No-Shop Clause

What is a no-shop clause?

No-Shop Clause (in German: No-Shop-Klausel) is the contractual obligation of a company and its shareholders not to look for other buyers or investors during an agreed period. They may neither approach third parties nor negotiate with them or hand over confidential information to them. The clause assures the selected interested party that the planned transaction will not be pursued in parallel with third parties during that time. The terms no-shop provision and, in German contracts, Exklusivitätsvereinbarung (exclusivity agreement) mean the same thing.

The term comes from US contract practice, but the substance is widespread in Germany. The clause usually appears in a letter of intent (a declaration of intent before a company acquisition) or a term sheet (an outline paper for a financing round). While these documents remain non-binding in their economic key points, the no-shop obligation is expressly agreed as binding. In a company acquisition it can additionally be agreed in the purchase agreement and continue to apply until closing, that is, until shares and purchase price actually pass. The party entitled to the benefit is the investor or buyer. The obligated parties are, depending on the transaction, the company, the founders or the selling shareholders; for management and advisers they usually assume responsibility.

No-shop clause and exclusivity period

In practice the two terms are often used interchangeably. They describe different levels of the same arrangement, however. The exclusivity period sets how long an interested party negotiates alone. The no-shop clause determines what is prohibited during that time and what remains permitted. Without a precise provision, the exclusivity commitment remains open to interpretation, for example on the question of whether a conversation with an existing investor about bridge financing already amounts to a breach.

The term generally follows the exclusivity. In financing rounds it usually covers a few weeks, in a company sale often up to three months. The commitment ends when the period expires, when the main agreement is signed or when the interested party declares that it will not pursue the transaction further.

Content of a no-shop clause

A complete clause regulates several obligations, each of which should be considered individually in the negotiation:

• No solicitation: The obligated parties may neither contact third parties actively nor encourage them to make offers, including indirectly through advisers.
• No talk: The stricter level also prohibits responding to unsolicited enquiries. Usually only a refusal without any substantive comment then remains permitted.
• No information: Third parties receive no access to the data room, no documents and no discussions with the management.
• Ending of ongoing contacts: Existing discussions are to be discontinued at the start of the period. Under the confidentiality agreements already concluded, sellers also frequently demand the return or deletion of documents that were handed over.
• Duty to notify: Incoming enquiries are to be reported to the entitled interested party, depending on the wording either only their receipt or also the name and key points of the offer.

Sample wording for a no-shop clause

A simple version in a letter of intent can read roughly as follows: “Until the expiry of eight weeks after signature of this declaration of intent, the sellers and the company shall not negotiate with third parties about an acquisition of shares or of the business of the company. They shall neither invite third parties to submit offers themselves nor do so through advisers, and they shall not hand over confidential information to them. They shall notify the buyer without delay of unsolicited enquiries.” Exceptions, grounds for termination and legal consequences are added by the law firm depending on the transaction.

Which transactions are blocked

In a company sale, the clause regularly covers the sale of shares, the transfer of the business by way of an asset deal, mergers and capital measures that lead to a change of control. In a financing round it usually blocks any raising of equity and equity-like funds such as convertible loans. A definition that is too broad also captures matters of ordinary business such as promotional loans or leasing agreements.

Legal classification in Germany

Under German law, the no-shop clause creates a contractual obligation to refrain from certain conduct. It is effective if the parties expressly agree it as binding, even if the rest of the letter of intent remains non-binding. A breach gives rise to a claim for an injunction. If the obligated party is responsible for the breach, that is, as a rule at fault, a claim for damages under Section 280(1) of the German Civil Code (BGB) is added.

Limits appear in enforcement. Within the short time frames of a transaction process, a claim for an injunction can at best be enforced in expedited court proceedings (interim legal protection). Damage is hard to prove, because it remains open whether, and on what terms, the main agreement would have been concluded without the breach. Interested parties therefore frequently combine the clause with a lump-sum cost reimbursement or a break-up fee, that is, a payment agreed in advance that falls due in the event of a breach without proof of damage.

Formal questions in the sale of GmbH shares

A pure obligation to refrain from conduct obliges nobody to assign shares. It therefore does not, in itself, require the notarial form of Section 15(4) of the German Limited Liability Companies Act (GmbHG). The position can differ where a breach is linked to a payment so high that it indirectly pressures the sellers into concluding the purchase agreement. The law firm checks whether such an agreement must be notarised before signing.

Stock corporations and public takeovers

Where the target company is a stock corporation (Aktiengesellschaft) and is itself a party to the contract, narrower limits apply. Its management board can bind itself only within the scope of its management responsibility (Section 76(1) of the German Stock Corporation Act, AktG) and its duty of care (Section 93(1) AktG). In public takeover bids, takeover law expressly permits the management board to look for a competing offer (Section 33(1), sentence 2 of the German Securities Acquisition and Takeover Act, WpÜG). Agreements between the bidder and the target company therefore often contain reservations in favour of the duties of the company's bodies, which resemble the US fiduciary out.

