A standstill agreement is often used as a form of defense during a hostile takeover. In mergers and acquisitions (M&A), the agreement involves obtaining a promise from the unsolicited bidder (often an activist investor) to limit the amount of stock that the bidder can purchase, dispose of, or vote in the target company. This allows the target company more time to implement additional takeover defenses (such as a poison pill or poison put) and gives the target company more control over the deal process should they choose to engage with the potential acquirer.
As an enticement for taking no action, the target company may promise to buy back the prospective acquirer’s stock holdings in the target at a premium. (This is also known as greenmail and is no longer universally permitted). Alternatively, the target may grant the bidder (limited) access to the target company’s financial information under the terms of a confidentiality agreement. In the Standstill Agreement example below, the target firm offers to amend the shareholder rights plan (Poison Pill) should the bidder enter into the agreement. This situation suggests a deal that was never truly hostile, but could be completed if negotiations are thoroughly considered.
Another type of standstill agreement may also occur when the parties agree not to deal with additional parties in a particular matter (in this case a takeover) for a given period of time. For example, the target and prospective purchaser may each agree not to solicit or engage in acquisitions with other parties. The agreement increases the parties’ incentives to invest in negotiations and complete due diligence with respect to their own potential deal.
Standstill Agreement Example
An example of a standstill agreement signed by Autobytel, CCM Master Qualified Fund, Coghill Capital Management and Clint Coghill and filed with the SEC contains the following provisions
- WHEREAS, the Stockholder has filed a Schedule 13G, as amended, under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the Securities and Exchange Commission indicating the Stockholder’s Beneficial Ownership (as defined below) of 4,281,610 shares of common stock of the Company, par value $0.001 per share (the “Common Stock”), and subsequently acquired 106,800, giving it Beneficial Ownership of a total of 4,388,410 shares of Common Stock representing approximately 9.7% of the total outstanding Common Shares (as defined below) as of the date hereof;
- WHEREAS, the Stockholder has stated to the Company that the Stockholder is obligated to purchase an additional 3,730,000 shares of Common Stock (the “Additional Shares”) pursuant to put options it entered into if those put options are exercised on January 14, 2009 thereby increasing the Stockholder’s total Beneficial Ownership interest up to seventeen point ninety-five percent (17.95%) of the total outstanding Common Shares;
- WHEREAS, the Stockholder has entered into total return equity swap agreements (the “Swaps”) with certain counter parties relating to 3,894,023 shares of Common Stock in the aggregate (the “Reference Shares”), that provide that (i) the Stockholder will be obligated to pay to the broker any capital depreciation of the Reference Shares as of maturity, plus interest, and (ii) the broker will be obligated to pay to the Stockholder any capital appreciation of the Reference Shares as of maturity, and (iii) all balances under the Swaps will be cash settled at maturity and there will be no transfer of voting or dispositive power over the Reference Shares;
- WHEREAS, the Company is party to that certain rights agreement, dated as of July 30, 2004, by and between the Company and U.S. Stock Transfer Corporation (the “Rights Plan”) that is triggered in the event any one person or group acquires a Beneficial Ownership interest of fifteen percent (15%) or more of the then outstanding Common Shares (subject to certain exceptions as set forth in the Rights Plan);
- WHEREAS, the Stockholder has asked the Company to amend the Rights Plan to allow it to purchase the Additional Shares without triggering the Rights Plan; and
- WHEREAS, the Company is willing to amend the Rights Plan but only if the Stockholder agrees to enter into this Agreement.
It is important to note that these agreements are unique and can be specifically tailored to each situation. Traders must take care in understanding the relevance of each point listed. If a standstill agreement is negotiated, it tends to negatively affect the merger arbitrage spread. By reducing the chance that a deal may be successful (DCP) the potential returns from a takeover will increase as the merger spread widens.
