Business Takeover

A Standstill Agreement is a legal contract between two parties that temporarily restricts certain actions, typically in the context of mergers and acquisitions (M&A), corporate takeovers, or shareholder disputes. The purpose of a standstill agreement is to prevent one party, usually a potential acquirer, from purchasing additional shares or taking control of the other party (the target company) without mutual consent. This agreement gives the target company time to consider its strategic options and prevents the acquirer from launching a hostile takeover during the standstill period.

Key Features of a Standstill Agreement:

1. Share Purchase Restrictions:

   • The agreement usually includes a provision that prohibits the acquirer from buying additional shares of the target company beyond a specified limit. This prevents the acquirer from gaining a controlling interest or increasing its ownership stake without the target company’s consent.

   Example: “The Acquirer agrees not to purchase any additional shares of the Target Company beyond its current 10% ownership during the standstill period.”

2. Prohibition on Hostile Actions:

   • The acquirer agrees not to engage in any hostile takeover activities, such as launching a tender offer, soliciting proxies, or attempting to replace the target company’s board of directors.

   Example: “The Acquirer shall not initiate any proxy fight, tender offer, or other actions aimed at taking control of the Target Company during the standstill period.”

3. Confidentiality Clause:

   • The agreement may include a confidentiality clause that restricts the acquirer from using or disclosing any non-public information obtained during negotiations or due diligence.

   Example: “The Acquirer agrees to keep all non-public information provided by the Target Company confidential and shall not disclose it to any third parties.”

4. Duration of the Standstill Period:

   • The agreement specifies the length of the standstill period, which is typically between six months and two years. During this time, the restrictions outlined in the agreement are in effect.

   Example: “This standstill agreement shall remain in effect for a period of 12 months from the date of signing.”

5. Termination Conditions:

   • The agreement may include conditions under which the standstill restrictions can be terminated, such as mutual consent, the expiration of the standstill period, or a significant change in circumstances (e.g., a third-party takeover bid).

   Example: “The standstill restrictions shall terminate upon the mutual written consent of both parties or if a third party makes a public offer to acquire the Target Company.”

6. Non-Solicitation Clause:

   • The acquirer may be restricted from soliciting the target company’s employees, customers, or shareholders during the standstill period.

   Example: “The Acquirer agrees not to solicit or engage with the Target Company’s employees, customers, or shareholders during the standstill period without prior written consent.”

Why Use a Standstill Agreement?

1. Protection Against Hostile Takeovers:

   • The target company can use a standstill agreement to protect itself from an aggressive or unwanted takeover attempt, giving its board of directors time to evaluate the offer and consider alternative options.

2. Facilitates Negotiations:

   • By temporarily halting aggressive actions, the standstill agreement allows the parties to engage in good-faith negotiations without pressure from the market or shareholders.

3. Preserves Shareholder Value:

   • The agreement can help maintain the stability of the target company’s stock price, preventing large, sudden changes in ownership that could disrupt the market.

4. Encourages Strategic Partnerships:

   • Standstill agreements can be used as part of strategic alliance negotiations, allowing the parties to explore potential collaborations without the risk of one party gaining undue control.

Types of Standstill Agreements:

1. M&A Standstill Agreement:

   • Used in mergers and acquisitions to prevent the acquirer from taking unilateral action or buying additional shares while negotiations are ongoing.

2. Debt Standstill Agreement:

   • In financial distress situations, creditors may agree to temporarily halt collection actions or legal proceedings against a debtor company while restructuring negotiations take place.

3. Shareholder Standstill Agreement:

   • An agreement between a company and a large shareholder, preventing the shareholder from increasing its ownership stake or launching a proxy fight.

Example of a Standstill Agreement Clause:

Article 2: Restrictions on Share Purchases

During the term of this Standstill Agreement, the Acquirer agrees not to, directly or indirectly, purchase, acquire, or agree to purchase any additional shares of the Target Company that would result in the Acquirer owning more than 15% of the outstanding shares. The Acquirer further agrees not to engage in any proxy solicitation or make any public announcement of a takeover bid without the prior written consent of the Target Company.

Benefits of a Standstill Agreement:

1. Time for Strategic Decision-Making:

   • Provides the target company with time to evaluate the acquirer’s proposal and consider alternative strategies, such as seeking other buyers or implementing a defensive strategy.

2. Reduces Market Uncertainty:

   • By preventing sudden stock purchases or hostile actions, the agreement helps stabilize the market and reduces uncertainty for investors.

3. Promotes Fair Negotiations:

   • Establishes a framework for negotiations, reducing the risk of aggressive tactics and promoting a fair and balanced discussion between the parties.

