What is a Standstill Agreement?

A standstill agreement is an agreement between a potential acquirer and a target company, limiting the ability of the 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 acquirer at a premium. Or, the target company may grant the 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. This means that shareholders could sue the board of directors for breaching its fiduciary duty to them.

More generally, standstill agreements can be used to pause a transaction for a period of time. For example, a lender and borrower may agree to pause debt payment for a certain period of time.