It has become quite common in negotiated acquisitions for boards of target companies to agree not to solicit other offers after signing the merger agreement (under ‘no-shop’ provisions), and to pay a ‘break fee’ to the initial bidder under certain specific circumstances, such as where the target’s board exercises its so-called ‘fiduciary out’ to support a competing superior bid.
Contrary to no-shop provisions, ‘go-shop’ provisions developed in the United States allow a target to actively solicit offers from other bidders after signing the merger agreement, usually for a limited period of time. This period is generally between 20 and 30 days, but has been as low as 15 days and as high as 45 to 50 days in recent transactions. Go-shop provisions generally allow an unlimited solicitation during the go-shop period. Maytag, for example, canvassed over 100 other potential bidders under a go-shop provision, but some other acquisition transactions did limit the number of permitted bidders or restricted potential offers to a pool of potential buyers (e.g., only strategic buyers.)
Go-shop clauses are still used rather infrequently in the United States compared to the more traditional no-shop structure. Certain objections to go-shops versus a pre-agreement auction or similar process relate to the initial buyer’s advantage with respect to the necessary time to complete due diligence and financing (more so where the go-shop period is short) and the deterrent effect of any matching rights and break fees in favour of the initial bidder. However, go-shops may have the advantage for the target over a pre-agreement auction in accelerating the sale process so that it becomes a less time-consuming and disruptive process for management. The go-shop also ensures that the seller has secured the offer put forth by the first bidder while leaving the seller open to pursue higher offers.
Related Break Fees
In recent transactions with go-shop provisions, the amount of the break fees was adjusted depending on whether a competing bid emerged during the go-shop period (in which case the break fee was equal to 1 to 1.5 per cent of transaction value) or after the go-shop period and during the no-shop period (in which case the break fee was equal to 2 to 3 per cent of transaction value).
U.S. Courts and the Revlon Duty
U.S. courts have defined the duty of directors in a sale of control context as one of seeking the highest value reasonably available for stockholders (the so-called ‘Revlon duty’). Under the Revlon duty, once the directors have decided to sell control of a company, "[t]he directors’ role change[s] from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company." Go-shop provisions may in principle be a more effective method of ensuring that duty is fulfilled than the no-shop structure, although this has not been blessed by the courts.
Although the Canadian courts have not developed a standard similar to the Revlon duty in a sale of control context, the Ontario Court of Appeal has stated (in a decision discussed elsewhere in this issue) that a ‘market canvass’ or ‘market check’ may be appropriate. (See the related article in this issue that discusses this case in the context of post-agreement market checks.) In light of the length of time that must pass under Canadian law between the announcement of an offer and its completion, most practitioners consider a ‘post-announcement’ or ‘post-agreement’ market canvass to be sufficient for a traditional no-shop structure with a reasonable break fee. Accordingly, buyers are more likely to object to the inclusion of go-shop provisions in transactions involving Canadian targets. However, as demonstrated in the recent offer by Algonquin Power Income Fund to purchase all units of Clean Power Income Fund, go-shop provisions may nonetheless be a useful negotiation tool in structuring an M&A transaction.