Meaning
Contractual restrictions in preliminary acquisition agreements prevent potential buyers from accumulating target company shares or launching hostile takeovers during negotiations. Including a standard standstill covenant ensures that the target company can share sensitive financial information with a bidder without fear of a sudden, unsolicited buyout attempt. This agreement creates a structured, cooperative environment for conducting due diligence.
Acquisition Halt
The covenant restricts the prospective buyer from purchasing shares in the open market, launching a tender offer, or soliciting proxies from other shareholders. These restrictions apply regardless of how favorable the market conditions become. This restriction prevents the bidder from using private due diligence findings to build a hostile stake.
Duration Limit
These agreements are typically limited to a specific period, such as one or two years, allowing the parties time to negotiate a friendly transaction. If negotiations break down and the standstill period expires, the bidder is free to launch a hostile campaign. This time limit ensures that the target company cannot indefinitely block a transaction.
Carveout Exception
Fall-away clauses often terminate the standstill early if a third party launches a public bid for the target company. This exception allows the original bidder to compete fairly in the open market to protect its investment interests.
