What Is This Document?
The purpose of a standstill agreement is to “create walls” around an ongoing deal, in order to let the parties negotiate without the threat of a third party intervention. While such an agreement could be used to protect any type of deal that requires an exclusive relationship, this scenario presents itself often for the purchaser of a business, who would like to protect that acquisition from the threat of other buyers.
When Would I Use It?
In challenging times, for example, if there is a force majeure event that disrupts an industry (like a financial crisis, or worldwide pandemic) - it might be prudent for parties that are deep into negotiations for any exclusive arrangement (exclusive partnership, sales arrangement, vendor-purchaser arrangement) to enter into the standstill, to preserve the negotiations from a third party swooping in and replacing one of the parties.
To provide a more specific example: A standstill agreement would be used in the middle of a deal, for example, if a purchaser is interested in buying a business from a vendor, to provide for an exclusive period for negotiations. Both parties would negotiate a time period in which the standstill would take place, such as 240 days, for example. This language may be contained within a letter of intent to purchase a business, or it may be a standalone agreement.
In the example of a vendor and purchaser, receiving a standstill agreement would be a show of good faith by the potential purchaser, for significant time spent scoping a potential sale.
Who Signs This Agreement?
Both parties who are negotiating (the buyer and seller, or two potential partners, or a potential vendor and potential purchaser) would sign the agreement.
What Are The Core Elements Of This Agreement?
Important clauses in a standstill agreement include:
- Confidentiality Of The Deal: A prohibition to share or discuss the deal terms with other buyers, to eliminate the potential for a third party coming in with a slightly better deal.
- Exclusivity: A restriction on the “ability to receive other offers” clause, which prohibits the vendor from receiving offers from other potential counterparts.
- Possibly “Operations In The Ordinary Course” which, in the context of purchase of a business, ensures that the vendor guarantees that the business, which is being sold, continues to run as prior to the standstill agreement.
- Possibly “Scope Of Deal” which states what elements of the deal are exclusive and what is excluded - to permit negotiations to continue on the non-exclusive elements.
- Break Fee: The final important clause in a standstill agreement is a “Break Fee”, that states what is to happen if a breach of the agreement takes place. Typically, a party that breaches the agreement would be forced to pay legal costs or compensation for the money and time lost to the other party, due to the breach of (typically) the exclusive negotiating period.
Takeaways:
- A standstill agreement is used to create walls around an ongoing deal in order to negotiate with the vendor without the threat of a third party intervention.
- Most commonly, a standstill agreement is used for an acquisition, for example a vendor selling a company to the buyer.
- Important clauses in a standstill agreement include: An inability to receive other offers clause, a confidentiality clause around terms of the potential deal, request that operations proceed in the ordinary course, and a “break fee” in the event of breach clause.