Definition and Explanation of the Term: Standstill in Law
The term Standstill (in English, approximately “standstill,” “standstill agreement,” or “standstill obligation”) refers, in legal contexts, to a contractually or legally agreed obligation to refrain from or halt certain actions for a specified period. The standstill concept is applied in various areas of law, particularly in corporate law, mergers & acquisitions (M&A), capital markets law, antitrust law, and civil law. A standstill generally serves to create a legal “state of rest” between the involved parties, for example to ensure procedural processes or preserve room for negotiations.
Fields of Application and Legal Significance of the Standstill
Corporate Law and M&A
In the context of corporate acquisitions and participation transactions, the standstill agreement plays a decisive role. Here, an investor undertakes towards the target company not to acquire further shares, not to increase their participation, or not to initiate a hostile takeover for a certain period. The aim of such a standstill arrangement is to protect the company from unwanted loss of control during sensitive phases, such as ongoing takeover negotiations, and to preserve a strong negotiating position.
Typical Provisions of Standstill Agreements in the M&A Context
- Restriction on the acquisition of additional shares or participations
- Refrain from making takeover offers (“takeover bids”)
- Prohibition on forming shareholder groups (“acting in concert”)
- Obligation to maintain confidentiality of certain information (linked to non-disclosure agreements)
Capital Markets Law and Takeover Law
In capital markets law, standstill clauses are often part of voluntary commitments by institutional or strategic investors towards listed companies. They prevent thresholds under the German Securities Acquisition and Takeover Act (WpÜG) from being exceeded during a specific period. In addition, standstill agreements can contribute to the observance of holding periods after large-volume capital measures.
In takeover law, standstill obligations can also constitute restrictive ancillary agreements in public takeover offers, with which bidders and target companies comply with regulatory requirements and manage transparency obligations.
Antitrust Law
In European and German antitrust law, the so-called standstill obligation refers to the duty of companies not to complete a planned concentration until clearance has been granted by the competent competition authority (§ 41 German Act Against Restraints of Competition, Art. 7 EC Merger Regulation). The standstill obligation serves to maintain effective competition by prohibiting irreversible measures before the completion of antitrust review. Infringements can result in the nullity of the concentration and significant fines.
Standstill Obligation under EC Merger Regulation and GWB
- Art. 7 para 1 EC Merger Regulation: Prohibition of implementation of concentrations before final approval
- § 41 para 1 GWB: Enforcement of Standstill in German Merger Control Law
Civil Law Standstill Clauses
In the area of obligations, standstill clauses are agreed as part of contracts, such as in loan or restructuring agreements. Creditors undertake therein to refrain from enforcing their claims (due dates of repayments, asserting termination or enforcement) during the standstill period. This gives debtors time flexibility for restructuring or negotiation.
Legal Consequences, Requirements and Enforcement
Contractual Structuring
Standstill clauses are fundamentally discretionary and are individually negotiated. They must precisely define the duration, exact subject matter, and any exceptions. The legal consequences of breach, in particular contractual penalties or rescission rights, are usually part of the contract. In the context of capital markets or antitrust law, binding force follows directly from the law, and a breach may be subject to fines or invalidation of the measure taken.
Duration and Termination
The period of a standstill is generally limited, for example to several months up to two years, in exceptional cases even longer. Termination occurs automatically upon expiry of the agreed period or by occurrence of specific contractually defined events (for example, conclusion of a takeover agreement). Early termination may, in some cases, be effected by mutual agreement of all parties.
Standstill in Case Law
The interpretation and effectiveness of standstill clauses have repeatedly been reviewed by courts. Key points of dispute include compatibility with mandatory law (e.g. abuse control in civil law, antitrust requirements, company law) as well as the scope and transparency of standstill arrangements. Courts generally recognize admissibility and effectiveness as long as a party is not unreasonably disadvantaged or mandatory statutory provisions are not violated.
