From a purely legal perspective, mergers and acquisitions can be seen as a nexus of contracts. From start to finish, every transaction brings with it a series of terms, clauses, and provisions. One such example is the standstill agreement – a measure that sometimes included in the non confidentiality clause.
This is the DealRoom overview of the standstill agreement.
How does a Standstill Agreement Work?
The standstill agreement, which prevents potential buyers from publicly announcing a bid for the target without its consent, is usually in effect for 18-24 months.
In addition to helping the target company to control the bidding process, it should prevent potential buyers from using confidential information obtained during due diligence to leverage that information to make a bid for the target company (i.e. if research into the target company revealed some vulnerability, the standstill agreement protects it from a bid that would take advantage of that vulnerability).
There is an in-built controversy here. Because the standstill agreement is put in place by the target company’s executives, it tends to favor them, rather than the target company’s shareholders.
That is to say, if the target company receives a bid from a company that its executives don’t want to speak with, it can refuse the deal and hinder them from making a hostile takeover attempt (which might be in the shareholders’ interests).
This is why the standstill agreement is seen as one of the defence mechanisms against hostile takeovers.
Standstill Agreement Example
Standstill agreements have become a popular way for company executives to fight off the advances of activist shareholders, who threaten the status quo of the company’s management.
One popular example of a shareholder example is Dan Loeb, CEO of Third Point LLC. Mr. Loeb is regularly asked to sign standstill agreements with target companies coming in his line of vision. A recent example of this can be seen with Disney.
In 2022, Third Point LLC invested $1 billion in Disney, with the ultimate intention of forcing them to spin off ESPN. Dan Loeb wrote a letter to the board of Disney outlining how he believed that this was something the company should consider – a typically passive aggressive move from an activist investor. The writing between the lines is that, if they decided not to sell ESPN, as he requested, he would continue to buy up shares in the company, ultimately forcing the current board to resign.
Disney and Dan Loeb reached a compromise in September 2022. In exchange for his signing of a standstill agreement, they would appoint a Loeb-supported member to the board: Caroyln Everson, effectively giving Loeb an insider on the Disney board.
The standstill agreement stipulated that he wouldn’t be able to acquire any more than 2% of Disney’s shares by April 2024, or until such time that Everson had left Disney.
Conclusion
Standstill agreements are one of the many provisions in M&A that practitioners should be aware of. Although only associated with public companies, they provide useful insights into corporate behavior.
First, into the agency problems that company shareholders face by appointing non-shareholder third parties as executives, but also the lengths that those same executives can go to avoid hostile takeovers and protect their roles.
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