What is a Standstill Agreement?
A standstill agreement is a legally binding contract that is designed to restrict an entity or individual from taking certain actions against a company or its shareholders for an agreed period of time. This type of agreement can play a vital role in business negotiations, including mergers and acquisitions.
Standstill agreements are often used in the context of mergers and acquisitions (M&A). In these cases, the agreement serves three main purposes:
In prohibiting bidders from acquiring certain beneficial ownership of a company’s stock, the standstill agreement can help protect the target’s board of directors from a hostile takeover. For example, by using the NOL tax assets as leverage , the board can dissuade shareholders who support activist investors from selling their stock, thereby making it difficult for an activist investor to accumulate enough shares to gain control of the board through stockholder votes. Even if an activist investor gains control of the target company board through stockholder votes, with a standstill agreement in place, the target’s board of directors could potentially resist an activist investor’s desire to remove the board and appoint its own director nominees.
As a result of these restrictions, companies that have interest in negotiating exclusive periods for discussion, due diligence, and exclusivity are often able to enter and execute a standstill agreement with target companies.
Key Terms of a Standstill Agreement NDA
Standstill agreements are essential in safeguarding companies’ interests in the world of mergers and acquisitions. The protections provided by such standstills are typically two-fold: on the one side, the standstill prevents the trading in shares or related securities of the target company by the acquirer or its associates; and on the other side, the standstill protects the confidentiality of any information relating to the target business so that the acquirer does not take undue advantage of any such information to gain value, or to the detriment of the target business.
As a corollary, when a standstill is agreed to at the outset of a potential acquisition of a target business, the parties will also typically agree to a non-disclosure agreement (NDA) for the purpose of protecting the target’s confidential business information. NDAs are usually entered into for a specific period, in which all involved parties conduct their own due diligence. At the end of this period, a potential acquirer may elect to enter into a separate definitive share purchase agreement with the target company. Such definitive share purchase agreement will then incorporate additional restrictions originally contained in the NDA for purposes of keeping confidential the terms of the contemplated share purchase agreement itself (i.e., the terms under which the acquirer agrees to acquire the target, including price terms, etc.). The following are additional key features of NDAs in the context of standstill agreements: Confidentiality Restrictions. As discussed above, each party is required to protect and maintain the confidentiality of information exchanged between the parties. Confidentiality restrictions may apply indefinitely while the agreement is in effect, or they may remain in effect for a pre-agreed period following the expiration of the agreement (e.g. a period of three years or five years post-termination). Permitted Disclosure. In many cases, parties may be permitted to disclose confidential information in three instances: (i) in the case of a valid request from a governmental authority (provided the recipient of the information notifies the disclosing party and provides the disclosing party with an opportunity to challenge such request for disclosure); (ii) to the extent the information becomes publically disclosed (other than as a result of a breach of the agreement); and/or (iii) to the extent the information is disclosed to a third party in accordance with the provisions of the agreement (e.g., when a party wishes to disclose information to counsel or employees). Exclusions from Permitted Disclosure. Conversely, the agreement will typically carve out exceptions to permitted disclosure under the two instances above, for purposes of ensuring that confidential information shared between the parties that becomes public goes beyond a specific group of persons (or behaviors) designated in the agreement, as a means of further preventing any such information from becoming public knowledge. For example, the agreement may seek to ensure that the confidential information has not been shared with a competitor, or that information shared was not made public through the negligence or fault of the receiving party. Exceptions. Per the terms of the agreement, the parties will typically exclude certain class of information from the restrictions on disclosure, including information already in existence (in the public domain) independently of the disclosure of such information, or otherwise obtained by the receiving party free of any obligation to keep the information confidential. Other exceptions may include publicly available information and/or information released into the public domain without or in breach of a prior confidentiality obligation.
Legal Liability for a Standstill Agreement NDA
Despite the potential benefits of negotiating a standstill agreement, there are also legal implications for businesses when entering into an NDA.
One of the risks of the standstill period is that it could be used as an opportunity for one party to exploit information for its own commercial gain. There have been cases in which, following the standstill period, one party has used confidential information to compete with the other.
Following termination of a standstill period, the obligation to keep material confidential may continue indefinitely. For this reason, parties should recognise the potential for a standstill period to be used as a way for one party to get the upper hand in negotiations, or to simply obtain confidential information about the other party. It is therefore vital that the terms of a standstill agreement are clearly set out, and that the provisions of any standstill agreement are complied with.
There are various enforcement challenges of confidential information and standstill agreements, some of which are outlined below.
