The significant economic consequences of COVID-19 reach businesses across all sectors of the global economy. For many, the financial realities of the pandemic are stark and require those organizations consider unique arrangements to ensure continuity of operations.
When studying the options available, businesses would be wise to include a discussion of standstill agreements. Although most frequently used in the context of mergers and acquisitions, standstill agreements should be considered in other circumstances due to the uncertain economic times brought about by COVID-19.
How does a standstill agreement work?
Standstill agreements live up to their name, placing a temporary legal freeze or “standstill” on commercial relationships. This standstill can give the parties time for conditions to stabilize or otherwise prevent a default under an agreement. Under a standstill agreement, creditors agree not to take legal action against a debtor for a specified period of time. In exchange, the debtor typically agrees not to engage in any transaction “not in its ordinary course of business,” and not to make any sudden or significant changes in ownership or control of the business. Parties can otherwise modify the terms of an agreement as appropriate.
This cooperative agreement does not release parties from their obligations. Instead, it recognizes the economic challenges of the times and formalizes an understanding between the two companies that they desire to preserve the business relationship through the turmoil. These agreements can avoid litigation resulting from breaches of contract and preserve key relationships.
Notably, a standstill agreement need not freeze the relationship in its entirety and the parties can negotiate and draft the agreement’s terms so that certain obligations or services continue through the standstill period. For instance, a debtor may continue to make partial payments to the creditor during the standstill period or a creditor may continue to provide services.
Last week, the American Bar Association published a model standstill agreement, specifically tailored towards the COVID-19 pandemic. One of the model agreement’s unique provisions states the parties support one another’s attempt to secure new financing, allowing the parties to reference the standstill agreement in loan applications or financing discussions. As many organizations seek to take advantage of new government and private funding, this support may encourage lenders and promote provision of capital.
When may a standstill agreement be relevant for your business?
If your organization is struggling to meet its obligations under its contracts, including either paying or collecting for services, a standstill agreement may provide some relief. Standstill agreements should not be used only as a vehicle to delay litigation but should be entered into with the intent to preserve commercial relationships.
Please contact either of the authoring attorneys or a member of the Woods Rogers Business and Corporate practice to discuss whether a standstill agreement may be appropriate for your business.