4. Preserves Relationships:

   • In cases where the parties may work together in the future, the agreement helps maintain a positive relationship by preventing contentious actions.

Potential Downsides of a Standstill Agreement:

1. Limited Flexibility for the Acquirer:

   • The acquirer may feel restricted by the agreement, especially if the standstill period is lengthy or if the target company does not engage in good-faith negotiations.

2. Delayed Decision-Making:

   • The target company may use the standstill agreement to delay making a decision, potentially missing out on valuable opportunities.

3. Market Perception Issues:

   • Investors may view the use of a standstill agreement as a defensive tactic by the target company’s management, potentially leading to negative perceptions.

4. Legal and Regulatory Challenges:

   • The agreement must comply with securities laws and regulations, which may require careful drafting to avoid potential legal issues.

Legal Considerations:

1. Compliance with Securities Laws:

   • The agreement must comply with regulations such as the Securities Exchange Act of 1934, which governs tender offers and proxy solicitations.

2. Antitrust Concerns:

   • In some cases, the agreement may be scrutinized by antitrust regulators if it affects competition in the market.

3. Enforceability:

   • The enforceability of the standstill agreement may depend on the specific terms and conditions, as well as the jurisdiction in which it is executed.

Example in Practice:

Example: Microsoft and Yahoo Standstill Agreement

• In the late 2000s, Microsoft made an unsolicited offer to acquire Yahoo. During the negotiations, Yahoo implemented a standstill agreement, restricting Microsoft from making additional stock purchases or launching a hostile bid while discussions continued. This allowed Yahoo’s board to evaluate the offer and consider alternatives, such as exploring other strategic partnerships or deals.

Example: Private Equity Standstill Agreement

• A private equity firm looking to acquire a stake in a publicly traded retail company agrees to a standstill provision with the target company’s board. The agreement prevents the private equity firm from increasing its ownership stake beyond 10% for 18 months, giving the target company time to evaluate the offer and seek other potential investors.

Conclusion:

A Standstill Agreement is a strategic tool used in corporate negotiations to temporarily restrict certain actions, such as stock purchases or hostile takeover attempts. It provides a framework for discussions, giving the target company time to evaluate its options while reducing market volatility. However, it must be carefully drafted to comply with legal requirements and balance the interests of both parties. When used effectively, a standstill agreement can facilitate fair negotiations and help protect the interests of the target company and its shareholders.

A Rights Agent Agreement is a legal contract between a company (the issuer) and a third-party agent (the rights agent) that outlines the duties and responsibilities of the agent in administering a rights offering or shareholder rights plan. The rights agent acts as an intermediary, handling the issuance, exercise, and transfer of rights that may be distributed to the company’s shareholders.

Key Situations Where a Rights Agent Agreement is Used:

1. Rights Offering:

   • A rights offering is a method by which a company offers existing shareholders the opportunity to purchase additional shares at a discounted price, often as a way to raise capital. The rights agent facilitates the offering, ensuring shareholders receive their rights and can exercise them if desired.

2. Shareholder Rights Plan (Poison Pill):

   • In a shareholder rights plan, also known as a poison pill, the company issues rights to existing shareholders to purchase additional shares at a discount if an acquirer attempts a hostile takeover. The rights agent administers the plan, distributing the rights and processing shareholder transactions.

Key Components of a Rights Agent Agreement:

1. Appointment of the Rights Agent:

   • Specifies the appointment of the rights agent, who is responsible for handling the administrative tasks associated with the rights offering or shareholder rights plan.

   Example: “The Company hereby appoints [Agent’s Name] as the Rights Agent to act in accordance with the terms of this agreement.”

2. Duties and Responsibilities of the Rights Agent:

   • Outlines the specific tasks the rights agent will perform, such as distributing rights, maintaining records, processing subscriptions or exercises, and handling transfers of rights.

   Example: “The Rights Agent shall be responsible for distributing rights certificates to shareholders, processing the exercise of rights, and maintaining accurate records of rights holders.”

3. Issuance and Distribution of Rights:

   • Details the process for issuing rights to shareholders, including the timing, method of distribution, and any applicable conditions.

   Example: “The Rights Agent shall distribute rights certificates to all eligible shareholders of record as of [Record Date], in accordance with the instructions provided by the Company.”

4. Exercise of Rights:

   • Describes the process by which shareholders can exercise their rights, including the procedures for submitting subscriptions, payment methods, and deadlines.

   Example: “Shareholders may exercise their rights by submitting a completed subscription form and payment to the Rights Agent no later than [Expiration Date].”

5. Transfer and Exchange of Rights:

   • Specifies the procedures for transferring or exchanging rights, including any restrictions on the transferability of rights.

