Go-Shop Provisions: Beneficial Inducement Mechanisms or “Window Dressings” for Powerful Private Equity Buyers?

Amanda K. Bloch, University of Chicago

Abstract

In response to changing market conditions and enhanced judicial and regulatory scrutiny of boards, parties negotiating a merger have increasingly included go-shop provisions in their agreements. Go-shop deals are intended to provide target companies with the advantage of locking in a floor value on the company while continuing to shop, and they provide private equity buyers with highly valued exclusivity. In this vein, go-shop clauses are advantageous to both sides of a deal, and studies indicate that properly structured go-shop deals may in fact provide higher returns to shareholders. However, several aspects of these deals generate criticism, and the strict deal protection mechanisms that accompany go-shop provisions and management involvement will often deter third parties from offering a superior bid, particularly for financial buyers. Delaware jurisprudence indicates that courts will permit go-shop deals in the future, but only where the target board sincerely solicits third party bids and provides outside buyers with a legitimate opportunity to inquire into and propose an alternative offer. Overall, in order to maximize value for shareholders, target boards may want to bargain for a go-shop provision in a merger agreement, but they should limit management’s role in the deal and ensure that the deal protections do not provide incumbent buyers with too great of an advantage over other potential bidders.