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‘Go-Shop’ Clauses on the Upswing in M&A Agreements

When investor Carl Icahn proposed to buy automotive supplier Lear Corp. for $2.9 billion in February 2007, Lear’s directors accepted the offer with the condition they could shop around for 45 days to find a better deal.           

Although no better deals emerged—and Lear shareholders eventually rejected Icahn’s bid—the example illustrates a growing trend in corporate mergers and acquisitions (M&A). Namely, corporate directors increasingly are negotiating ‘go-shop’ clauses in unsolicited acquisition agreements as a way to check the market before the shareholders vote on the deal.       

In a recent Dykema on Demand Podcast, M&A attorney Mark Peters explained to InsideCounsel how go-shop clauses work. “Once the decision has been made to sell the company, the go-shop clause helps the board fulfill its fiduciary duty to take all reasonable steps to maximize value to shareholders,” Peters said. “It allows the seller to proactively check the market, while still locking in the buyer as a stalking horse during the shopping period.”           

With shareholders taking a more activist role in major M&A decisions, go-shop clauses likely will become more common, and their terms will become more standardized as corporate directors seek to meet their fiduciary obligations.

Checking the Market
Buyers in unsolicited acquisitions often include “no-shop” clauses in their agreements. Such clauses prevent target-company directors from actively seeking a better deal. This insulates buyers from the risk of a bidding war, and ensures the target company’s directors and officers will focus on closing the deal, rather than courting other suitors.            

In recent years, however, corporate boards have sought more active ways to ensure that the unsolicited offer on the table is the best they’re likely to get.            

“Go-shop clauses will become more popular in a buyer’s market, where there are frequent unsolicited bids and sellers have significant negotiating leverage,” Peters said. “And they are particularly relevant in management buyouts, where shareholders are wary about deals that include personal gain for the management group.”            

Not all M&A situations are appropriate for go-shop clauses, however. For example, where the deal results from an auction process, additional shopping would be redundant. And more passive market-check mechanisms—such as “fiduciary-out” clauses and “window-shop” provisions that allow directors to consider third-party offers, but not to solicit them—have passed court scrutiny.            

However, in the right situations, go-shop clauses are becoming an increasingly attractive compromise that gives an unsolicited buyer a preferred negotiating position, while allowing the company and its directors to actively confirm they are getting the best deal for shareholders.

Two-Tier Fees
The primary terms in go-shop clauses define the length of the shopping period (generally between 30 and 50 days) and the conditions of negotiations. They specify the selling company’s right to solicit offers and provide due-diligence information, and the buying company’s right to match any other offers. They also define how breakup fees will be calculated, if the original deal is canceled in favor of an offer received during or after the shopping period.            

“One of the points for negotiation will be agreeing on what can happen after the go-shop period ends,” Peters says. “Being forced to decide during a 45-day shopping period whether to terminate an initial agreement is difficult, and has been criticized by the courts.”           

To address this issue, some agreements allow negotiations to continue beyond the end of the shopping period, and some have provided a two-tier termination fee, under which the seller pays a lower fee if the decision to terminate is reached either during the go-shop period or with a bidder who started negotiating with the target during that time.            

As such terms mature and become more standardized, and more deals include go-shop clauses, they will become more familiar to shareholders and corporate directors. And over time, go-shop clauses likely will evolve into a common feature of unsolicited acquisitions.

For more information, contact Mark Peters at mwpeters@dykema.com.

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