In order to protect confidential information, the wronged party must act quickly when a breach of an agreement occurs. It may be possible to obtain an injunction from the High Court requiring the other party to hand over information, and then destroy it. An interim injunction can be obtained at any time before the commencement of proceedings.
An interim injunction is usually as follows: If it is essential that confidentiality obligations are met during the standstill period, it is a good idea to include a so-called springing venue clause in the agreement, which provides that if enforcement action needs to be taken for breach, the proceedings will be held in a specified jurisdiction, or that a particular governing law will apply. This can be enforced by an injunction, with an associated threat to obtain an anti-suit injunction against the defendant in the relevant jurisdiction (i.e. to stop them from bringing proceedings elsewhere).
An important limitation on enforcing a right of action is the ability of the other party to challenge the contractual nature of the agreement. In these circumstances, the desired relief may not be available.
In addition, it can be difficult to enforce a non-compete/trade restriction that is more restrictive than necessary (e.g. lacks reasonableness). For a non-compete to be enforceable, it must be ‘reasonable’ (courts will consider reasons of public policy when deciding if it is reasonable). Therefore, it may be difficult for a party to rely on an absolute prohibition on another competing. Furthermore, it is arguable that the party seeking to enforce a restriction must prove that it is reasonable in the specific circumstances of its case and the particular fact pattern.
An unreasonable non-compete may still be potentially enforceable in tort, but it is unlikely that courts in other jurisdictions will enforce it). Even if such a restriction is enforceable, the remedy may be limited to an award of damages.
It is important to note, however, that if one party obtains confidential information to which they would otherwise not be entitled, this information will have little or no value. This may be especially true in technology and data science industries in which success often depends on the speed of implementing new innovations.
Standstill Agreement NDAs: Advantages
For companies using them, standstill agreement NDAs help protect their sensitive information and key strategic advantages. There are three main benefits of using standstill NDAs:
Protection of sensitive information. Confidentiality terms in standstill agreement NDAs help protect the company’s sensitive information with all the parties involved in the transaction. The most common approach is that prior to executing a standstill agreement, the seller would provide interested parties with a confidentiality agreement that allows them to learn more about the deal. Once the deal terms are agreed upon, a standstill agreement would be executed to confirm the seller’s confidentiality terms and provide the parties with important information about the deal, such as the fact that the buy or sell side will not solicit employee, customer or supplier information until the deal is finalized or terminated. When drafting a standstill agreement, certain information should be excluded from the definitions of "confidential information," such as information that is already generally available to the public or previously known by the recipient.
Preservation of strategic advantage. The standstill portion of the standstill agreement NDAs assumes that a party that is seeking to acquire the target company may not be doing so at the same time as another party. This means that once the negotiations commence, the seller will not be pursuing additional buyers. The seller will be working with one suitor only, and wants the suitor to do everything it can to make the deal happen. For the buyer, it is equally important to have the standstill provision to prevent the target companies from soliciting multiple competing suitors; this again allows the buyer to control the process of discussions and negotiations with the target company.
Security of sensitive information. The standstill portion of the standstill agreement NDAs assumes that in order for the buyer to perform due diligence and for the target company to evaluate the buyer’s ability to close the transaction, the target company will need to share their information with the buyer. In order to support the buyer’s due diligence efforts, the target companies are usually willing to provide all information to the buyer; the only restriction on the target company is the duration of the obligation of the buyer to keep information confidential, which is normally described in the standstill agreement.
Standstill Agreements Situations
Standstill agreements are used in a variety of situations in business dealings. Perhaps the two most common circumstances are when an acquisition or merger is being contemplated, or when a joint venture is being formed. In fact, when finalizing the terms of a joint venture, a standstill agreement is often a contingency that must be adhered to before the deal is struck.
There are several potential scenarios where a standstill agreement might be necessary. First, the most obvious instance is when two or more entities are in talks to combine their businesses, whether through a full merger or a less formal approach such as entering into a strategic partnership. Having a standstill agreement in place can be beneficial. It allows the parties to ensure that all information is only being used for the business purpose of the combination or strategic partnership. Second, if a company is looking to merge with or acquire another company, and the keen interest from the acquiring entity is evident, a standstill agreement may be necessary to preserve the value of the target company in the eyes of shareholders or investors. If negative rumors are circulating about a potential combination, the value of the target company could be adversely affected.
