No Shop Provision

What is the No Shop Provision?

A no-shop provision, also often known as a no-shop clause, is an agreement or a contract between buyers and sellers wherein the buyer is prohibited or prevented from soliciting his purchase proposals from other parties. This means the buyer is contractually prevented from offering his services to other parties. 

This means that once such a clause is present and the agreement is agreed upon or a letter of intent which proves that the parties committed to entering into a transaction are signed, the seller can no longer offer the same product or service to another party for a specific duration. 

Furthermore, the seller is also prevented from providing any information about the deal to third parties. If there are any bids from third parties, the seller must inform the buyer. 

These provisions, also called “the no solicitation clause,” are often used by large corporations and are entered into as a sign of good faith to showcase that the seller is committed to selling their products or services to that particular buyer. 

The main motive is that the buyer is protected from losing the product or service from another party who offers a higher price after the letter of intent has been signed. 

However, these provisions have an expiration date and are only for a specific duration. This means that the seller can entertain other buyers once the timeframe elapses and the product hasn’t been sold.

Understanding no-shop Provisions

The primary purpose of a no-shop provision is to protect the buyers' interests. The buyer can sign a letter of intent and put into effect such a provision and prevent the seller from entertaining any more offers for a specific time duration. 

This allows the buyers to take enough time to weigh out the pros and cons of the transaction and to analyze whether they should proceed with the transaction or let it go. In addition, it protects the buyer as the deal's valuation is not driven further. 

The buyer does not need to worry about hurrying and losing out on the offer to another party, as the seller is contractually obligated to wait and is prevented from taking offers from other parties. 

Often, if a high-profile buyer is interested in a deal, it may attract further bids from other parties, which would increase the price due to more offers. However, such provisions prevent this as the seller can’t entertain such requests. Thus, they can avert bidding wars. 

Simultaneously, the periods in such a provision are not too long to harm the seller. This is because the seller cannot be stopped from taking offers from other parties indefinitely. 

Example of a No Shop Provision

These provisions are prevalent in mergers or takeovers, wherein the target company will be contractually prohibited from taking any offers from third parties. 

For example, if a high-profile company like Google wants to take over a business to make the offer seem more attractive, the target company may want to include such a provision. 

This would protect Google as the target company wouldn’t be able to take any offers from the other companies, which would send in offers after seeing Google’s interests. Thus, Google would be prevented from a bidding war. 

One commonly cited example of such a provision is the Microsoft LinkedIn deal in 2016. This transaction was an extremely high-stakes transaction wherein Microsoft offered to acquire the platform of LinkedIn. 

The takeover was valued at over $26.6 billion, with the shares valued at $196. However, the deal contained a clause wherein LinkedIn would have to pay a $725 million breakup fee if LinkedIn struck an agreement with another buyer. 

This meant that LinkedIn would have to pay Microsoft a considerable amount if it entered into a sale with another party in search of a better offer. This effectively prevented LinkedIn from entering other offers and was an example of a no-shop provision. 

This was mainly done to prevent Microsoft’s competitor, salesforce, from placing a bid. However, in the end, salesforce did make an unsolicited bid, which LinkedIn would have had to take due to its fiduciary duty towards its shareholders, which made Microsoft raise its offer.  

Exceptions to a No Shop Provision

There are various cases wherein a no-shop provision won't bind the parties. A public company, for example, has a fiduciary duty to have the best interest of its shareholders and thus may have to take an offer if it is better. 

This was the case in the Microsoft LinkedIn deal wherein salesforce had a better offer which made LinkedIn take the proposal to its board. Microsoft had to raise its offer to continue to be the buyer eventually. 

Some additional exceptions include the following:

1. Go Shop Provisions: Such a provision allows the buyer to seek more proposals or entertain further potential buyers after a specific time has elapsed. For example, the seller can look for other offers if the deal has not been completed within 40-60 days. 
2. Window Shop: This provision will allow the seller to talk or interact with other third parties to check whether they can get a better offer. Despite this, they will still not be allowed to accept that offer as the no-shop provision would still bind them
3. Fiduciary Out: As mentioned above, this is the case when the seller can break the provision if it feels that, in the future, the agreement would not be in the best interest of the shareholders. As the board's primary and most important duty is to serve its shareholders, the seller could escape the agreement. 

However, such an exemption must be included in the signed contract between the buyer and the seller. 

Other Deal Protection Mechanisms

While entering into a merger or an acquisition, the parties often do not just include a no-shop provision but rather combine it with several other mechanisms which protect the buyer. 

Some of these may be breakup fees, lock-ups, stock options, or recommendation agreements which help protect the buyer and make the no-shop deal more effective. 

1. Breakup Fees

A breakup fee is a fee or penalty the seller must pay the buyer if they choose to rescind the offer and sell the business to another party. This prevents the buyer from soliciting the company from other third parties. 

This was the case in the LinkedIn-Microsoft merger, wherein if LinkedIn had sold the business to another party, they would have had to pay Microsoft a considerable sum. 

2. Lock Ups

Lock Ups are cases where the buyers are given an option to acquire a part of the target company or the seller's stock. 

Thus, the buyer will already have part-ownership of the company, which gives them a competitive advantage over other potential parties who may want to acquire the business too. 

However, this shouldn’t be used to coerce the board of directors or pressure the shareholders. 

3. Stock Options

The buyer can acquire a fixed number of shares in this deal structure if a specific pre-determined event transpires. This not only allows the buyer to increase their stake but also raises the demand for the claims of the target company.  

4. Recommendation agreements

These are agreements between the buyer, and the board of directors of the seller company or the target company wherein the board of directors agrees to recommend the merger or the takeover to the shareholders. 

However, these offers must be accompanied by a fiduciary out clause. If the company receives a better request, the board of directors has a fiduciary duty toward the shareholders to accept that offer.

Researched and authored by Soumil De | LinkedIn

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