A standstill agreement occurs when more than one loan is obtained by a company against a single collateral.

What often happens is that one of the lender's loans becomes a subordinate to the other. In this case, an agreement is drafted out to manage both loans simultaneously with one being a senior lender and one being a subordinate lender.

Uses of Standstill Agreements

Standstill agreements do not exist solely between the two lenders but can also exist between the lenders and borrows as well. They can provide for time to be given to the borrower during which no payments will be required of them so they can restructure their liabilities.

These agreements can also protect companies form aggressive or hostile takeover attempts.

The ability of the bidder to buy or sell the company's stock is limited by these agreements, which in turn gives the target company more of a say in the process.

After a borrower defaults on a loan, the standstill agreement prevents the junior lender from taking any action to remedy the situation for a specified period of time. The actions of the junior lender that might remedy the situation are therefore brought to a standstill to allow the senior lender to take the action as it sees fit.

A few exceptions might be provided for in the agreement, but otherwise, all actions are prohibited. The junior lender can notify the senior lender of their intention to take action, and the standstill agreement lapses after 150 to 180 days.

Among the uses of standstill agreements are the following:

  • Protection of interest
  • Management of limitation periods
  • Protection in the event of a takeover
  • Management of purchases during takeovers
  • Confidentiality

Protection of Interest

A standstill agreement is an agreement drafted by the senior lender to make sure that tier interest is protected by the new arrangement. They are also referred to as subordination agreements. With standstill agreements, the parties in question can deal with whatever issues might arise pre-action and help to reduce the chances of a dispute

Management of Limitation Periods

Standstill agreements can be used to adjust limitation periods. These days, it is not uncommon for standstill agreements to be used to extend or completely remove limitation periods.

However, they have their disadvantages, which are seen in the cases of Russell v. Stone and Muduroglu v. Stephenson Harwood.

The basis of a subordination agreement is to ensure easier transactions between the senior and junior lender. The senior lender, in this case, has first rights to whatever assets have been used for collateral by the borrowing company. If the borrower defaults on the loans, the senior lender has the legal right to claim the assets.

If a company takes out a loan with a bank and then a line of credit, a subordination agreement will likely be included. If the company defaults on both loans, the bank will have first claims on the assets used for collateral, and the equity line lender will have the second claim.

Protection in the Event of a Takeover

Standstill agreements can be used to guide and dictate how a bidder is allowed to handle the stock of his or her target company, which includes disposal, purchasing, or voting.

In the event of a takeover, a standstill agreement can be used to stop a hostile takeover where mutually favorable terms cannot be reached. Considering the fact that the bidder will have access to the company's financial records, a standstill agreement prevents potential exploitation.

If a bidder goes ahead and launches a hostile takeover, the target firm can get a guarantee that limits how much stock the bidder can acquire in the company. This enables them to develop some form of defense against the takeover. 

In exchange for this, the company might decide to buy back the stock at a premium price. The stock can be purchased in exchange for other things such as a seat on the board of directors.

During the negotiation process, the agreement can also state that the various parties cannot engage in deals with other parties until the negotiation is completed.

Management of Purchases During Takeovers

Standstill agreements might also put other measures in place to protect the company. For instance, they might create a time limit during which time the bidder cannot attempt a takeover.

Standstill agreements also spell out the terms of purchase. They might specify that a bidder may not attempt to purchase a company or make an offer without first attaining consent.


Confidentiality clauses are often a part of standstill agreements. These clauses must be executed before any due diligence materials are obtained. They allow for some recourse if a bidder takes advantage of confidential information to launch a hostile takeover when a sales agreement cannot be made. This, along with preventing hostile takeover altogether, is one of the main aims of a standstill agreement.

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