A “go-shop” is a provision in a merger agreement that permits a target company, after executing a merger agreement, to continue to actively solicit bids and negotiate with other potential bidders for a defined period of time. Where a target has engaged in a thorough pre-signing market canvass, a go-shop has little or no utility. However, when a target has not undertaken any form of pre-signing market canvass before signing up a deal (typically either because the buyer professed an unwillingness to bid if the target commences a market canvass or because the target was concerned that an auction process would result in employee and/or customer defections1), a go-shop theoretically should produce the best possible transaction for the target company and its stockholders. While the authors are not aware of any empirical analysis of go-shops, our practical experience suggests that while go-shops may be beneficial in some circumstances, they may serve as mere window dressing in other cases. If so, then judicial skepticism of the benefit of a go-shop is warranted in the latter cases.
Running the Sales Process
In considering a transaction involving a change of control, directors of Delaware corporations are charged with obtaining the best transaction reasonably available for the corporation and its stockholders.2 The phrase “Revlon duties” refers to (i) the standard of review that a Delaware court will utilize in reviewing transactions involving a sale, break-up or change of control of a corporation and (ii) the contextually-specific obligations that are imposed on a board of directors in such transactions. While there is no “blueprint” for running a sales process, the board of directors of a target company generally may satisfy its fiduciary duties to obtain the best transaction reasonably available under the circumstances for the corporation and its stockholders by engaging in one of the following types of transactions: (i) a transaction with the highest bidder after a full public auction of the target company, i.e., a pre-agreement market check; (ii) a transaction with the highest bidder after a more limited pre-agreement market check in which multiple potential bidders are contacted and participate in the bidding; or (iii) a transaction with a single bidder where the target board has reliable evidence sufficient to allow it to assess the fairness of the bid (and, by extension, whether it has obtained the best transaction reasonably available).3
The Post-Signing Market Check
During the late 1980s, Delaware courts considered whether target company directors who had forsaken an open auction process in favor of negotiating with a single bidder had satisfied their heightened duties in a sale of control when they agreed to a transaction with a post-signing market check. A post-signing market check, it was argued, was effective because it established a “floor” for the transaction and, by providing for a limited period of time after the announcement of the transaction for a competing bidder to emerge, allowed a transaction’s reasonableness to be tested.4
The Delaware courts first considered the post-signing market check in the case of In re Fort Howard Corp. S’holders Litig.5 In Fort Howard, plaintiffs, shareholders of Fort Howard Corporation, the target company, sought a preliminary injunction against the closing of a tender offer for up to all of the outstanding shares of the company. The tender offer was the first step of a two-step leveraged management buyout transaction. The shareholders alleged, among other things, that the Fort Howard directors favored the management-led buyers and did not seek the best transaction reasonably available under the circumstances.
The transaction at issue in Fort Howard included a number of features that came to define the post-signing market check. In particular, the Fort Howard board approved a transaction with a single bidder, but provided a mechanism by which competing bidders could later emerge. The transaction contained (i) a “window-shop” provision allowing the company to receive and consider alternative proposals but not to actively to solicit such proposals; (ii) a press release stating that Fort Howard had the right to consider alternative proposals and would consider alternative proposals; (iii) a window of forty (40) calendar days between the announcement of the transaction and the anticipated closing of the tender offer; and (iv) a modest termination fee (1.9% of the equity value of the transaction).6
The Court of Chancery concluded that the rationale for adopting this approach – “permitting the negotiations with the management affiliated buyout group to be completed before turning to the market in any respect – ma[de] sense.”7 The Court of Chancery noted that “[t]o start a bidding contest before it was known that an all cash bid for all shares, could and would be made, would increase the risk of a possible takeover attempt at less than a ‘fair’ price or for less than all shares.”8 The Court also determined that the “alternative ‘market check’ that was achieved was not so hobbled by lock-ups, termination fees or topping fees, so constrained in time or so administered (with respect to access to pertinent information or manner of announcing ‘window shopping’ rights) as to permit the inference that this alternative was a sham designed from the outset to be ineffective or minimally effective.”9 Rather, it found the device “reasonably calculated to (and did) effectively probe the market for alternative possible transactions.”10 Having reached the conclusion that the Fort Howard board acted in a good faith pursuit of company and shareholder interests by structuring the transaction in this manner, the Court concluded that the board had not violated its Revlon duties.
