Make the Deal

CHAPTER 13 Topping a Public Merger

Overview of “No-Shop” Provisions

“No-shop” provisions in public mergers

“No-shop” provisions are customary in public company deals. They restrict the target company from taking actions that increase the likelihood that another bidder will make a competing offer to acquire the target.

In a public company merger, the buyer cannot close the transaction until the public shareholders vote to approve the deal. Until that vote occurs, a competing bidder can disrupt the original deal by convincing the target’s shareholders that a better offer awaits them. A no-shop is a way for the buyer to reduce the risk of a competing bidder arising—by restricting the activities of the target company vis-à-vis competing bidders. The target cannot seek them out, negotiate a competing deal with them, or otherwise facilitate a competing bid.

The no-shop is not as harsh as it sounds in practice. It comes with an escape valve: the fiduciary out. A fiduciary out is an exception to the no-shop that is imposed by case law.¹ There are two primary fiduciary out exceptions. The first exception is relatively easy to satisfy, and allows the target company to provide diligence and negotiate with an unsolicited competing bidder. The second permits the target company to actually terminate the original merger agreement in order to enter into a competing deal on superior terms.

Exercising the fiduciary out termination right triggers an obligation for the target to pay the fiduciary ...