What Is a Standstill Agreement in Finance

por lucasvictor

14 de abril de 2022

A status quo agreement is an agreement that preserves the status quo. This is an agreement between the target and the bidder that prevents the bidder from submitting a bid to purchase the target company without first obtaining the bidder`s consent. It may be included as a provision in the confidentiality agreement and will be executed prior to receipt of due diligence documents. A standstill agreement aims to prevent hostile bids and provides a possible remedy in the event that the bidder uses confidential information to make a hostile bid in cases where the parties cannot reach an amicable agreement on the terms of sale. A status quo agreement will sometimes take place when a hostile takeover is underway. Here are the basics of a status quo agreement and what it means for your investment. A standstill agreement is a form of anti-takeover measure. A standstill agreement tends to favour the existing management team over the rights of shareholders, who might otherwise benefit from a buyback offer that increases the value of their shares. A company under pressure from an aggressive bidder or activist investor will find a status quo agreement useful to mitigate the undesirable approach. The agreement gives the target company more control over the transaction process by requiring the bidder or investor to have the opportunity to buy or sell the company`s shares or launch proxy contests. Suppose a business receives a line of credit even if it already has a term loan from a bank. This line of credit includes a subordinated arrangement or clause as part of the loan documents. In the event of default by both, the lender is first entitled to assets; The equity line lender has a second claim.

A status quo agreement can be used between a lender and a borrower. This gives the borrower time to restructure their liabilities. On the other hand, the lender provides for a moratorium on the payment of interest or principal on the loan. If a company takes out a loan from a bank and then a line of credit, it is likely to enter into a subordinated contract. If the company defaults on both loans, the bank has initial claims on the assets used for the guarantee, and the lender of the equity line has the second claim. In the event of a takeover bid, a standstill agreement can be used to end a hostile takeover in which mutually advantageous terms cannot be reached. Considering that the bidder will have access to the company`s financial records, a standstill agreement prevents possible exploitation. A standstill agreement can practically be an agreement between the parties in which both decide to suspend a particular case for a period of time. It can be an agreement to defer scheduled payments to help a customer overcome difficult market conditions. They may also be agreements to interrupt the production of a product.

A status quo agreement is a contract that is agreed between a company and a company that is trying to adopt it. The standstill agreement puts an end to the hostile takeover. In most cases, the acquired company will offer to buy back the shares held by the hostile acquisition offeror. The company usually has to pay a premium to recover these shares. Other agreements may also be concluded between the two parties that do not involve share purchases. Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of “Solving the Capital Equation: Financing Solutions for Small Businesses.” Wright has helped companies secure more than $31 million in financing.

She holds a master`s degree in finance and entrepreneurial management from the Wharton School at the University of Pennsylvania. The bidder`s ability to buy or sell the Company`s shares is limited by these agreements, which gives the Target Company greater scrutiny in this process. As a hostile takeover mechanism, the target company may receive a promise from a hostile bidder to limit the number of shares the offeror can buy or hold in the target company. This gives the target company time to build other defense strategies against acquisitions. In return, the target company can buy back the potential acquirer`s holdings of shares of the target company at a premium. The target company may offer a different incentive, for example. B one seat on the Board of Directors. A standstill agreement can also be an agreement between the parties not to negotiate with other parties during negotiations between them for a certain period of time. It can also be used as an alternative to bankruptcy or foreclosure. In general, standstill agreements can be used to suspend a transaction for a period of time. For example, a lender and borrower may agree to suspend debt payments for a certain period of time. A recent example of two companies that have signed such an agreement is Glencore plc, a Swiss-based commodity trader, and Bunge Ltd., an agricultural commodities trader in the United States.

In May 2017, Glencore took an informal approach to buying rubber bands. Soon after, the parties agreed to a standstill agreement that prevents Glencore from collecting shares or making a formal offer of rubber band until a later date. The agreement is all the more relevant as the tenderer would have access to the confidential financial information of the target company. Upon receipt of the potential acquirer`s privilege, the target company has more time to establish additional defenses as part of the acquisition. For certain situations, the target company undertakes to repurchase shares of the target company for a premium in return for the potential purchaser. In other areas of activity, a standstill agreement can be virtually any agreement between the parties in which both agree to suspend the case for a period of time. This could be an agreement to defer payments intended to help a company survive difficult market conditions, agreements to stop producing a product, agreements between governments, or many other types of agreements. At the international level, it may be an agreement between countries to maintain the current situation, where the responsibility owed by one to the other is suspended for a certain period of time. The agreement is particularly important because the bidder had access to the target company`s confidential financial information. If a company receives another loan against its existing collateral, it will convince the first lender to subordinate to the new loan or receive a new subordinated loan to the first. In both scenarios, lenders use a subordinate agreement to define the terms between them.

Some senior lenders may include a standstill clause or a clause to protect their interests. If this is the case, the resulting agreements are called subordination and status quo agreements. A subordination and standstill agreement defines the specific or general collateral used, the junior lender`s payment entitlements and the priority of those rights. The agreement contains a detailed definition and description of the terms of subordination and what happens in the event of default or bankruptcy. As part of a subordination and status quo agreement, the junior lender agrees to notify the senior lender in the event of default of the junior loan by the company. A subordination agreement is an agreement between two lenders – a lead lender and a junior lender. The junior lender readily agrees to subordinate his right to all or part of the assets of a company to a senior lender. This means that the primary lender is first entitled to the assets if the company defaults on both loans or goes bankrupt. A status quo agreement may also exist between a lender and a borrower if the lender stops charging a planned payment of interest or principal on a loan to give the borrower time to restructure its liabilities.

Some exceptions could be provided for in the agreement, but otherwise all actions are prohibited. The junior lender may notify the lead lender of its intention to take action, and the standstill agreement will expire after 150 to 180 days. The basis of a subordinate arrangement is to ensure easier transactions between senior and junior lenders. In this case, the lead lender has initial rights to all assets used as collateral by the borrowing company. If the borrower defaults on the loans, the main lender has the legal right to claim the assets. The standstill agreements also specify the terms and conditions of purchase. You can specify that a bidder cannot attempt to purchase a business or bid without their prior consent. Standstill agreements can be used to determine and dictate how a bidder can manage the assets of its target company, including disposal, purchase or reconciliation. Status quo agreements exist not only between the two lenders, but can also exist between lenders and borrowers. You can provide the borrower with a period of time during which no payment is required from them so that they can restructure their liabilities. These agreements can also protect companies from aggressive or hostile takeover attempts.

A standstill agreement or provision prohibits subordinated or subordinated lenders from taking corrective action for a certain period of time following a company`s late payment. A “remedy” is the enforcement action a lender can take to remedy a default. The status quo puts the junior lender`s default healing activities at a “standstill” to give the lead lender time to take certain steps if they wish. During the standstill period, virtually all remedies are prohibited, unless the agreement expressly provides for exceptions. Generally, standstill provisions do not last more than 150 to 180 days after a subordinate lender notifies the lead lender of its intention to take enforcement action. As an investor, you probably won`t appreciate a status quo agreement taking place. .