Following Fort Howard, a board was able to satisfy its Revlon duties – to pursue shareholder interests upon sale of the company, in good faith and advisedly, in an effort to obtain the best price reasonably available – even when involved only with a single bidder, provided that the procedure it adopted to structure a transaction and the negotiations surrounding that transaction were “sufficient to inform the exercise of judgment that board [will have] made in entering the merger agreement.”11
The Post-Signing Market Check Redux
In recent years, the Delaware courts have revisited what characterizes an adequate post-signing market check. In each of In re Pennaco Energy Inc.12 and In re MONY Group Inc.13, the Court of Chancery approved a post-signing market check that differed in several important respects from the postsigning market checks previously condoned by the Court of Chancery. First, in Pennaco and MONY, the target board of directors agreed to a termination fee that appeared to be significantly higher (3.0% and 3.3%, respectively) than might have been expected in the context of a sale of control (in the absence of an auction or a pre-signing market check) to a single bidder. (In several earlier decisions, the Court of Chancery had approved transactions involving post-signing market checks that had termination fees ranging from 1.9% to 2% of the equity value of the deal.14) Citing precedent decided in the context of stock-for-stock mergers or liquidated damages provisions, the Court of Chancery approved the higher termination fees in both cases.15 Interestingly, however, the Court did not analyze whether the higher termination fee was reasonable in comparison to the fees previously approved by the Court of Chancery in earlier decisions involving single bidders and post-agreement market checks. Second, although the press releases issued by the Pennaco and MONY boards both failed to explicitly invite competing proposals, this difference did not cause the Court any pause.16
Before the Pennaco and MONY decisions, if a target had negotiated with a single bidder and then agreed to be acquired by that bidder, the availability of a post-agreement market check, coupled with a press release inviting competing bids and a modest termination fee (approximately 2% or less of the equity value) would likely have provided the target board with reliable evidence sufficient to assess the fairness of the initial bid. Moreover, in such cases, other deal protections, such as a matching right, were generally kept to a minimum. However, in Pennaco and MONY, the Delaware courts seemed to relax several of those requirements when it permitted a higher termination fee (closer to the amount generally seen in transactions that have been subject to at least a limited market check) and matching rights and it did not require the target to issue a press release that expressly invited competing bids.
Emergence of Go-Shop Provisions
After the Pennaco and MONY decisions, post-agreement market checks began fading into the background and a new approach – the go-shop provision – started to take hold. A typical go-shop provision17 permits a target company to solicit proposals and enter into discussions or negotiations with other potential bidders during a limited period of time (typically 30-50 days) following the execution of the merger agreement.18 The target company is permitted to exchange confidential information with a potential bidder, subject to the execution of a confidentiality agreement that is substantially on the same terms and conditions as the confidentiality agreement executed by the initial bidder. Any non-public information provided or made available to a competing bidder typically also must be provided or made available to the initial bidder.
Increasingly, go-shops also provide for a bifurcated termination fee – a lower fee payable if the target terminates for a competing bidder who is identified during the go-shop period and a traditional termination fee if the target terminates for a competing bidder who is identified after the go-shop period ends. For example, while only 67% of the 2006 go-shop transactions surveyed by the authors also included a bifurcated termination fee, every 2007 go-shop transaction included a bifurcated termination fee. Moreover, the termination fees during the go-shop period are, on average, between onethird and two-thirds of the full termination fee payable after the go-shop ends.
Depending upon the merger agreement, the actions that a topping bidder must take during the go-shop period in order to avail itself of the lower termination fee vary widely. Some agreements merely require that (i) the target board conclude before the end of the go-shop period that the topping bidder has submitted an acquisition proposal that constitutes or is reasonably likely to lead to a superior proposal, and (ii) the target board terminate the initial proposal (whether before or after the end of the go-shop period). When this type of provision (commonly referred to as “open” go-shop) is used, the target has the entire go-shop period to solicit a competing proposal and the topping bidder has ample time to pull together its competing proposal. Other merger agreements, however, take a markedly different approach and require, prior to the end of the go-shop, that (i) the jumping bidder must sign a confidentiality agreement, resolve all due diligence concerns, and prepare and submit a topping bid and form of merger agreement, and (ii) the target board must determine that the topping bid is a “superior proposal,” wait for the initial bidder’s match right to expire, accept the topping bid, approve the merger agreement and terminate the initial merger agreement. When the parties agree to this type of provision (commonly known as a “closed” go-shop), the go-shop period, for all practical purposes, is shorter than an “open” go-shop because it requires the jumping bidder to submit its initial bid early in the process to allow enough time for the target to take the remaining actions.
