The term standstill agreement refers to various forms of agreement which businesses may enter into in order to delay action which might otherwise take place.
A standstill agreement may be used as a form of defence to a hostile takeover, when a target company acquires a promise from an unfriendly bidder to limit the amount of stock that the bidder buys or holds in the target company. By obtaining the promise from the prospective acquirer, the target company gains more time to build up other takeover defenses. In many cases, the target company promises, in exchange, to buy back at a premium the prospective acquirer's stock holdings in the target.
Common shareholders tend to dislike standstill agreements because they limit their potential returns from a takeover.
In May 2000, Health Risk Management, Inc. (HRM), a health care company, entered into a standstill agreement with Chiplease Inc., Banco Panamericano, Inc., Leon Greenblatt and Leslie Jabine, a shareholder group with approximately 14% of HRM's shares. Under this agreement, HRM permitted the shareholder group to designate one director on the HRM board and to increase its stock holdings by about 10%. In return, the shareholder group agreed to dismiss all litigation.
Another type of standstill agreement occurs when two or more parties agree not to deal with other parties in a particular matter for a period of time. For example, in negotiations over a merger or acquisition, 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 due diligence, respecting their own potential deal.
Standstill agreements are also used to suspend the usual limitation period for bringing a claim to court.