It is quite common in negotiated acquisitions for companies to perform a pre-signing market canvass and to enter into an acquisition agreement that contains a “no-shop” provision with a fiduciary out clause for unsolicited third-party proposals, as well as a break fee payable in the eventuality of the target company accepting a superior offer. Less common is the practice of foregoing the pre-signing market canvass and combining a “go-shop” provision that allows the target company to actively solicit superior proposals for a specified period of time after entering into the acquisition agreement with a two-tiered break fee that provides for a lower break fee if the target company accepts a superior offer during the go-shop period and a higher break fee if it accepts one in the subsequent “no-shop” period.
The greatest advantage of the go-shop structure is that it can generate significant timing advantages compared to the more typical pre-signing market canvass. As there is already an acquisition agreement in place when superior offers are solicited, the buyer and the target are able to work concurrently to complete the closing conditions which can greatly reduce the overall length of the transaction. Accordingly, go-shops may be particularly interesting in circumstances in which there are significant timing constraints, particularly if the emergence of serious competing bidders is unlikely.
From the target’s perspective, since there is already a deal in hand, go-shops provide a “floor value” which focuses the market canvass on serious competing bids. From a hesitant buyer’s perspective, go-shops may also provide additional comfort that expenses relating to advisory fees and due diligence will yield a return on investment. Even if the target is not ultimately acquired, the break fee provides a return for the cost, time and risk incurred.
Despite these advantages, there have been a number of criticisms of go-shops. The charges that are typically levelled are that go-shops provide the initial buyer with an unfair timing advantage over subsequent competing bidders and that they rarely stimulate attractive alternatives but are simply “window dressing” designed to provide the perception that a market canvass has occurred. Concerns have also been aired that private equity buyers may be reluctant to “jump” each other’s transactions, which effectively significantly reduces the pool of potential buyers. These criticisms are buttressed by the reality that competing offers in the go-shop context have been relatively rare in the U.S. experience, though in Canada there have been notable instances in which competing bidders have made topping offers during the go-shop period.
It is true that the initial buyer has a significant timing and informational advantage over subsequent competing bidders. It is for this reason that the cumulative effect of all deal protection mechanisms needs to be carefully examined and that the terms of the go-shop provision and two-tiered break fee must be carefully crafted. The deterrent effect of the size of the go-shop break fee as well as the length of the go-shop period are particularly important. Other factors which may have a deterrent effect on competing bidders include whether there is a “soft stop” which allows a competing bidder who has begun negotiations during the go-shop period to stretch them into the no-shop period, whether there are restrictions on the identity or number of potential buyers that can be contacted during the go-shop period, the terms of the matching rights, if any, provided to the initial buyer, whether expense reimbursement for a competing bidder may be considered, and the terms of any lock-up agreements that may be entered into with target shareholders.
Whether or not to use a go-shop will ultimately depend on the parties and specific facts of a given transaction. While go-shops may not be routinely used in Canadian transactions, they provide certain advantages to buyers and sellers and, as such, should be given consideration when the circumstances warrant.