In the current wave of U.S. public mergers and acquisitions, and notwithstanding the credit crunch-induced deal downturn, "go-shop" provisions have become increasingly prevalent. This trend is likely due to the relative strength in bargaining that sellers and targets have recently enjoyed, coupled with the normal risk aversion felt by public company directors in respect to deal-related stockholder litigation. While go-shop provisions can be used quite effectively to help target boards satisfy their fiduciary duties, these provisions are not universally appropriate and should even be resisted in certain circumstances.
A go-shop clause allows the target company, after execution of a merger agreement, to actively solicit and negotiate with other potential bidders for a defined period of time. Invariably, there's a lower termination fee payable -- often referred to as a bifurcated fee provision -- if the agreement is terminated in this period. After expiration of the go-shop period, merger agreements generally provide a standard "no-shop" or "window-shop," which prohibits the target from soliciting third-party bids, subject to a fiduciary out clause. A target that receives an unsolicited superior proposal during the no-shop period is normally permitted (under the fiduciary out) to terminate the original agreement and enter into a new one with the superior bidder upon payment of a breakup fee.
A Delaware corporate board involved in the sale of control has a fiduciary duty under Revlon to take measures to ensure that stockholders obtain the highest value reasonably attainable. So a target board that has not undertaken a pre-signing market canvass will often insist on a go-shop. The other option is to present the initial buyer with the less-desired alternative of allowing the target to conduct a pre-signing auction. While post-signing market checks are nothing new to U.S. mergers and acquisitions practice, in this summer's Topps decision, Delaware validated the use of go-shop provisions in lieu of a full-blown pre-signing auction as a reasonable approach to value maximization, thus consistent with the target board's Revlon duties.
The key features of a go-shop clause are:
• Limited time period: The period during which bids can be actively sought typically ranges from 25 to 50 calendar days following the signing of the original merger agreement. During this period, the target board and its financial advisers will actively canvass potential bidders and are advised not to leave any potential type of bidder off the list -- for example, by soliciting/pursuing financial sponsors at the expense of strategic partners.
• Bifurcated breakup fee: The fee payable to the initial buyer in the event that the target terminates the original merger agreement during the go-shop period is normally 40% to 65% of the termination fee that is payable in the event that the agreement is terminated during the no-shop period.
• Grandfather provisions: The target will normally be able to continue negotiations with a prospective bidder following the go-shop period if the prospective bidder's proposal may result in a deal that is superior to the original merger agreement. If the original agreement is terminated in favor of a deal put forth by a grandfathered bidder, the target may be required to pay the full no-shop termination fee.
• Matching right in favor of original buyer: As is the case in traditional no-shop provisions, the merger agreement will normally provide that the target board must present any superior proposal to the original buyer and consider any proposed changes to the original buyer's terms. Also important in light of the length of the go-shop period, the original buyer will have some period -- normally two to five business days -- to rebid should the target board determine that a go-shop bid is superior. A well-funded original buyer that has room to move up can, by its willingness to go one or two rounds, neutralize the go-shop clause and force any new buyer to be subject to the normal no-shop provisions -- including the higher termination fee.
Notwithstanding the interest surrounding the increased frequency of go-shop clauses, such provisions are not the best option in every deal. First, the Delaware courts have never stated that a go-shop is legally required, nor has the market practice universally required it.
Indeed, the target board is often already in possession of reliable evidence such as an investment bank fairness opinion upon which it can measure the fairness and approve a transaction without a pre-signing survey of the market.
Second, while the go-shop framework is set up to encourage active bidding, there is no empirical data to suggest that the bidding is any more active than it would be with a traditional no-shop, even with the lower breakup fee.
Third, a go-shop clause may work against the desired transaction structure. For example, a tender offer (which generally offers the parties a quicker acquisition path) may not leave enough time for proposals to develop in the go-shop framework.
And finally, even if a target successfully negotiates a go-shop clause, it could end up as a go-shop in name only. If the go-shop period is too short, or perceived by the market to be too short, and the original buyer has a match right, together with the negotiation-rebidding period, the practical benefit to the target could likely be of limited value.
Target boards and prospective purchasers, together with their legal and financial advisers, should consider carefully whether the particular transaction requires the use of a go-shop clause with a traditional no-shop. It should not be viewed as a one-size-fits-all must-have by target boards (especially those that have reliable evidence about what a market canvass would reveal). Nor should a go-shop be resisted by buyers when the circumstances justify the target board's needing it to help satisfy their fiduciary duties. - Matthew Herman
Matthew Herman is a corporate partner in the New York office of Freshfields Bruckhaus Deringer LLP, where he leads the U.S. M&A practice.
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