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What Is A Standstill Agreement In Finance

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What Is A Standstill Agreement In Finance

In 2019, video game distributor GameStop signed a status quo agreement with a group of investors who wanted changes in corporate governance, believing that the company had intrinsic value when the share price reflected. A company that is pressured by an aggressive bidder or activist investor believes that a status quo agreement is useful in weakening the unsolicited approach. The agreement gives the target entity greater control over the deal process by requiring the bidder or investor to buy or sell the company`s shares or launch proxy contests. In short, a status quo agreement is a contract between creditors and a debtor company in which participating creditors agree not to take steps to recover or enforce their debts during a period when information can be collected and a strategy can be formulated to enable the company to survive its economic pressures. The goal is often to restructure in one way or another. Commercial creditors are generally not included, as the company normally has to pay these creditors to ensure that its day-to-day operations are maintained. As a hostile anti-opaque defense mechanism, the target company can obtain a promise from an unfriendly bidder to limit the amount of shares the bidder can buy or hold in the target company. This gives the target company time to implement other acquisition defence strategies. In return, the target entity may repurchase the equity holdings of the potential purchaser on the target share with a premium. The target company may offer another incentive, such as. B a seat on the board of directors.

A status quo agreement can also be an agreement between the parties not to deal with other parties for a specified period of time during negotiations. It can also be used as an alternative to bankruptcy or enforced execution. In the event of a delay in a loan agreement or if it is likely that this will occur in the future due to payment constraints for the company, the company and its creditors may enter into a status quo agreement to suspend either the creditor`s performance rights (if the late payment has already occurred) or the payment obligations (if the default occurs in the near future). This is a fully consensual private contractual agreement between the creditors and the debtor company. A status quo agreement can be a useful tool in many scenarios. For example, a company faces individual pressure from creditors when a legal claim has expired and the debtor company is temporarily insolvent, but the unsecured creditor does not wish to avail itself of a collective liquidation procedure, with all the complexity and associated costs. In this case, the status quo agreement maintains the filing of proceedings long enough to allow the debtor company to raise the necessary funds to repay the debts. In a more complex situation, for example. B, where there are several bondholders (perhaps different marginal tranches) and institutional lenders, the status quo agreement provides a respite to explore formal restructuring.