An exception to the no-shop (www.practicallaw.com/9-382-3646) provision in a merger agreement that allows the target company to actively seek, discuss and negotiate an alternative transaction with a third party for a specified period of time, usually 30-60 days, after the execution of the merger agreement.
Go-shops supplement traditional fiduciary out (www.practicallaw.com/5-382-3460) and window-shop (www.practicallaw.com/3-383-2234) provisions. They are often included in the merger agreement when the target company has not conducted an auction (or has conducted a limited pre-signing market check (www.practicallaw.com/8-383-2199)) and has concerns that it has not entirely satisfied its fiduciary duties (www.practicallaw.com/7-382-3459).
Reasons for Target Company to Favor a Go-shop
A target company may prefer that the buyer rely on a go-shop rather than the target conducting a pre-signing auction because of the potential risks that an auction introduces. For example, the target company might have concerns that its market value will drop if it conducts a public auction and receives no (or low) bids. The target company might also have business reasons to avoid an auction, such as:
The impact of the news of a possible sale on employee morale and retention.
The possibility that customers will leave the company, rather than wait out the results of the auction.
The possibility of leaks of confidential information to competitors (or deliberate disclosure if a competitor expresses interest in making a bid).
Reasons for Buyer to Accept a Go-shop
Although go-shops favor the target company, some buyers may agree to a go-shop because:
It helps avoid the delay of an auction or pre-signing market check. The go-shop allows the transaction to move toward closing during the market check.
It provides the buyer some comfort that a court will not find that the board has breached its fiduciary duties because of its failure to conduct a pre-signing market check.
Having already signed an agreement with the target company, the buyer knows it has an advantage over competing bidders, who must offer a price that is higher than the aggregate amount of the buyer's offer and the cost of the break-up fee (www.practicallaw.com/9-382-3284), and who have less time to evaluate the target company and determine the purchase price.
Go-shops are primarily found in transactions with private equity buyers, who tend to have a stronger preference for avoiding a full-blown auction. They often feel at a disadvantage in an auction setting when pitted against strategic buyers who can offer other competitive advantages to the target company. Strategic buyers, on the other hand, typically disfavor go-shops, even if the target company has not conducted a robust market check, because they do not want to be used as a mere stalking horse (www.practicallaw.com/4-383-2224).
For more information about go-shop provisions, see Practice Note, No-shops and Their Exceptions: Exceptions to No-shops in Public Deals: Go-shops (www.practicallaw.com/8-386-1078).