What is a no shop clause?
What is the definition of a no shop provision?
When is it used, how important is it what are some exceptions?
In this article, we will break down the notion of no shop clause so you know all there is to know about it.
We will define it, look at what it is, see when it is used, why it’s so important, look at the exceptions to the no shop clause along with examples and sample clauses.
Keep reading as we’re sure you’ll learn a few awesome things!
What is a no shop clause
A No Shop Clause is a contractual provision that buyers and sellers include in their contract to prevent the seller from soliciting purchase proposals from others for a certain period of time.
A no shop clause can also be referred to as a non-solicitation clause.
The objective of a no shop provision is to protect the buyer’s purchase interest in the assets or business of another for a certain period of time and prevent the seller from selling to another interested buyer in the meantime.
A no shop clause is essentially a contractual covenant where the seller undertakes not to solicit purchase offers or bids from others for a certain period of time.
No shop clause definition
According to The Law Dictionary, a no-shop clause is defined as follows:
An agreement clause between an owner and a prospective buyer to suspend all other purchase negotiations for a stated time period.
What is notable in this definition is that the buyer “suspends” all other purchase negotiations for a “time period”.
When is the no shop clause used
The no shop clause is generally used in M&A transactions where a buyer is interested to purchase the business of the seller and it may take some time to close the transaction.
Considering the due diligence process may take a few weeks, a few months or even longer, the buyer’s interest is to prevent the seller from fishing for other interested buyers and getting a higher bid.
As a result, following the execution of the letter of intent, the buyer and the seller agree to a “no shop” clause where the seller commits not to “shop” around for another interested bidder.
This type of clause favours the buyer more than the seller.
The seller will be limited in its ability to finding a potentially higher bid while the buyer has the assurance that the seller will not sell to another interested party until the deal is closed.
Why is a no shop clause used in contracts
Quite often, well-known companies operating in highly competitive markets and with high negotiating power leverage a “no shop clause” in their purchase contracts.
Fundamentally, their underlying intent to prevent the seller from soliciting other bids is justifiable.
For example, a well-known brand looking to make a strategic acquisition can potentially lose the opportunity merely due to the fact that they are interested in a particular target igniting the competitors’ interest.
Should the competitors find out, they may decide to make a higher bid to “steal” the opportunity by acquiring the target or just create a competitive environment to prevent the deal from easily closing.
In such environments, a high-profile buyer will want to keep the acquisition highly secret and to prevent competitors from interfering with the acquisition.
The buyer will want the seller to refrain from talking or negotiating the sale with anyone.
The no shop clause also serves as a means to prevent the seller from actively engaging with the buyer’s competitors knowing that the competitors will want to drive the purchase price upwards.
What is the scope of a no shop clause
The no shop clause is a provision where the seller agrees not to negotiate the sale of an asset or a business with other interested buyers for a specified period of time.
The scope of the clause should ensure that the buyer effectively stops the negotiation with others and makes the timeline clear.
Here are the elements that a no shop clause should contain:
- Obligation where the seller does not discuss or negotiate the potential sale of the asset or business with others
- Obligation where the seller does not solicit others to make a purchase offer
- Obligation where the seller commits not to share any information about the business or asset with any third party
- Obligation where the seller does not disclose any information about the buyer’s purchase proposal
- Obligation where the seller immediately communicates to the buyer the receipt of any unsolicited third-party purchase offers
- A clear description of the timeline where the seller is bound to this obligation
By scoping the no shop language properly, the prospective buyer will ensure that seller will not attempt to derail the purchase transaction or inflate the purchase price by manufacturing third-party bids during the due diligence phase.
How long is a no shop agreement
A no shop agreement can vary in duration depending on the complexity of the deal.
For smaller size M&A transactions, it’s fairly common to see no shop obligations last between 45 to 60 days to allow the completion of a due diligence process.
However, for much larger transactions and high-stake deals, you may see no shops extending many months.
The duration of the no shop is left to the appreciation of the buyer based on its assessment of how long it may take to close the deal.
It’s not ideal for the seller to agree to a long-term no shop clause as it may limit its ability to find competitive bids on the market.
The no shop should be long enough to protect the buyer but short enough not to prevent the seller from selling to the highest bidder.
No shop provision exceptions
The directors of a company are legally mandated to protect and preserve the interest of the corporation, its stakeholders and ultimately its shareholders.
We typically refer to this as the directors’ fiduciary duty.
As a result, the board of directors of a company cannot necessarily agree to a no shop clause and prevent the company from selling to the highest bidder in the market.
To ensure the directors act within the parameters of their legal obligation, certain exceptions or carveouts can be negotiated when agreeing to a no shop.
One exception to the “no shop” obligation is the “go shop”!
