Airgas for a certain period of time. This allowed Airgas to continue operating independently without the threat of a hostile takeover.
FAQs on Standstill Agreement
1. What is a Standstill Agreement?
A standstill agreement is a formal agreement between parties to stop an action for a particular period. This agreement is often used in business situations where two companies decide to halt any ongoing dispute or in hostile takeovers where the target company prevents the bidder from buying their company’s stock for a specific period.
2. Why is a Standstill Agreement made?
The primary purpose of a standstill agreement is to prevent the hostile takeover of a company by another. By halting the purchasing of more shares, the standstill agreement allows the target company to prevent the takeover, at least for a specified period.
3. What are the components of a Standstill Agreement?
A typical standstill agreement consists of the details of the parties involved, the duration of the agreement, the negotiations or potential solutions to disputes, and the conditions under which the agreement can be terminated. The agreement must be signed by all parties to be effective.
4. Does a Standstill Agreement apply only to finance and business?
No, while standstill agreements are most commonly used in business, they can also be applied in other contexts to pause an ongoing process or dispute. For instance, in international relations, standstill agreements can be used to stop military action between two parties.
5. What happens after the expiration of a Standstill Agreement?
Once a standstill agreement expires, the parties are no longer obligated to halt the action initially stopped by the agreement. Depending on the situation and the terms of the agreement, the parties may resume the action, extend the agreement, or negotiate a new arrangement.
Related Entrepreneurship Terms
- Corporate Finance
- Takeover Defense
- Debt Restructuring
- Mergers and Acquisitions
- Hostile Takeover
Sources for More Information
- Investopedia: This website offers a broad range of finance and investing terms, including “Standstill Agreement”. Its easy-to-understand definitions make it a great resource for those new to finance.
- Corporate Finance Institute (CFI): CFI provides a wide range of finance articles and learning resources that provide in-depth and comprehensive information on financial topics like the “Standstill Agreement”.
- Law Insider: This website is a comprehensive resource for legal terms and definitions, and it offers a contract and clause library. It’s an excellent site for understanding the legal aspects of a “Standstill Agreement”.
- The Balance: The Balance is known for personal finance advice but also covers a range of finance topics in depth, including “Standstill Agreement”. Its articles are straightforward and user-friendly.