Distinction from Related Legal Terms
Standstill clauses are to be distinguished from Lock-up Agreements (prevention of the sale of shares), Non-Shopand No-Talk Clauses (prohibition on entering into negotiations with third parties during the sales process) or Standstill Agreements in insolvency law (forbearance from measures to realize collateral for a certain period). These clauses often occur together or are contractually linked.
Summary and Significance of Standstill in Legal Transactions
The standstill is a central concept in numerous legal areas. It enables legal certainty, planning, and structured negotiations in complex economic and legal settings. Through precise contractual structuring and compliance with statutory requirements, the standstill principle makes a significant contribution to preventing legal and economic disadvantages and securing the interests of all parties involved.
Frequently Asked Questions
What legal obligations arise from a standstill agreement?
A standstill agreement establishes specific contractual obligations between the involved parties, in particular the duty to refrain, for a fixed period, from enforcement of certain rights or claims. For example, a creditor typically undertakes not to initiate enforcement measures against the debtor or to declare loans due within the agreed standstill period. The debtor may also be obliged during the term of the agreement to fulfill certain information and cooperation duties, such as disclosing their financial situation or refraining from certain acts that could harm the counterparty’s interests. Such obligations are usually set out explicitly and violations can lead to the immediate end of the standstill agreement and reestablishment of the original legal position, including the possibility to initiate enforcement or assert claims.
What legal consequences result from a breach of a standstill agreement?
A breach of a standstill agreement generally constitutes a contractual violation that can entail various legal consequences. Contracts often provide that if a party breaches its obligations, the other party is granted specific rights, such as immediate termination of the standstill period and the right to immediate enforcement of all contractual or statutory claims. Furthermore, the injured party may claim damages, provided measurable financial harm has resulted. It is also possible to sue for injunctive relief or to compel fulfillment of agreed obligations. If the standstill is violated in the context of insolvency law issues, insolvency law consequences, such as initiation of insolvency proceedings, may also occur.
Are there formal requirements for entering into a standstill agreement?
Under German law, there are generally no mandatory formal requirements for the validity of a standstill agreement; it can be concluded either in writing or orally. However, for reasons of evidence and legal certainty, it is strongly recommended to establish it in writing, detailing all conditions, durations, obligations of the parties, sanctions in the case of breach, and, if applicable, rules on extension or termination. In special cases, such as agreements involving real property rights or corporate structures, statutory formal requirements such as notarization may apply.
Which aspects should be expressly regulated from a legal perspective?
From a legal perspective, it is advisable to formulate standstill agreements as clearly and precisely as possible. Key points should include the exact definition of the scope of the standstill obligation, the temporal scope, the parties’ specific information and cooperation duties, and the prerequisites for early termination or extension of the agreement. Furthermore, provisions should be made on how to handle any new claims or rights arising during the standstill and what legal consequences are contemplated in the event of a breach. Jurisdiction and choice of law agreements should also not be overlooked for practical enforceability.
How can compliance with a standstill agreement be legally secured?
To effectively ensure compliance with the standstill agreement, parties can provide for various legal mechanisms in the contract. These include contractual penalties for breaches of agreed obligations, requirements to provide security, for example by guarantees, or involving a trustee to monitor compliance with the conditions. It is furthermore possible to structure the agreement as an “irrevocable acknowledgement of debt” within the meaning of § 781 BGB, thereby further strengthening the legal position of the beneficiary party. Additionally, control elements such as regular reporting obligations, rights of inspection, or external expert opinions can serve as safeguards.
In which legal contexts is the standstill typically applied?
From a legal point of view, standstill agreements are particularly common in the areas of finance and restructuring law. They play a central role in the run-up to and during corporate restructurings, especially in out-of-court restructuring negotiations or in intra-group negotiations on debt regulation. In the context of planned company acquisitions or takeover offers, standstill agreements also serve to temporarily suspend shareholder rights or obligations to allow time for negotiations. Furthermore, they are used in patent law and antitrust matters, for instance, to temporarily suspend actions in anticipation of a forthcoming agreement.