On the other hand, a company that is being acquired or merged with may find that it has a competitive advantage once it signs a standstill agreement, particularly in a public offering situation . If a standstill agreement is signed, there is an opportunity for the target to negotiate a better deal for itself. For instance, if the parties anticipate that other companies will want to acquire the target company as well, the target can get a premium offer from the acquirer by threatening to conduct an auction process. If no standstill agreement is signed, those negotiations become more difficult.
Another common scenario that arises during the course of business, even without the direct intent of any party to merge or acquire, involves public companies. Whenever a company goes through an initial public offering (IPO), it is necessary to sign a standstill agreement with its underwriters. This document is important because it ensures that the underwriters and institutional investors who have been privy to insider information about the company’s future plans do not sell any shares for a certain period after the offering is complete. The standstill agreement therefore creates a closed window during which no shares can be sold.
In addition, standstill agreements may be appropriate in connection with stockholder proposals. For example, when a company contemplates a stockholder proposal on a matter such as a merger, acquisition or other company action, that company will ask the stockholders who have submitted the proposal to sign a standstill agreement that ensures that they will not engage in any stock trading or dispositions that would disrupt the company’s business or otherwise materially affect the negotiation of the proposal.
Drafting a Standstill Agreement NDA
While having a mutual standstill that prohibits either party to the NDA from initiating a tender offer, proxy contest or litigation against the other in order to obtain control of the target may be suitable for a clean deal, many stakeholders would prefer to have the right to terminate the deal and initiate one of these takeover threats if the target reverts to undesirable behavior (e.g., not allowing due diligence such as that required by Section 203(g) of the Delaware General Corporation Law). Equity investors and activist investors believe that they are giving up their rights to seek change, and they want the right to at least threaten to initiate one of these takeover threats if the deal goes south after the standstill is signed. Therefore, a much more common arrangement is one with increased rights for investors (board seats, governance policy agreements, limited covenants or even break up fee obligations) in consideration for their agreement to refrain from initiating board manipulation.
Yet whatever the purpose of a standstill, there are various considerations to take into account when drafting standstill agreement NDAs. These can include:
In addition, standstill agreement NDAs must be tailored to the deal situation. For example, if the investor already owns 10 percent of the target’s shares, the deal terms and standstill provisions might be a lot different than if the investor owns just one percent of the target’s shares. If the investor has already violated the target’s standstill provisions in prior negotiations, that could also affect the drafting of a new standstill agreement.
Likewise, we recommend that you ensure that the standstill provision is clear on its terms, such as a prohibition on the mere communication of a hostile bid (a specified percentage of ownership being considered as a hostile bid), a prohibition on the initiation of a proxy contest or whether the investor can act in concert with other shareholders and raise issues at the stockholder level.
Standstill Agreement NDAs: Things to Avoid
A common pitfall is inadequate legal protections for vital assets like trade secrets, which can prove to be devastating if your company does not retain its intellectual property rights. Another major area that companies fall prey to relates to vague and ambiguous terms that remain open to interpretation down the line. Finally, companies that do not fully vet their intermediaries often face the possibility that they have entered into less than favorable agreements as a result of poor drafting. Below we identify the errors buyers and sellers make with their standstill agreement NDAs:
1. Failing to Include Specific Terms – Many standstill agreement NDAs are drafted paintbrush-style and do not cover the particulars of a deal. The pitfalls of this are easy to understand. Companies that do not have a complete picture of their rights create enormous risks to their operations and their bottom line.
2. Unclear Terms – Vague NDAs can often lead to unwanted legal surprises that may not come to light until months or years into the deal. Companies should be particularly wary of provisions that include ambiguous language because this will ultimately leave the interpretation up to a judge or jury.
3 . Failure to Retain Key Rights – Companies that do not retain their key rights can be left exposed in the wake of the termination of a deal. Your NDA should clearly outline what rights you will be granted and whether or not those rights will be retained after the fallout. Many standstill agreement NDAs are drafted without a clear framework of your rights, exposing your company to potential breaches of contract.
4. Straying from the Terms of the Deal – It is important that there is no confusion about the deal you are entering into. Many agreements are the product of a series of miscommunications and are not reflective of the deal struck by the negotiation teams. Remember, NDAs are meant to help you clarify your terms, so don’t be afraid to renegotiate your deal if the original provisions are not crystal clear.
5. Not Consulting with an Attorney – Companies that do not seek the counsel of an attorney may not understand the extent of their rights under the agreement. NDAs are complex documents, which take qualified attorneys many years to master. More importantly, if your agreement is drafted poorly, you may actually be liable for damages for breach of contract. Poorly drafted NDAs are not worth the risks.