Go-Shop Provision

What is a go-shop provision?

Go-shop provision (go-shop clause) refers to a provision in US takeover agreements that allows the target company, after signing, to actively look for better offers. The target company is the company that is to be taken over. During a limited period, the go-shop period, it may approach other interested parties, negotiate with them and give them information. After the period expires, a no-shop clause applies, which prohibits approaches and negotiations.

The clause originates from takeovers of listed US companies. It is common above all where the target company was not offered broadly to the market before signing. Typical cases are the acquisition by a private equity investor and the management buy-out, that is, the purchase by the company's own management. Private equity investors are investment firms that usually take over companies as majority owners and partly with debt financing. The governing body of the company (board of directors) is thereby meant to be able to check afterwards whether a higher price can be achieved. In German mid-market and venture transactions, the go-shop provision seldom occurs.

Origin in US corporate law

The benchmark in US law is the case law of Delaware, the home state of many US companies. Under it, the governing body must, on a sale of control, seek the best value reasonably available to the shareholders in the circumstances. Contractual commitments that exclude any better offer from the outset are not accepted by the courts. A prior market check is not mandatory for this, but the governing body must decide on a sufficiently informed basis.

If a takeover agreement is signed without a prior auction, the go-shop period serves as a subsequent market check.

How a go-shop clause works

• Period: The active search is limited to a period after signing, in the US market often 30 to 45 days.
• Approach and information: During the period, the target company may approach interested parties, give them access to the data room and negotiate, usually after a confidentiality agreement has been concluded.
• Preferred bidders: Anyone who submits a serious offer within the period may often continue negotiating afterwards (excluded party).
• Reduced fee: If the target company switches to a bidder from the go-shop phase, it owes the original buyer a lower break-up fee than for a later switch.
• Matching right: The original buyer learns of a superior offer and can improve its own within a few business days (matching right).

After the period expires, the no-shop obligation applies. The target company can then respond to unsolicited offers only within the scope of the fiduciary out.

Effect in practice

A change of bidder remains the exception. The original buyer has completed its review, knows the company and can match any third-party offer. A new interested party would have to carry out a review in a short period, bear costs and reckon with the first bidder following suit. Many therefore refrain from making an offer. The agreed price acts as a floor that a third party has to exceed noticeably.

Whether the clause actually creates competition or mainly protects the decision of the governing body depends on the length of the period, the level of the fee and the information given to new bidders.

Classification under German law

Sale of GmbH shares and funding rounds

In a GmbH (German limited liability company), the shareholders themselves dispose of their shares and sign a notarially recorded purchase agreement. There is no governing body on the seller side whose duties would require a subsequent market check. A go-shop rule would presuppose a right of withdrawal reserved to the sellers in the purchase agreement, which is unusual. The market check therefore takes place before signing, in an auction process or in parallel discussions. Anyone who wants to continue examining alternatives after an agreement in principle regulates this in German practice in the letter of intent. Possible are a short exclusivity period or none at all, or exceptions in the no-shop clause for certain other interested parties. In funding rounds the clause does not occur.

Listed stock corporations

In public takeovers, the offer is addressed directly to the shareholders. The search for a competing offer is expressly exempt from the prohibition of frustrating action under takeover law (Section 33 (1) sentence 2 of the German Securities Acquisition and Takeover Act, WpVÜG). The law regulates competing offers specifically (Section 22 WpVÜG). Shareholders who have already accepted the first offer can, under certain conditions, withdraw. The management board and supervisory board must give a reasoned statement on every offer (Section 27 WpVÜG). Because the law itself opens up this room for manoeuvre, contractual go-shop clauses are unusual in German takeovers.

Worked example: go-shop provision in a US takeover

A financial investor signs a takeover agreement with a listed US company at USD 20 per share with 50 million shares outstanding. A go-shop period of 40 days and a regular break-up fee of 3.5% of the equity value (value of all shares at the offer price) are agreed. A reduced fee of 1.5% applies to bidders from the go-shop phase. A strategic interested party is considering an offer of USD 21 per share.

• Equity value: 20 × 50 million = USD 1 billion
• Regular fee: 3.5% of USD 1 billion = USD 35 million
• Reduced fee: 1.5% of USD 1 billion = USD 15 million
• Offer of the interested party: 21 × 50 million = USD 1.05 billion
• Total economic cost within the period, because the fee reduces the value of the target company: USD 1.05 billion + USD 15 million = USD 1.065 billion
• The same calculation after the period expires: USD 1.05 billion + USD 35 million = USD 1.085 billion
• Per share: USD 1.065 billion / 50 million = USD 21.30 within the period, USD 1.085 billion / 50 million = USD 21.70 afterwards
• Advantage of the go-shop phase: USD 20 million, that is, USD 20 million / 50 million = USD 0.40 per share

The reduced fee lowers the entry cost for a third party but does not remove the first bidder's head start. It can match USD 21 per share without bearing a fee, so that the interested party must reckon with further bidding rounds.

Distinctions: go-shop, no-shop, fiduciary out and auction process

• No-shop clause: prohibits the search for other interested parties. The go-shop provision permits it for a limited period after signing.
• Fiduciary out: permits only responding to an unsolicited, superior offer. The go-shop provision permits active approaches.
• Auction process: establishes the market check before signing. The go-shop provision moves it to the period afterwards.

Common mistakes

• Period too short. If the time is not enough for a third party's review and financing commitment, the go-shop phase has no consequences.
• Unequal information. If new interested parties do not receive the same documents as the first bidder, a serious counter-offer is hardly possible.
• Unclear bidder definition. If there is no clear rule on who counts as a bidder from the go-shop phase, disputes arise over which fee is payable.
• Conflict of interest in a management buy-out. If the management, which itself stands on the buyer side, conducts the search, the independence that gives the clause its purpose is missing.
• Transferring into German contracts without adaptation. In a notarised GmbH purchase agreement, such a rule requires a right of withdrawal for the sellers, the consequences of which must be regulated separately.

Frequently asked questions

Are there go-shop clauses in Germany?

Rarely. In the sale of GmbH shares, the market is tested before signing, and for listed companies takeover law itself already opens up the search for competing offers.

Why is the go-shop provision common in management buy-outs?

Because the management is simultaneously on the buyer side there. The subsequent market search under the leadership of independent members of the governing body is meant to show that the price has not been set too low at the expense of the other shareholders.

Who pays the fee if a bidder from the go-shop phase wins the deal?

The target company pays it to the original buyer, namely the agreed reduced fee. The new buyer is not obliged to do so, but regularly takes the payment into account in the amount of its offer, because it reduces the value of the company.

Does the original buyer learn of competing offers?

Yes, as a rule. Takeover agreements oblige the target company to inform it of a superior offer and its material terms so that it can exercise its matching right.

The Roemer Capital view

In the transactions that Roemer Capital supports, the go-shop provision hardly occurs. The shareholders of a GmbH decide on the sale themselves and can establish the market check before signing. For this, Roemer Capital runs an auction process or at least parallel discussions with several interested parties before a purchase agreement is negotiated.

Some international buyers bring US contract templates with go-shop, matching and fee rules. Roemer Capital then translates their economic effect for the client: what threshold a third-party offer would have to clear and what commitment the sellers enter into. Whether and how such a rule can be carried over into a German purchase agreement is assessed by the client's law firm.