   Example: “The Rights Agent shall facilitate the transfer of rights upon receipt of a duly executed transfer form, subject to the terms of this agreement.”

6. Recordkeeping and Reporting:

   • Requires the rights agent to maintain accurate records of rights holders and provide regular reports to the company on the status of the rights offering or plan.

   Example: “The Rights Agent shall maintain a register of all rights holders and provide weekly status reports to the Company, detailing the number of rights exercised and remaining outstanding.”

7. Compensation and Fees:

   • Specifies the fees and compensation the rights agent will receive for its services, including any reimbursements for expenses incurred.

   Example: “The Company agrees to compensate the Rights Agent with a fee of $10,000, plus reimbursement of reasonable expenses incurred in the performance of its duties.”

8. Indemnification:

   • Includes an indemnification clause protecting the rights agent from liability arising from actions taken in good faith while performing its duties under the agreement.

   Example: “The Company agrees to indemnify and hold the Rights Agent harmless from any claims, liabilities, or damages arising from actions taken in good faith in connection with this agreement.”

9. Termination of Agreement:

   • Specifies the conditions under which the agreement can be terminated by either party, including any notice requirements.

   Example: “Either party may terminate this agreement upon 30 days’ written notice to the other party. Upon termination, the Rights Agent shall deliver all records and documents related to the rights offering to the Company.”

10. Governing Law:

    • Indicates which state’s laws will govern the interpretation and enforcement of the agreement.

Example: “This agreement shall be governed by and construed in accordance with the laws of the State of [State Name].”

Example of a Rights Agent Agreement Clause:

Section 4: Duties of the Rights Agent

The Rights Agent shall be responsible for distributing rights certificates to shareholders, processing the exercise of rights, maintaining a register of rights holders, and providing periodic reports to the Company on the status of the rights offering. The Rights Agent shall act in accordance with the instructions provided by the Company and in compliance with applicable laws and regulations.

Benefits of a Rights Agent Agreement:

1. Efficient Administration:

   • The rights agent handles complex administrative tasks, ensuring the smooth execution of the rights offering or shareholder rights plan.

2. Accurate Recordkeeping:

   • The rights agent maintains detailed records of rights holders and transactions, providing transparency and accuracy in the process.

3. Reduced Burden on the Company:

   • By outsourcing the management of rights-related activities, the company can focus on strategic decisions rather than administrative tasks.

4. Legal Compliance:

   • The rights agent helps ensure compliance with securities regulations and corporate governance requirements.

Potential Downsides:

1. Additional Costs:

   • Hiring a rights agent involves fees and expenses, which may be significant depending on the size and complexity of the offering.

2. Reliance on a Third Party:

   • The company must rely on the rights agent to accurately manage the process, which may introduce risks if the agent fails to perform its duties effectively.

3. Complexity in Communication:

   • Coordinating communication between the company, shareholders, and the rights agent can be challenging, particularly during time-sensitive transactions.

Legal Considerations:

1. Securities Law Compliance:

   • The rights agent must comply with federal and state securities laws, including regulations governing rights offerings and shareholder rights plans.

2. Fiduciary Duty:

   • The rights agent has a fiduciary duty to act in the best interest of the shareholders and the company while performing its responsibilities.

3. Indemnification and Liability:

   • The indemnification clause must be carefully drafted to protect the rights agent from liability, while also ensuring that the agent acts in good faith and with due diligence.

Example in Practice:

Example 1: Rights Offering by a Biotech Company

• A publicly traded biotech company decides to conduct a rights offering to raise capital for new drug development. The company appoints a rights agent to manage the process. The rights agent distributes rights to existing shareholders, allowing them to purchase additional shares at a discount. The agent handles all subscriptions, processes payments, and provides the company with regular updates on the progress of the offering.

Example 2: Shareholder Rights Plan by a Retail Corporation

• A retail corporation implements a shareholder rights plan (poison pill) to protect against a hostile takeover attempt. The rights agent is responsible for issuing rights to the company’s shareholders, which can be exercised if an acquirer attempts to buy a significant stake. The rights agent manages the records, tracks the ownership of rights, and ensures compliance with the plan’s terms.

Conclusion:

A Rights Agent Agreement is a critical document in corporate transactions involving rights offerings or shareholder rights plans. It helps streamline the process, ensures compliance, and provides transparency for both the company and its shareholders. By clearly defining the duties and responsibilities of the rights agent, the agreement helps facilitate a smooth and efficient administration of rights-related activities, reducing the risk of errors and legal issues. When properly executed, a Rights Agent Agreement can be a valuable tool for managing complex shareholder transactions and protecting the interests of the company and its investors.