Go shop provision

What Is a Go Shop Provision?

A go shop provision is a clause in a definitive acquisition agreement that allows a target company to actively solicit alternative acquisition proposals from third parties for a specified period after signing an initial agreement. This provision is a significant component within mergers and acquisitions (M&A) transactions, falling under the broader category of corporate finance. Its primary aim is to maximize shareholder value by ensuring the selling company has adequately tested the market to secure the best possible deal.

History and Origin

Go shop provisions emerged in M&A practice in the mid-2000s, representing a shift from traditional deal structures that often included "no-shop" clauses. Historically, after signing a merger agreement, target companies were generally restricted from actively seeking competing bids. However, the legal landscape, particularly in Delaware, where many companies are incorporated, emphasizes the fiduciary duty of a board of directors to obtain the highest possible price for shareholders when selling a company. This duty, often referred to as "Revlon duties," encouraged boards to explore mechanisms that would satisfy this obligation.¹⁵

The introduction of the go shop provision provided a formal mechanism for a post-signing market check. Rather than conducting an extensive pre-signing auction, which could be disruptive to the business, a board could sign a deal with an initial bidder and then "go shop" for better offers. This approach allowed the transaction to progress while simultaneously fulfilling the board's duty to thoroughly test the market.¹⁴ While early Delaware court decisions sometimes raised questions about their effectiveness, the Delaware Supreme Court has since affirmed that boards can satisfy their Revlon duties without conducting an active pre-signing market check, provided interested bidders have a fair opportunity to present higher-value alternatives and the board retains flexibility to accept a superior deal.¹³

Key Takeaways

• A go shop provision allows a target company to actively solicit alternative bids after signing an initial merger agreement.
• The period typically lasts between 30 and 60 days, giving the target time to seek superior proposals.
• It is designed to help a company's board of directors fulfill its fiduciary duty to shareholders by maximizing the sale price.
• The initial bidder often retains a "right to match" any superior offer and is typically entitled to a reduced breakup fee if the deal is terminated for a superior proposal.
• Go shop provisions are more common in transactions involving private equity buyers.

Interpreting the Go Shop Provision

The inclusion of a go shop provision in an acquisition agreement indicates that the selling company's board aims to demonstrate that it has thoroughly explored all reasonable alternatives to maximize value for its shareholders. The initial offer serves as a "stalking horse" bid, setting a floor for potential better offers.¹²

During the go shop period, the target company is generally permitted to engage with other potential buyers, provide them with confidential information (subject to confidentiality agreements), and negotiate terms. This process allows the target to gauge genuine market interest and potentially elicit a higher bid than the one initially secured. The length of the go shop period, typically one to two months, is often seen as a critical factor in its effectiveness, as potential alternative bidders need sufficient time to conduct due diligence and formulate a competitive proposal.¹¹

Hypothetical Example

Imagine TechInnovate, a public company, receives an acquisition offer from Giant Corp. for $50 per share. To ensure they are getting the best price for their shareholders, TechInnovate's board of directors negotiates a merger agreement with Giant Corp. that includes a 45-day go shop provision.

During this 45-day period, TechInnovate actively approaches other potential acquirers, providing them with confidential financial information and allowing them to conduct limited due diligence. On day 30, InnovateX, a competing firm, submits a superior, unsolicited offer of $55 per share. According to the terms of the go shop provision, TechInnovate's board informs Giant Corp. of the new offer. Giant Corp. then has a pre-agreed period (e.g., three to five business days) to decide if it wants to match InnovateX's offer. If Giant Corp. chooses not to match, TechInnovate can terminate the agreement with Giant Corp. (paying a reduced breakup fee) and enter into a new agreement with InnovateX, thereby securing a higher price for its shareholders.

