Go-Shops in M&A Deals: A Win-Win Provision?
“Go-shop” provisions are an increasingly important tool in the transaction planner’s toolkit, having gone from virtually non-existent in 2005 to very common today. A go-shop clause gives the target of an acquisition the right to shop for a superior offer for a specified time period after the initial deal is announced, in contrast to the traditional pre-signing market check followed by a post-signing “no-shop” provision.
As illustrated by recent deals, however, go-shops are occasionally used in “hybrid” forms, including, for example, a combination of no-shop provisions with a go-shop-like bifurcated termination fee (in which a lower fee applies if the target accepts an unsolicited topping bid made during a pre-specified post-signing period).
In 2008, one of us (Guhan Subramanian) published the first systematic empirical study on the incidence, design, and shareholder wealth consequences of go-shop provisions. Prior to this study, conventional wisdom tended toward the skeptical, with many commentators viewing go-shops merely as a “fig leaf” that (arguably) allowed a board of directors to satisfy its fiduciary duties, but did not necessarily maximize shareholder value. In contrast, the 2008 study found that go-shop provisions actually led to higher shareholder returns, either in the form of buyers willing to pay more for pre-signing exclusivity, or as the result of a meaningful search process that led to a competing offer and a bidding contest.
The 2008 study found that go-shop provisions actually led to higher shareholder returns, either in the form of buyers willing to pay more for pre-signing exclusivity, or as the result of a meaningful search process that led to a competing offer and a bidding contest.
The study cautioned, however, that go-shops had to be structured properly in order to have this positive shareholder wealth effect – including, for example, key provisions such as a longer go-shop window (e.g., 50-60 days rather than 20-30 days); a meaningful search process managed by a special committee of the board; a small (and bifurcated) break-up fee; and information rights or a one-time match right. The Delaware courts have also been attentive to these structural details in assessing whether go-shop provisions satisfy a sell-side board’s Revlon duties, which require that directors obtain the best value and deal terms reasonably available when they agree to sell control of a company.
Looking ahead, we predict that go-shop provisions will continue to proliferate in transactional practice. Sellers often prefer a go-shop process because it gives them the relative certainty of a “bird in hand” that can then be shopped for a bird in the bush. In addition, a go-shop allows the board to satisfy its Revlon duties and at the same time avoid some of the risks involved in pre-signing auctions or market checks, such as being viewed as a “damaged good” if the process results in no bidders (or bids lower than expected) and losing customers or employees. Buyers, on the other hand, like a go-shop process because it gives them pre-signing exclusivity, a slight leg-up in any ensuing bidding contest, and a consolation prize (the break-up fee) if their deal is jumped. While some scholars are alarmed by the proliferation of go-shop provisions, we believe instead that they may very well be a “better mousetrap” in sale processes for public companies. ■
By Analysis Group affiliate Guhan Subramanian, Joseph Flom Professor of Law & Business, Harvard Law School; H. Douglas Weaver Professor of Business Law, Harvard Business School; Co-Chair, Harvard Law School Program on Negotiation; and author, Dealmaking: The New Strategy of Negotiauctions; and Fernan Restrepo, Fellow, Stanford Law School.
Deal Metrics: Go-Shops and Topping Bids
- We analyzed outcomes of friendly cash transactions between 2005 and 2012 to understand the impact of go-shops on price. We found that go-shops can sometimes result in higher offers.
- Managing Principal Gaurav Jetley discusses the value of understanding the full risks, benefits, and implications of confidentiality and standstill agreements during negotiations.