In its studies of deal protections in domestic public M&A deals over the last two years, Practical Law observed that go-shop provisions—historically more common in deals with private equity buyers—were becoming increasingly common in deals with strategic buyers. A survey of all public merger transactions contained in the What's Market database for 2015 to date indicates that for the first time, strategic buyers are on pace to negotiate more deals with go-shops than are private equity buyers.

In a merger agreement with a go-shop provision, the target company's no-shop covenant does not immediately activate at signing. Instead, the target company has a defined period of time during which it may actively solicit and negotiate competing bids and provide confidential information to potential bidders.

Go-shops are only agreed to in a small percentage of deals, usually if:

Go-shops have tended in the past to be restricted to agreements with private equity buyers. This is because target companies are less likely to have fully canvassed the market for potential buyers when they do deals with private equity buyers. Private equity buyers, with exceptions, have historically preferred to avoid full-blown auctions, sensing a disadvantage in an auction against strategic buyers who can offer other competitive advantages to the target company. By contrast, strategic buyers can typically argue that the rationale for their mergers is to take advantage of operational synergies that cannot be matched merely with a higher per-share bid, and that they therefore should not be subject to further market checks.

Practical Law's study of deal protections in public merger agreements in 2014 observed that in spite of these historical practices, go-shops were becoming increasingly common (or, at least, less rare) in strategic deals (see Deal Protections and Remedies: A Comparative Analysis of 2014 Public Merger Agreements). In that year, a total of 13 merger agreements for acquisitions of US reporting companies valued at $100 million or more contained a go-shop, of which six were reached with strategic buyers and seven were reached with private equity and other financial buyers. This was a continuation of a trend observed in 2013, in which out of 19 agreements with a go-shop, 11 were reached with financial buyers and eight with strategic buyers.

In 2015, as of the date of this Article, strategic buyers for the first time have agreed to a go-shop in more deals than have financial buyers.

In the 19 transactions observed so far with go-shop provisions, 12 have been entered into with strategic buyers, compared to seven with financial buyers. This increase is not solely attributable to the overall increase in strategic-buyer activity in 2015 compared to years past. The percentage rise in go-shops in strategic deals—double the number in 2014 and 50 percent more than in 2013—far exceeds the rise in the number of strategic deals overall. Two possible theories, neither of which is exclusive of the other, can be offered to explain this trend:

In most deals with a go-shop provision, the merger agreement buttresses the go-shop with an added incentive for third parties to submit bids. This is accomplished through a two-tier break-up fee, in which the full amount is payable under the ordinary trigger events and a lower fee is payable if the target company accepts a superior proposal with a bidder who submitted a bid during the go-shop period. (The details of the trigger are themselves a matter for negotiation. In some agreements, the topping bid must be fully signed up by the end of the go-shop period to qualify for the lower bid. In others, it is enough if the third party submits a superior bid during the go-shop period, even if the agreement is finalized afterwards.)

Other agreements do not provide the target company with an affirmative go-shop of any form, but still use a two-tier break-up fee to incentivize third-party bidders to approach the target company with unsolicited bids. In these deals, if the target company enters into a third-party agreement within a specified period of time following the signing of the merger agreement, the target company pays a reduced break-up fee.

As shown in the figure above, all seven financial buyers who have agreed to a go-shop so far in 2015 have also agreed to a two-tier break-up fee structure. The deals with strategic buyers, on the other hand, have been more varied. Nine of the 12 agreements with go-shops have come with two-tier break-up fees, but three have provided for a single-tier fee. This was observed in the 2014 study as well. Another four agreements, all with strategic buyers, have provided for a two-tier break-up fee without an affirmative go-shop right.

For more, continuously updated information about go-shops in the M&A market, including their length and cut-off period for negotiations with qualifying bidders, see the What's Market public merger agreements database and select "Yes" in the Go-Shop facet.