Practical Applications

Go shop provisions are predominantly found in public M&A deals, particularly those involving financial buyers such as private equity firms. These buyers may prefer to avoid a protracted pre-signing auction process and instead rely on a post-signing go shop to provide market validation for their offer, thereby giving the target's board comfort regarding its fiduciary duties.¹⁰

While common in the United States, their prevalence varies globally. For instance, in Australia, go shop provisions have historically been rare, though specific instances have shown them to be effective in generating superior proposals. For example, in 2021, Mainstream Group Holdings included a one-month go shop provision in its scheme implementation deed, which ultimately led to a superior proposal from a rival bidder offering a 67% premium over the initial bid.⁹ This demonstrates the potential of a go shop provision to significantly enhance shareholder returns.

Limitations and Criticisms

Despite their intended purpose, go shop provisions face certain limitations and criticisms. Some argue that they often serve as "window dressing" to validate an already preferred deal rather than truly generating a superior offer.⁸ Critics suggest that the typical 30-to-60-day go shop period may be insufficient for a new bidder to conduct thorough due diligence and formulate a competitive, fully financed proposal, especially for complex transactions.⁷

Furthermore, the initial bidder usually retains a "right to match" any superior offer, potentially deterring other interested parties. If the target company accepts a higher bid from another party, a reduced breakup fee is typically payable to the initial bidder, which can still add a cost to the subsequent deal. The effectiveness of go shop provisions in consistently attracting higher bids has been debated within corporate governance circles, with some studies suggesting they do not always lead to a higher ultimate sale price.⁶ However, other analyses indicate they are associated with a higher likelihood of competing bids and upward revisions of initial offer prices, suggesting they do further shareholder interests.⁵

Go Shop Provision vs. No-Shop Provision

The go shop provision and the no-shop provision represent two contrasting approaches to how a target company can engage with potential buyers during an acquisition process.

A go shop provision explicitly allows and encourages the target company to actively solicit alternative bids for a defined period after signing an initial merger agreement. This means the target's board can proactively reach out to other potential buyers, share confidential information, and negotiate. Its purpose is to ensure the company obtains the best possible price by conducting a post-signing market check.

In contrast, a no-shop provision restricts the target company from actively soliciting or encouraging alternative acquisition proposals once a definitive agreement has been signed. Under a no-shop clause, the target generally cannot initiate discussions with other potential buyers or provide them with confidential information. However, most no-shop provisions include a "fiduciary out," which typically allows the board to consider and engage with unsolicited offers if the board determines, based on its fiduciary duty, that such an offer constitutes a "superior proposal."⁴ The key distinction lies in active solicitation versus passive reception of offers.

FAQs

What is the typical duration of a go shop period?

The typical duration of a go shop period is usually between 30 and 60 days, though it can vary depending on the complexity of the deal and negotiations between the parties.³

Does a go shop provision always result in a higher bid?

No, a go shop provision does not always result in a higher bid. While designed to encourage competing offers and maximize shareholder value, various factors such as market conditions, the attractiveness of the initial offer, and the limited time for other bidders to conduct due diligence can influence whether a superior proposal emerges. Some research suggests that they often do not lead to a higher ultimate price, while other studies show an increased likelihood of competing bids.²

Why would an initial bidder agree to a go shop provision?

An initial bidder might agree to a go shop provision for several reasons. It can help the bidder avoid the delays of a pre-signing auction process and provides some assurance that the target's board has fulfilled its fiduciary duty, potentially reducing the risk of shareholder litigation.¹ Additionally, the initial bidder often secures the right to match any superior offer, giving them a final chance to secure the deal.

How does a go shop provision relate to a board's fiduciary duty?

A go shop provision is primarily included to help a company's board of directors fulfill its fiduciary duty to maximize value for shareholders in a sale of the company. By actively testing the market for alternative offers after receiving an initial bid, the board demonstrates that it has taken reasonable steps to obtain the best price available. This acts as a post-signing market check.

Is a go shop provision mandatory in all M&A deals?

No, a go shop provision is not mandatory in all mergers and acquisitions deals. Its inclusion is subject to negotiation between the buyer and seller. While often seen in deals with private equity buyers or where a pre-signing market check was limited, many deals proceed with a no-shop provision, which is generally more restrictive on the target's ability to seek alternative offers.