March 31, 2006
Go-Shop Provisions
Posted by Bobby Bartlett

Bill Sjostrom over at Truth on the Market reported earlier this week on a New York Times article discussing the appearance of “go shop” provisions in several recent merger agreements. Basically, these provisions allow a seller to look around for better bids for a limited period of time (say 30-45 days) after signing an acquisition agreement. If the seller can find a better offer, it can terminate the original agreement and sell at the higher price, provided it pays a negotiated termination fee to the jilted buyer. As Sjostrom notes, the provision is unusual in that it departs from the traditional formula for locking up an acquisition. Traditionally, a buyer and seller would sign a merger agreement containing a “no shop” provision that barred the seller from soliciting or considering additional bids. The only exception (the so-called “fiduciary out”) was if an unsolicited bid appeared in which case the Board could consider it in order to discharge its fiduciary duties. Even then, however, an acquirer might hold “matching” (or “topping”) rights giving it the right to match (or top) the superior bid.

When I first read the Times article, my initial reaction was that the go-shop provision might be driven by private equity firms frustrated with the current buyout market. My contacts in the private equity world have frequently noted the challenge of today’s buyout environment where seemingly every deal involves a fiercely competitive auction (thus raising purchase prices, which is good for shareholders but bad for buyout firms). Presumably, this development stems partially from a target board's desire to discharge its Revlon duties prior to engaging in a buyout by conducting a thorough market-check. My instinct was that a go-shop provision might reflect an attempt by financial buyers to avoid these auctions while formally allowing a board to comply with Revlon through a market-check. Of course, the selling company will still conduct an auction, but practically speaking, there are a number of reasons why fewer firms should be interested in investigating the company after a deal has been signed. This is especially true where a buyer has negotiated matching/topping rights. Not only would prospective bidders have to bid enough to compensate for any termination fees, they might fear over-bidding due to the “winner’s curse” phenomenon.

Curious, I decided to look at the two instances cited by the Times where go-shop provisions were used. Consistent with my theory, both involved buyouts: Ripplewood’s attempted buyout of Maytag last year and Providence Equity’s proposed buyout of Kerzner International this year. But when I examined the actual go-shop provision for each deal (you can find the acquisition agreements here and here), I discovered a peculiar fact: neither contained matching/topping rights. As a result, one might say each deal was unduly at risk during the go-shop period. In fact, Ripplewood ultimately lost the Maytag deal when Whirlpool emerged with a superior bid. Of course, Ripplewood received a $40,000,000 termination fee, but Maytag’s proxy statement makes clear that Ripplewood was not at all happy about losing the deal.

So now I’m not so sure about my theory. Why wouldn’t these agreements include matching rights? This seems especially peculiar since the Delaware Chancery Court recently affirmed their use in KKR’s buyout of Toys-R-Us. Are companies pushing back on them out of concern that they deter bidding? Even so, they seem sufficiently important for an acquirer (especially after the Maytag/Whirlpool deal) that it would demand matching rights as a quid-pro-quo for the go-shop provision. Did Providence Equity just slip up?

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