A go shop provision is actually the opposite of the no-shop where the target company negotiates a specific period of time to actively look for interested third parties.
For example, a no shop clause can be negotiated for 3 months but the first 30 days following the signing of the letter of intent, the target company is authorized to seek interested bidders.
The window shop provision allows the target company to “talk” with third parties and discuss the possibility of a potential sale of the business.
This is similar to the go shop where the target company is given a chance to explore sale opportunities out there in the market and assess if it can get a higher bid.
The fiduciary out is the ability of the board of directors to get out of a no shop clause should there be concerns that the continuation of the deal can be detrimental to their business and violate their fiduciary obligations.
This is also referred to as the Revlon duty of the board of directors.
The board must continually strive to find the best and highest value for the company and its stakeholders.
The fiduciary opt-out should be expressly provided as an exception to the no shop provision to ensure that the directors are able to change their mind or recommendation in the context of the due diligence and information becoming available to them leading them to believe that pursuing the deal may not be to the target’s best interest.
No shop clause rule
Under certain laws, particularly securities laws, a public company may reject a no shop provision even if the purchaser and seller had agreed to it on the basis of statutory grounds.
For example, the responsibilities of a public company are such that they must look for the highest bidder possible.
In most cases, no shops should limit “solicited” offers and not limit “unsolicited” offers.
An unsolicited offer is an offer made by a third party in good faith without the intervention or solicitation of the target company.
When an unsolicited offer is received where the third party provides for a better offer or a higher bid, it’s in the target’s interest to be able to get out of the no shop if the buyer is not willing to match the offer.
For example, in the Microsoft and LinkedIn merger, it was provided that if LinkedIn received a superior offer that it considers, in good faith, better than that of Microsoft, it could accept provided it follows the procedures outlined in their agreement and gives a good-faith opportunity to Microsoft to renegotiate the terms of the merger.
Microsoft also ensured to include a termination fee of $725 million should LinkedIn accept a superior proposal!
The Microsoft/LinkedIn merger agreement provided the following provision on page 58:
if the Company has received a bona fide written Acquisition Proposal that the Company Board has concluded in good faith (after consultation with its financial advisor and outside legal counsel) is a Superior Proposal, then the Company Board may (A) effect a Company Board Recommendation Change with respect to such Superior Proposal or (B) authorize the Company to terminate this Agreement pursuant to Section 8.1(h) to enter into an Alternative Acquisition Agreement with respect to such Superior Proposal
No shop clause vs No talk clause
A no talk clause, also known as confidentiality clause or non-disclosure clause, is a contractual provision where the parties agree not to discuss the terms and conditions of the contract with third parties.
A no shop clause is a contractual provision where a party to the contract agrees not to negotiate the sale of assets or equity interests with third parties, to entice third parties to present to it a purchase offer or engage with others to solicit interest in the purchase of its assets or shares.
In the context of a merger, typically, the no shop provision will come with a no talk provision to ensure that the target company does not disclose the content of a letter of intent with third parties.
No shop clause vs Go shop clause
A go shop is essentially a contractual time period where the parties mutually agree that one party will look around and see if a third party may be interested in purchasing its assets or shares.
A go shop provision is negotiated along with a no shop clause in a contract to allow the target company a fair chance to evaluate the market conditions and see who else may be interested in buying its shares or assets.
A no shop clause on the other hand is to prohibit a company from shopping around and looking for other interested buyers.
A no-shop is a deal-protecting mechanism protecting the buyer from higher third party bids that may lead to an auction effect or having the seller leverage its higher valuation merely from the fact that a letter of intent has been signed.
No shop clause sample
Here is a sample no shop clause and possible contract language:
The Seller, along with their directors, officers, employees, representatives, fiduciaries or agents, for a period starting from the execution of the present Agreement and ending at the earlier of the Closing Date or the termination of this Agreement, will not solicit, directly or indirectly, the submission of a purchase offer from third parties, disclose the content of the present Agreement with any third party, provide any information or material to related to the sale of its assets or any form of equity interest. Should the Seller be in discussions or communication with third parties with respect to the sale of its assets or equity interest upon conclusion of this Agreement, it shall further agree to immediately cease such communications up the execution of the present Agreement.
No Shop examples
One of the most notable M&A transactions where a no-shop provision was used was in the Microsoft-LinkedIn transaction.
On June 13, 2016, Microsoft announced that it was looking to acquire LinkedIn by filing an Agreement and Plan of Merger between Microsoft and LinkedIn dated June 11, 2016.
In that context, LinkedIn had agreed to a no-shop clause committing not to speak to competitors.
Microsoft fortified the no-shop clause with a massive $725 million termination fee or penalty should LinkedIn sell its business to a third party.
Evidently, Microsoft was hoping to prevent its main competitor, Salesforce, from disrupting the deal.