The Intended Benefits of Go-Shops
The target’s desire for a bifurcated fee with a significantly lower termination fee payable during the go-shop should not be surprising – it enhances the effectiveness of the target’s go-shop by making the potential competing bidder’s “entry costs” lower than would exist with a traditional no-shop provision and corresponding full termination fee. If the reduced termination fee generates more interest in the target company than a traditional no-shop provision, then a superior offer may be more likely to emerge during the go-shop period.
By virtue of its ability to canvass the market following the execution of a definitive agreement, the board of directors may be in a better position to gauge the level of interest of other potential bidders, using the agreed upon purchase price as a floor. As a result, the target company’s board of directors should have a greater level of comfort that they have satisfied their fiduciary obligations to the company and its stockholders, including their duty under Revlon to secure the best transaction reasonably available. (If a superior offer fails to materialize during the go-shop period, the board of directors presumably would point to such failure as reliable evidence of the fairness of the initial bid.) Moreover, as noted above, a go-shop also permits the target company to agree to be acquired without having to conduct a full auction or pre-agreement market check, thus avoiding a number of undesirable consequences.19
A go-shop provision may also hold some appeal for potential bidders. For example, by agreeing to include a go-shop provision, a bidder avoids engaging in a potentially costly auction process. In addition, in many cases target companies have been willing to provide the initial bidder with the right to match any competing bid, whether made during or after the go-shop period.20 Finally, since a go-shop actively encourages jumping bids, the transaction (assuming it is not jumped) may be more defensible than a transaction that is simply subject to a traditional no-shop provision.21
Go-Shop Provisions: Effective Tools or Window Dressing?
Increasingly, both private equity firms and their targets have become comfortable with the exclusive negotiation/go-shop model.22 In fact, the transactions announced so far this year account for more go-shops than all prior years combined. Target companies, for their part, have had success negotiating go-shops with longer solicitation periods and lower termination fees for competing transactions proposed during the go-shop period. The question remains, however, whether such provisions provide an effective alternative to the traditional pre-agreement market canvass. Moreover, how should one measure the effectiveness of a go-shop? By the way in which they are structured and implemented? By reference to the theoretical possibility of a topping bid that they present? Or, by reference to the actual number of jumping bids that have occurred during a go-shop period? In the latter case, would a small number of jumping bids suggest that the original bid was “fully priced” or that go-shops are, for some reason, ineffectual? While we have not undertaken an empirical analysis of all the transactions with go-shops,23 we will offer three observations with respect to the questions we have posed.
First, the effectiveness of a go-shop may by compromised by the mechanics of the go-shop (for example, is it an “open” or “closed” go-shop) or by the manner in which the target board applies the mechanics of the go-shop. Several recent decisions of the Delaware Court of Chancery offer guidance on each of these points.24 For example, in Lear, the merger agreement between Lear and Carl Icahn provided for a “closed” go-shop – that is, it provided that the lower termination fee was available only if the target approved a superior proposal and terminated the original transaction before the end of the go-shop period. Criticizing the “truncated” nature of the go-shop, the Court observed that the go-shop:
left a bidder hard-pressed to do adequate due diligence, present a topping bid with a full-blown draft merger agreement, have the Lear board make the required decision to declare the new bid a superior offer, wait Icahn’s ten-day period to match, and then have the Lear board accept that bid, terminate its agreement with Icahn, and ‘substantially concurrently’ enter into a merger agreement with it. All of these events had to occur within the go-shop period for the bidder to benefit from the lower termination fee…. It is conceivable, I suppose, that this could occur if a ravenous bidder had simply been waiting for an explicit invitation to swallow up Lear. But if that sort of Kobayashi-like25 buyer existed, it might have reasonably been expected to emerge before the Merger Agreement with Icahn was signed…26
Because the go-shop required a topping bidder to “get the whole shebang done” during the go-shop, the Court gave “little weight” to the primary benefit of the go-shop – the bifurcated termination fee.27
In contrast to Lear, where the mechanics of the go-shop were at issue, the mechanics of an “open” go-shop were not criticized in the Topps decision. However, in Topps, the Court was troubled by the manner in which the target board implemented certain aspects of the go-shop:
Because of the final-hour nature of the bid, the Topps board had to determine whether to treat Upper Deck as an Excluded Party under the Merger Agreement so that it could continue negotiations with it after the close of the Go Shop Period. The Topps board’s decision not to do so strikes me as highly questionable…Upper Deck was offering a substantially higher price, and rather than respond to Upper Deck’s proposal by raising these legitimate concerns, the Topps board chose to tie its hands by failing to declare Upper Deck an Excluded Party in a situation where it would have cost Topps nothing to do so. Eisner would have had no contractual basis to complain about a Topps board decision to treat Upper Deck as an Excluded Party in light of Upper Deck’s 10% higher bid price.28
By failing to treat Upper Deck as an Excluded Party, the Topps board assured that the initial bidder would receive a higher termination fee in the event that a superior proposal from Upper Deck ultimately prevailed. The Court was “troubled” by the board’s decision to opt for that approach, when “the downside of [declaring Upper Deck to be an Excluded Party] is hard to perceive.”29
The Lear and Topps decisions, considered together, demonstrate that the manner in which a go-shop is drafted and implemented will impact the effectiveness of the go-shop and, in turn, will be considered by the Court when it assesses whether the target board has met its burden to obtain the best price reasonably available.
