Post-signing “go-shop” processes first appeared in 2004 as an alternative to the traditional sale process for public companies. As one way to satisfy its “Revlon duty” to get the best price in the sale of the company, the sell-side board would engage in a broad, pre-signing market canvass of potential buyers and then enter into a merger agreement with the winning bidder, which agreement would include a “no shop” covenant for seller between signing and stockholder approval with “fiduciary outs” for any superior offers that might materialize. Go-shops were introduced to enhance the post-signing process and perhaps allow for a less robust pre-signing process. They were initially received with some skepticism, and we believe the Delaware judiciary still may question their significance, but a study published in 2008 found that go-shops frequently led to higher bids during the go-shop period and that sellers extracted slightly higher prices from the original bidder in exchange for pre-signing exclusivity. Now fifteen years later, go-shops are a frequently used tool in private equity buyouts of public companies.
The author of the 2008 study, together with a colleague, recently published a new study, Go Shops Revisited, now raising concerns about the effectiveness of go-shops due to the evolution of their structure over the last decade. Looking at transactions with go-shops since 2010, the authors note that while post-signing market checks are significantly up, the deal “jump rate” during the go-shop period is significantly down, effectively to zero in the last few years, indicating that go-shops may no longer be providing meaningful value and efficiency to the M&A process. We encourage our clients and friends to read the study in its entirety, but, in summary, the authors note the following structural and contextual changes that they believe have negatively impacted the go-shop process: (i) the proliferation of match rights, nearly all of which are “unlimited,” (ii) the slight shortening of go-shop windows in larger deals, (iii) the personal incentives of executives, including “rolling over” sell-side equity in the deal, receiving equity from the PE fund as part of the deal, and, maybe most importantly, the structure of buy-side compensation if the PE fund retains management, (iv) the failure to use special committees in certain circumstances even if not legally required, (v) banker conflicts, on both the buy-side and sell-side, and (vi) deal terms in other agreements, such as support agreements.
We believe a sell-side board and its financial and legal advisors should carefully evaluate the entirety of the sale process and the transaction’s proposed terms, including the nature and breadth of the pre-signing process and any post-signing market check and the overall scope of any deal protection measures and the board’s fiduciary outs, in determining whether or not it is satisfying its Revlon duty in connection with a sale. The Go Shops Revisited study highlights some concerns regarding the effectiveness of go-shops that should be considered as part of that overall evaluation. Based on the facts and circumstances of any given transaction, a sell-side board may determine that they need to implement additional safeguards to their process, including engaging in a robust pre-signing market check, negotiating more aggressively for a price bump in exchange for an abbreviated pre-signing market check, and/or using a special committee to negotiate the transaction even if not legally required to do so.