Go-Shop Period

Introduction

The “Go-Shop Period” is a provision often included in merger and acquisition agreements that allows the target company to actively solicit and entertain alternative acquisition proposals from third parties over a specified period of time after signing the initial acquisition agreement. This period is designed to test the market to see if a better deal can be obtained, thereby maximizing shareholder value. The concept is commonly used in larger corporate transactions and is a critical tool for ensuring fiduciary duties are met.

Purpose and Importance

The purpose of the Go-Shop Period is to ensure that the selling company receives the best possible offer for its assets. This is particularly important because it provides an opportunity to verify that the company is not being undersold.

Shareholder Value

A key driver for including a Go-Shop Period in an acquisition agreement is the potential to enhance shareholder value. The board of directors has a fiduciary duty to act in the best interests of the shareholders, and being able to solicit higher bids can directly benefit shareholders.

Fiduciary Duty

By including a Go-Shop Period, the board can argue that it has fulfilled its fiduciary duties to shareholders by ensuring a fair process. Without this provision, directors might face criticism or legal challenges for not adequately exploring alternative opportunities.

Mechanisms of the Go-Shop Period

The Go-Shop Period generally follows a structured and tightly controlled process, and while the specifics can vary, there are common elements usually found in these agreements.

Duration

The length of the Go-Shop Period typically ranges from 20 to 60 days, although it can be shorter or longer depending on the specifics of the deal and negotiations.

Solicitation of Offers

During this period, the target company is allowed to initiate contact with, and may receive communications from, potential buyers. This process involves the company’s financial advisors and legal teams who actively seek out and evaluate alternative proposals.

Extending Offers and Confidential Information

Prospective buyers can extend offers, and the target company may provide them with confidential information under the terms of a non-disclosure agreement (NDA). This information generally includes financial statements, proprietary information, and other critical data necessary for due diligence.

Matching Rights

Often, the initial buyer retains the right to match or exceed any superior offer received during the Go-Shop Period. This ensures that the initial buyer still has a fair chance to complete the deal but also provides the opportunity for a higher bid to materialize.

There are several legal factors that must be considered when drafting and executing a Go-Shop provision.

Fiduciary Out

The fiduciary out clause allows the board to terminate the initial agreement if a better offer emerges during the Go-Shop Period, thereby ensuring that shareholders receive the highest possible value for their shares.

Break-Up Fees

If the target company decides to terminate the original agreement in favor of a superior proposal, it may be required to pay a break-up fee to the initial buyer. This fee compensates the initial buyer for its time, resources, and opportunity costs.

Regulatory Scrutiny

Regulatory bodies such as the Securities and Exchange Commission (SEC) in the United States may scrutinize Go-Shop provisions to ensure that they do not unfairly disadvantage shareholders or other stakeholders.

Case Studies

Several high-profile mergers and acquisitions have included Go-Shop provisions, demonstrating their real-world application and effectiveness.

Dell Inc.

In the acquisition of Dell Inc. by Michael Dell and Silver Lake Partners in 2013, a 45-day Go-Shop Period was included, during which the Special Committee of Dell’s Board of Directors actively solicited alternative proposals. This resulted in the consideration of several additional bids, although ultimately the original deal was consummated.

Safeway Inc.

The acquisition of Safeway Inc. by Albertsons in 2014 also included a Go-Shop Period. Safeway’s Board of Directors solicited superior proposals, but ultimately, no better offers were received, and the original deal proceeded.

Conclusion

The Go-Shop Period is a valuable mechanism designed to ensure that merger and acquisition transactions are conducted in a manner that maximizes shareholder value. By allowing the target company to solicit and consider alternative proposals, this provision provides a necessary check against underselling the company’s assets. While the inclusion of a Go-Shop Period adds complexity to the transaction process, the potential benefits in terms of increased shareholder value and fulfillment of fiduciary duties make it an important aspect of corporate acquisitions.