Second, when we surveyed the transactions that have utilized a go-shop, we noted just four transactions (of the sixty-two transactions we reviewed) that were successfully jumped during a go-shop period.30 In two of the four transactions, a private equity bidder made a jumping bid during a go-shop period (the Aeroflex and Catalina deals), while the other two transactions (the Triad and Everlast deals) involved jumping bids by a strategic buyer. In light of the prevalence of single bidder deals (generally involving private equity bidders), the low incidence rate of jumping bids by strategic bidders strikes one as surprising. However, it is unclear from the data whether strategic bidders fail to show more interest because (i) the initial bid fully priced the target, (ii) certain strategic bidders are unable to muster internal support quickly enough to generate a bid, or (iii) strategic bidders conclude that, in light of the timing delay, deal protections, management preferences, board inertia, etc., the “deck is stacked” against their competing bid. While private equity buyers generally do not suffer from the same set of internal limitations as strategic bidders, they are nevertheless no more willing to make a jumping bid during the go-shop (doing so in only 3% of the surveyed transactions), which may lend some credence to the argument that private equity firms are generally unwilling to jump another private equity buyer’s deal. In light of these statistics, one may ask whether practitioners, buyers and sellers – and more importantly, the courts – should be willing to draw any favorable inference from the existence of a go-shop when the reality is that competing bidders (of all kinds) are unlikely to submit a superior offer during a go-shop period. Put another way, why should one assume that a go-shop will serve to effectively canvass the market (and attain the best possible value for the target company and its stockholders) if that effort so rarely produces a competing bid?
Third, a go-shop may merit additional examination (and perhaps skepticism of its value) if it is used in a transaction in which a private equity buyer has negotiated material terms of the transaction with the CEO or other key executives of a target company before the board of directors becomes involved. While a jumping bid remains possible, will the fact that the initial bidder has reached agreement with the CEO increase the reluctance of other potential bidders to bid because they perceive that management may be less willing to fairly negotiate with a third-party? In such cases, is it reasonable to expect that a go-shop provision adds anything meaningful? Will the go-shop serve to cleanse the process flaws? One recent Delaware decision suggests, rather firmly, answers to each of these questions.
In In re SS&C Technologies, Inc., Shareholders Litigation, the CEO of a Delaware corporation, with the assistance of investment bankers hired by the company, discussed a possible acquisition of the company with six private equity firms, subject to the CEO’s right to “make a significant investment in the acquisition entity.”31 The CEO presented the board of directors with the preferred bidder’s offer, which was subsequently negotiated and accepted by the special committee. When considering a proposed settlement of the litigation, Vice Chancellor Lamb observed that the CEO’s and board’s conduct raised a number of questions regarding “whether, given [the CEO’s] precommitment to a deal with [acquiror], the board of directors was ever in a position to objectively consider whether or not a sale of the enterprise should take place.”32 The Court also expressed its skepticism whether, given the CEO’s agreement to consummate a transaction with the initial bidder, the special committee was in a position to solicit competing bids, particularly from potential bidders that would not have been interested in retaining management. Where a CEO’s conduct corrupts the sales process, as it did in SS&C, it seems unlikely that the existence of a go-shop will provide any meaningful additional comfort to the Court.
Ultimately, the value of a go-shop provision is directly tied to the context in which the target board of directors determines to negotiate for it. Assuming the target company’s board of directors has a thorough knowledge of the market and a corresponding belief that the go-shop will make a material difference,33 a go-shop provision may be a valuable (and viable) alternative to the traditional post-agreement market check.34 However, the target board should negotiate for a go-shop that provides potential bidders with a meaningful opportunity to make a topping bid while the lower termination fee remains available.35 In addition, where the initial transaction is the result of negotiations that have been tainted by the actions of overreaching management, practitioners and directors should be hesitant to draw much comfort from the use of a go-shop.