Wednesday, May 13, 2009

Are "Go Shop" Clauses Trending Up in M&A Transactions?

By Tom McLain

Although they have been around since about 2005 and are part of the "standard" arsenal of clauses that M&A lawyers use, "go shop" clauses may be gaining some additional popularity in the current economic environment when one considers transactions such as Barclays' $4.2 billion sale of iShares to CVC Capital Partners (see Financial Times article). Generally, "Go shop" clauses are loved by Sellers but are not too popular with Buyers.

As the name suggests, a "go shop" clause allows the Seller to accept a high bid in a non-binding letter of intent, but still continue to shop for an even better bid. One of the distinct advantages to a public company Board of Directors is that a "go shop" clause limits later shareholder criticism that the Board failed to obtain the maximum price. Some argue that a "go shop" clause may actually expedite the sale of a company because the Board may be less hesitant to accept a bid and because the Board may be able to avoid or minimize other necessary due diligence such as obtaining a fairness opinion. Others argue that "go shop" clauses can slow a transaction because the Buyer waits until the "go shop" until the period of time in which the Seller can solicit new bids expires before it begins pursuing the transaction in earnest.

Buyers almost always prefer to use a "no shop" clause because it theoretically prevents the Buyer from being outbid. Additionally, Buyer argue that a "no shop" clause is necessary for them to commit to spend the time, money and effort to complete due diligence and draft a definitive agreement. Those arguing against "go shop" clauses say that they tend to have a chilling effect on the bidding because no Buyer wants to submit a price and then be the target of other bidder's efforts to buy the seller. However, particularly in the case of a public company, the insulating effect of a "go shop" clause may protect the successful bidder from subsequent shareholder suits that seek to enjoin a sale.

While it is always risky to predict trends, "go shop" clauses could become a bit more commonplace in the current economic environment. Companies that are effectively being forced to sell or merge due to dire financial conditions already have disappointed shareholders who have lost considerable value as compared to market prices of several months back. As a way of satisfying some of those shareholder concerns and perhaps heading off shareholder claims that the Board sold at a price below market value, public company Boards may be drawn quickly to "go shop" clauses. As the M&A market continues to slowly reestablish itself, we will see whether "go shop" clauses become more prevalent.

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