What are the common pitfalls of a standstill clause in M&A negotiations

The common pitfalls of a standstill clause in M&A negotiations include excessively long durations, overly broad definitions of restricted activities, and the inclusion of 'don't ask, don't waive' provisions. These traps can stifle competitive bidding, prevent superior offers, and inadvertently lock a target into a suboptimal transaction.

The Anatomy of a Standstill Pitfall

A standstill agreement is designed to protect a target company from hostile overtures while sharing confidential information. However, when drafted poorly, these clauses become instruments of entrenchment rather than protection. The most significant pitfalls arise when the language fails to account for changing market conditions or the fiduciary duties of the target's board.

1. Excessive Duration

Many standstill agreements are drafted with durations that outlive the relevance of the confidential information provided. While 12 to 24 months is standard, some agreements push for 36 months or longer. A duration that exceeds the shelf-life of the data provided is a red flag for regulators and shareholders.

Key takeaway: Always tie the duration of the standstill to the specific nature of the confidential information provided. If the data becomes stale in 6 months, the standstill should not last for 24.

2. The 'Don't Ask, Don't Waive' Trap

This provision prevents a bidder from even requesting permission to make a new offer. By prohibiting the request, the target board effectively blinds itself to potentially superior bids. In Delaware, courts have scrutinized these provisions heavily, noting that they may interfere with the board's fiduciary duty to maximize shareholder value.

3. Overly Broad Scope of Restricted Activities

If the clause prohibits not just the acquisition of shares but also 'any action that would require a public announcement,' it may inadvertently prevent the bidder from engaging in legitimate, non-hostile discussions or participating in a broader strategic process.

Comparison of Standstill Provisions

Mitigating Risks: Best Practices for Negotiators

To avoid the pitfalls mentioned above, legal teams should implement a rigorous review process for every standstill clause. Follow these steps to ensure your agreement remains balanced:

1. Define 'Fall-away' Triggers: Ensure the standstill terminates automatically if the target enters into a definitive agreement with a third party.
2. Limit the Scope: Explicitly exclude private, non-public inquiries from the definition of 'restricted activities' to allow for future negotiation.
3. Carve-outs for Fiduciary Duties: Include language that allows the bidder to make confidential proposals to the board if the target enters into a transaction with another party.
4. Review 'Acting in Concert' Definitions: Ensure these definitions are narrow enough to avoid capturing the bidder’s affiliates or unrelated portfolio companies.

The Impact of Jurisdiction

In jurisdictions like Delaware, the 'don't ask, don't waive' provision is subject to the 'Revlon' standard of review. If a board uses a standstill to block a superior offer, they must demonstrate that the restriction was reasonable in relation to the threat posed. Failing to include a 'fiduciary out' can lead to litigation that stalls the entire M&A process.

Key takeaway: Always include a 'fiduciary out' clause. This ensures that if a superior offer emerges, the board is not contractually prevented from considering it, thereby protecting the directors from breach of duty claims.

Actionable Checklist for Counsel

• Does the standstill expire automatically upon a change of control?
• Is there a clear definition of 'Confidential Information' that limits the scope of the standstill?
• Are there carve-outs for passive investment activities?
• Does the agreement permit the bidder to request a waiver in writing?

TermScore automates the identification of these high-risk standstill provisions by scanning your M&A documents against a database of market-standard clauses. By flagging overly restrictive durations and missing 'fiduciary out' language in seconds, TermScore allows your legal team to focus on high-level negotiation strategy rather than manual document review.