While there are many ways for a public company to engage in a sales process, a privately negotiated sale offers advantages to both the buyer and the target company. A privately negotiated sale enables the buyer to avoid the competitionbased issues associated with an auction, such as having to share access to the target’s management, dealing with a management whose attention is fragmented, and receiving the same diligence information as all other bidders. The target, for its part, may have concerns about the impact that a public auction would have on its business operations and stock price, as well as the possible consequences of announcing its intention to sell itself, especially if the result is a busted auction. To avoid these risks, a target may choose to enter into a purchase agreement without making a prior public announcement of its intention to sell or engaging in an auction, and utilize a “go-shop” provision as a post-signing market check.
A go-shop provision is a clause that permits a target company to actively solicit offers from other potential buyers for a limited time following the signing of a purchase agreement. Upon the expiration of the go-shop period, the target company would then be subject to a customary “no-shop” restriction on solicitation with a “fiduciary out” clause, which restricts the target’s ability to receive offers from and negotiate with other bidders except for unsolicited, non-negotiated superior offers.
While go-shop transactions are not the norm in public company acquisitions, they are becoming more common. According to FactSet TrueCourse MergerMetrics, in the first four months of 2007 there were 21 deals involving U.S. target companies that contained a go-shop provision, as compared with 16 deals containing such a provision in all of 2006.1 In many of these deals, the transaction involved a private equity buyer.
o-shop provisions can vary as to their terms and, as such, can be structured to provide differing levels of deal protection and advantage to a buyer. Common terms that are negotiated include the length of the go-shop solicitation period, whether there is a “hard stop” or “soft stop” at the end of such period, the discount of the break up/termination fee during the go-shop period, the buyer’s right to be updated as to alternative bids, and the buyer’s right to match or top competing bids. And when negotiating these terms, it is important to remember that go-shop provisions primarily serve to allow the target’s board of directors to fulfill its fiduciary duties; because the buyer assumes the target’s liabilities once the deal is consummated, the risk of a shareholder lawsuit ultimately falls on the buyer.
While go-shop solicitation periods have ranged from as short as 10 days to as long as the deal’s completion, in 2007 the majority of deals had go-shop periods of between 30 and 50 days from the signing of the purchase agreement. Obviously, the shorter the length of the go-shop period the more difficult it is for another bidder to complete its diligence process and submit a topping offer. Also, adding a “hard stop” to the go-shop provision (i.e., requiring that a competing offer must be accepted, and an agreement entered into, and not just negotiated or submitted, during the go-shop period) gives the buyer additional protection. A “soft stop,” which permits parties that began negotiating with the target or made an offer to it before the end of the go-shop period to continue to negotiate with the target after expiration of the go-shop period, increases the chances of a topping bid.
Most go-shop provisions have a two-tiered structure for termination fees, with a lower fee for deals that break up during the go-shop period and a higher fee for deals that are terminated after the expiration of the go-shop period. While there is no standard fee, the amount charged during the go-shop period is usually one-third to two-thirds of the fee charged after the go-shop period expires. A buyer should attempt to secure a provision that allows for a reduced termination fee only if a bid is accepted and a deal is signed during the go-shop period, but with no reduction in the termination fee for bids that are tendered during the go-shop period but are not accepted until after the go-shop period expires.
As with no-shop deals, it is important for a buyer to secure a provision requiring the target to inform the buyer of any alternative proposals it receives, to provide the buyer with copies of any written proposals and to share with the buyer all information that the target provides to competing bidders. Inclusion of such a provision ensures that the buyer will be alerted to any potential threats to the signed deal in a timely manner, giving the buyer the time and information necessary to prepare to match or top another bid.
In addition, a provision obligating the target to renegotiate with the initial buyer for a specified amount of time before accepting a bid submitted by an interloper affords the initial buyer ample opportunity to evaluate whether or not it wants to match a competing bid. This term has the added benefit of serving as a deterrent to potential interlopers, who must consider the possibility that any bid they make could be matched, resulting in wasted effort and unrecoupable expense.
While a go-shop provision increases the possibility of a buyer losing out to a topping bid during the go-shop period, it is important to note that competing offers are made in only about 10% of the deals containing go-shop provisions. In addition, successfully negotiating the terms of such a provision can yield substantial deal protection while also providing a buyer with the assurance of at least some compensation for its time and effort in the event of a topping bid