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. A status quo agreement is an agreement between a potential acquirer and a target entity that limits the purchaser`s ability to increase its interest in the target company. The agreement can be used to terminate a hostile acquisition attempt, usually at the price of a cash payment to the potential purchaser, which involves a surtax buyback of the shares already held by the purchaser. Or the target company may grant a seat on the purchaser`s board of directors in exchange for the absence of an increase in its holdings. A status quo agreement between a lender and a borrower may also exist when the lender stops requiring a planned interest or capital payment for a loan to give the borrower time to restructure its debts. In general, status quo agreements can be used to interrupt a transaction for a period of time. For example, a lender and a borrower may agree to stop paying the debt for a period of time. A status quo agreement is an agreement that preserves the status quo.
It is an agreement between the objective and the bidder that prevents the bidder from making an offer to purchase the target without first obtaining its approval. It can be added as a provision in the confidentiality agreement and will be executed before obtaining due diligence material. A status quo agreement aims to prevent hostile bids and provides a possible remedy in case the bidder uses confidential information to make a hostile offer if the parties fail to reach a mutual agreement on the terms of sale. In other areas of activity, a status quo agreement can be virtually any agreement between the parties, in which both parties agree to discontinue the case for a specified period of time. This may include an agreement to defer payments to help a company in difficult market conditions, agreements to stop the production of a product, agreements between governments or many other types of agreements. A status quo agreement can be used as a form of defence of a hostile takeover when a target company receives a commitment from a hostile bidder to limit the amount of shares it buys or holds in the target company. By committing to the promise of the potential acquirer, the target company saves more time to set up new takeover defenses. In many cases, the target company promises in return to repurchase the equity holdings of the potential purchaser for the purpose of an increase. A status quo agreement is a form of anti-support measure. A recent example of two companies that have signed such an agreement is Glencore plc, a Commodities trader based in Switzerland, and Bunge Ltd, an American agricultural commodities trader. In May 2017, Glencore took an informal step to buy Bunge.
Shortly thereafter, the parties agreed to a status quo agreement that prevents Glencore from accumulating shares or making a formal offer for Bunge until a later date. 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.