While still used sparingly, there has been a slight increase in the use of “go-shop” clauses by Canadian targets in friendly acquisitions over the past few years. The few issuers that used go-shops were able to sign an acquisition agreement and conduct a market check after signing, thereby enabling them to secure an offer for the company while still preserving their ability to actively seek higher bids.
In most friendly acquisitions of Canadian companies, however, the target will conduct a market check before entering into an acquisition agreement. Since the target has already conducted a market check, the buyer will insist that the acquisition agreement contain a “no shop” provision that, subject to limited exceptions, prohibits the target from soliciting or dealing with competing offers.
Two potential risks of conducting a pre-signing market check are: (i) some buyers may not be willing to participate in an auction or market check process which could result in the loss of a potential offer, and (ii) during the time it takes to conduct the market check, equity and/or debt markets could change such that the target’s stock becomes less desirable or valuable, or a potential buyer may no longer be able to secure debt financing or use its own stock as acquisition currency. This could result in not only the loss of a potential offer, but if the market check was, or becomes, public, the target can be considered damaged or unwanted and experience a significant decrease in its stock price.
Despite the potential benefits of a go-shop, or the fact that they have become fairly common in the United States, particularly in deals involving private equity buyers, go-shops are used only sparingly in Canada - there have only been 21 announced deals since 2007 which included a go-shop clause. Furthermore, the empirical evidence in Canada, though somewhat limited, shows that it is very rare for a topping bid to emerge as a result of a go-shop. Over the past five years, the only deal with a go-shop that resulted in a topping bid was the October 17, 2011 offer by Prime Restaurants Inc. to acquire Cara Operations Limited. In that transaction, Fairfax Financial Holdings Limited made a topping bid during the go-shop period that Cara did not match.
It is not clear why go-shops have not resulted in more topping bids, though a few possibilities include:
- high initial bids, perhaps as a result of the pressure of the go-shop,
- investors, particularly private equity investors, not willing to participate in a process where there is an existing bid, or
- investors not participating in the post-signing market check as a result of the short go-shop period together with the fact that they must not only top an existing bid, but do so factoring in the break fee as well as any matching rights.
Given the potential benefits and limitations to go-shops, it is critical that targets and their advisors carefully negotiate and draft go-shops to maximize effectiveness. Some of the key points that should be considered include:
- Length of the Go-Shop Period – A go-shop should provide sufficient time to conduct a meaningful market check which will depend on factors such as the complexity of the target and the pool of potential bidders. Go-shop periods in Canada are typically between 30-45 days though we have seen as short as 14 days and as long as 60 days.
- Two Tiered Break Fee – Most go-shops include a two tiered break fee that provides for (i) a reduced break fee during the go-shop period or thereafter with an excluded person (discussed below), and (ii) a full break fee following expiry of the go-shop period. The go-shop break fee is generally about 40-60% of the full break fee.
- Excluded Person – The majority of the 21 Canadian deals announced since 2007 permitted the target to continue to negotiate with an “excluded person” during the no-shop period and to pay the lower, go-shop break fee if a transaction was announced with an excluded person. While the precise definition is subject to negotiation, an “excluded person” is a bidder that submitted an acquisition proposal to the target during the go-shop period that the target board determined is, or is reasonably l ikely to lead to, a superior proposal.
- Matching Rights – In most public acquisitions, a bidder is given a right to match a superior proposal during the non-solicit (or no-shop) period. However, in approximately one-third of the transactions involving a go-shop, the initial bidder was not given the right to match a superior proposal during the go-shop period even though they were able to do so during the non-solicit period.