A standstill agreement is a legal agreement between a potential acquirer and a target company, limiting the ability of the potential acquirer to increase its ownership percentage in the target company. The agreement can be used to halt a hostile takeover attempt, typically at the price of a cash payment to the potential acquirer that involves a buyback of the shares already held by the potential acquirer at a premium. Or, the target company may grant the potential acquirer a board seat in exchange for not increasing its share holdings.
A standstill agreement may be included in the boilerplate language associated with a confidentiality agreement that a potential bidder for a company must sign before being allowed to look at a company's due diligence documents. By including this clause in the agreement, the bidder is prevented from engaging in hostile acquisition activities after a friendly purchase agreement falls through.
A standstill agreement tends to favor the existing management team over the rights of shareholders, who might otherwise benefit from a buyout offer that increases the value of their shares.