In the sale of GmbH shares this question hardly arises, because the shareholders themselves decide whether to sell. A strict no-shop clause without such an exception is permissible and common there.

Negotiating a no-shop clause

• End date and grounds for termination. Sellers look for a fixed end date. A rule is also common under which the commitment lapses if the interested party changes the purchase price or material conditions to the sellers' disadvantage.
• Milestones. The exclusivity can be tied to interim steps, such as comments on the draft agreement or proof of funds by a specified date.
• Scope of the duty to notify. The duty to name a third party that makes an enquiry can conflict with that party's own confidentiality. Sellers therefore frequently limit the notification to the receipt and the nature of the enquiry.
• No continuing effect. The sellers' side generally rejects a prohibition on concluding a deal with certain third parties even after the period has expired, because it blocks the alternatives precisely after failed negotiations.

Practical example: no-shop clause in the sale of a software GmbH

The shareholders of a software GmbH (German limited liability company) with annual revenue of around EUR 12 million have run an auction process. They sign a letter of intent with a strategic buyer at a purchase price of EUR 42 million. The no-shop clause runs for 60 days and contains the following provisions:

• no contact with the four other bidders of the second round, whose access to the data room is blocked on the day after signing,
• notification of unsolicited enquiries within two business days, without any obligation to name the enquirer,
• an exception for a committed credit line from the company's house bank and for talks with existing shareholders about bridge financing,
• automatic termination if the buyer reduces the purchase price or has not submitted a final position on the sellers' draft purchase agreement by day 45,
• reimbursement of the buyer's documented adviser costs of up to EUR 250,000 if the sellers breach the clause.

On day 20, a financial investor that was not involved in the process asks for a conversation. The company replies that no talks are possible at present and notifies the buyer of the enquiry within the deadline. On day 50, after completing its review, the buyer submits an offer that is EUR 3 million lower. This satisfies the agreed termination rule and the commitment lapses. The sellers may resume talks with the earlier bidders and the financial investor and negotiate the reduction while alternatives exist again.

Distinctions: no-shop, go-shop, fiduciary out and break-up fee

• Go-shop provision: the counterpart from US practice. After signing, it allows the target company to search actively for better offers for a short period.
• Fiduciary out: an exception from the no-shop obligation under US practice, which allows the governing body of a listed target company to respond to an unsolicited, superior offer.
• Break-up fee: governs the payment consequence if the transaction fails for agreed reasons, for example after a breach of the no-shop clause.

Common mistakes

• Unclear definition of the transaction. If it is not specified which matters are blocked, it remains open whether, for example, an asset deal, a minority stake or a convertible loan falls under the prohibition.
• No fixed end date. A term “until the end of due diligence” is extended by every delay on the part of the interested party.
• No exception for financing needs. Without such an exception, a company with tight liquidity cannot raise bridge funds during the period without breaching the clause.
• Advisers not involved. If an adviser continues outreach because he or she knows nothing of the signing, the sellers breach their own obligation.

Frequently asked questions

Is a no-shop clause binding in a non-binding letter of intent?

Yes, if the parties expressly agree it as binding. A letter of intent and a term sheet usually distinguish between non-binding key points and individual binding provisions. The binding ones regularly include exclusivity, confidentiality and the allocation of costs.

What is the difference between no-shop and no-talk?

No-talk goes further: it also prohibits discussions about unsolicited enquiries, whereas no-shop mainly prohibits the active search. If the clause contains a no-talk prohibition, usually only a refusal without any substantive comment remains possible in response to an enquiry. Milder versions allow a note that talks will be possible once the period has expired. An agreed duty to notify applies in both cases.

What follows from a breach of the no-shop clause?

The entitled interested party can demand that the conduct stop and, where the breach is attributable to the other side, damages, the amount of which it must however prove. Many contracts therefore provide for a lump-sum cost reimbursement that falls due without proof of damage.

Does a no-shop clause have to be notarised?

As a rule not, because it creates no obligation to assign shares. Notarisation can become necessary if a high payment obligation in the event of non-completion exerts indirect pressure to sell.

The Roemer Capital view

Roemer Capital recommends that clients agree a no-shop clause only once a fully negotiated offer is on the table whose purchase price, price mechanics and conditions are fixed in writing. Until then, competition among the interested parties is kept alive. The clause itself is negotiated with a fixed end date, automatic termination in the event of an adverse change to the offer and exceptions for the company's liquidity needs.

During the period, the remaining interested parties are informed in an orderly way about the pause, without giving details about the preferred bidder, and incoming enquiries are documented for the agreed notification. The legal drafting and the question of notarisation rest with the client's law firm. Roemer Capital's contribution is to ensure that the clause fits the timetable and the alternatives of the process.