A go-shop period is a provision that allows a publicly traded company to search for competing bids even after it has already received a firm bid. The original offer then serves as a basis for possible better offers. The duration of a go-shop period is usually about one to two months. Ten years ago, one of us published Go-Shops vs. No-Shops in Private Equity Deals: Evidence & Implications, the first systematic empirical evaluation of Go-Shops (the “Original Study”). The sample included all redemptions announced between January 2006 and August 2007 (n = 141), including 48 transactions including go-shop processes. Contrary to comments from practitioners and academics at the time, who were generally skeptical of go-shops, the original study found that go-shops often led to higher bidders during the go-shop period and sellers extracted slightly higher prices from the initial bidder in exchange for exclusivity before signing. Subsequent studies have generally confirmed these empirical results. In an active M&A environment, it may be reasonable to believe that other bidders may come forward. However, critics say go-shop periods are cosmetic for the board to give the impression of acting in the best interests of shareholders, but rarely lead to additional offers because they don`t give other potential buyers enough time to complete the target company`s due diligence. Historical data has shown that a very small fraction of initial bids are set aside in favor of new bids during Go Shop periods.
This decrease in skip rates cannot be explained by simple factors such as uniformly shorter Go-Shop periods, an increase in Go-Shop cancellation fees, or a tightening of definitions of excluded parties. Delaware courts have emphasized the importance of these factors in structuring a meaningful go-shop process, and it`s no surprise that practitioners have adopted these guidelines. As in other areas of transaction practice, lawyers, bankers, and school principals are much better at burying their manual labor. The real explanation requires a closer look at the structural and contextual factors affecting go-shops. A final category of reasons that can reduce the efficiency of the Go Shop process is the technical details of the Go Shop itself. Through a complex interplay of terms and conditions, some buyers have achieved a “backdoor” tightening of the definitions of “superior proposal” and “excluded party,” so potential third-party buyers must effectively submit a full takeover proposal during the go-shop phase. These seemingly technical adjustments to Go-Shop`s legal requirements can significantly reduce the effectiveness of Go-Shop as a pricing tool. From a target company`s perspective, the purpose of a go-shop arrangement in a purchase agreement is to provide a mechanism to test the market to ensure that the price obtained for the company`s shares is the best reasonably available. It is difficult to determine the extent to which these provisions are effective in achieving this objective. Some commentators have criticized the go-shop store regulations as a simple window dressing that will rarely lead to better deals. To date, most transactions with Go-Shop settlements eventually end up.
Even a go-shop period in the range of 40 to 50 days can leave little time for potential buyers to exercise reasonable caution and make a competing superior offer. That`s why the no-shop clause almost always includes an exception for unsolicited superior offers. Namely, if the target determines that the unsolicited offer is likely to be “superior”, they can get involved. From LinkedIn`s merger agent: New bidders may be willing to allow the inclusion of a go-shop layout, despite the higher risk a go-shop provision entails for a first bidder than traditional no-shop, as it`s always better to postpone a signature to allow for an auction or full market review before the deal. A go-shop process after signing allows the transaction to move forward during market verification. In addition, a post-agreement contract verification often offers some protection in the form of a termination fee to a first bidder whose transaction is terminated in favor of a higher bid. Go-Shop`s provisions also offer a former bidder certain benefits in the context of a market review under the agreement that they may not have in an auction or contract prior to the agreement. Competing bidders during a Go Shop period will likely have to offer a higher price than the initial offer and will cover the cost of cancellation fees and associated costs. In addition, the competing bidder will likely have less time than the original bidder to assess the target and determine a price. While the lack of stores severely limits the purchase of the store, target boards have a fiduciary responsibility to maximize the value of the offer to shareholders, so they generally cannot refuse to respond to unsolicited offers. Conflicts of interest between investment bankers can also reduce the efficiency of go-shops.
For example, in the incestuous world of private equity, the sell-side banker`s financial incentives to please the buyer (who doesn`t want to outbid) may be greater than the banker`s financial incentives to find a higher bidder during the go-shop phase. Alternatively or in addition, the buyer`s bankers may discourage potential buyers from engaging meaningfully in the go-shop process. Our article presents a taxonomy of these conflicts and provides examples of each conflict. It also documents how boards fail to form special committees that could adequately resolve these conflicts. Duration: A go-shop period is usually between 20 and 50 days from the date of the final agreement and should give the target company sufficient time to explore the market, taking into account the scope of a market review prior to signing. The longer the Go-Shop period, the less a court considers whether the duration was sufficient to perform the functions of a board of directors. A Go Shop period of less than 30 days may be subject to stricter review by a court. The Go-Shop provisions complement the more traditional “fiduciary” provisions of the takeover agreement. In other words, target boards of directors are allowed to fulfill their fiduciary duties and generally review global proposals until shareholders vote on the purchase agreement, even if the Go-Shop bidding period has expired, and terminate the original agreement in favor of a higher offer against payment of a termination fee.
Matching Rights: Some agreements give the original bidder the right to match a higher offer received during the Go Shop period. In Topps, the court found that Michael Eisner`s matching rights were appropriate, but it was more skeptical of the initial bidder`s matching rights in Lear and Berg because, combined with the store closure provisions, the matching right, which gave the original bidder a period of days to exercise the right and thus further increased the time limits for a potential competing bidder. further reduces the chances of the potential competing bidder realistically concluding a final agreement by the end of the Go-Shop deadline. .