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How buyers and sellers deal with competing bids after signing the merger agreement
When Microsoft/LinkedIn merger agreement describes in detail the limitation on LinkedIn's ability to solicit other offers during the period between when the merger agreement was signed and when the deal will close., the press release disclosed that the breakup fee would take effect if LinkedIn ultimately consummates a deal with another buyer. Page 56 of the
This section of the merger agreement is called “No Solicitation,” and is more commonly known as a "no-shop" provision. No-shops are designed to protect the buyer from the seller continuing to accept bids and using the buyer’s bid to improve its position elsewhere.
No-shops are included in the majority of deals.
For Linkedin, the violation of the no-shop would trigger a $725 million breakup fee. According to M&A law firm Latham & Watkins, no-shops typically prevent the target from conducting the following activities in the period between signing and closing:
While no-shops place severe limitations on shopping the deal, target boards have a fiduciary responsibility to maximize offer value for shareholders, so they generally cannot refuse to respond to unsolicited offers.
That’s why the no-shop clause almost always has an exception around unsolicited superior offers. Namely, if target determines that the unsolicited offer is likely to be “superior,” it can engage. From LinkedIn’s merger proxy:
A "superior proposal" is a bona fide written acquisition proposal … for an acquisition transaction on terms that the LinkedIn Board has determined in good faith (after consultation with its financial advisor and outside legal counsel) would be more favorable from a financial point of view than the merger. ...
The buyer usually has the right to match the offer and to gain full visibility on the discussions:
… and taking into account any revisions to the merger agreement made or proposed by Microsoft prior to the time of such determination and after taking into account the other factors and matters deemed relevant in good faith by the LinkedIn Board, including the identity of the person making the proposal, the likelihood of consummation, and the legal, financial (including financing terms), regulatory, timing and other aspects of the proposal.
Of course, if the superior proposal is accepted, LinkedIn still has to pay the termination fee (which means any offer must be sufficiently superior as to be worth the termination fee):
LinkedIn is not entitled to terminate the merger agreement to enter into an agreement for a superior proposal unless it complies with certain procedures in the merger agreement, including engaging in good faith negotiations with Microsoft during a specified period. If LinkedIn terminates the merger agreement in order to accept a superior proposal, it must pay a $725 million termination fee to Microsoft.
In the Microsoft/LinkedIn acquisition, the no-shop was an important part of the negotiation, as Microsoft was weary of other suitors, namely Salesforce. Ultimately, the no-shop held, but it did not prevent Salesforce from trying to come in with a higher unsolicited proposal bid for LinkedIn after the deal, forcing Microsoft to up the ante.
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The vast majority of deals have no-shop provisions. However, there is an increasing minority of deals in which targets are allowed to shop around for higher bids after the deal terms are agreed upon.
Go-shops generally generally only appear when the buyer is a financial buyer (PE firm) and the seller is a private company. They are increasingly popular in go-private transactions, where a public company undergoes an LBO. A 2017 study conducted by law firm Weil reviewed 22 go-private transactions with a purchase price above $100 million and found that 50% included a go-shop provision.
From target shareholders’ point of view, the ideal way to sell is to run a sell-side process in which the company solicits several buyers in an effort to maximize the deal value. That happened (somewhat) with LinkedIn – there were several bidders.
But when the seller doesn’t run a “process” – meaning when it engages with a single buyer only — it is vulnerable to arguments that it did not meet its fiduciary responsibility to shareholders by failing to see what else is out there.
When this is the case, the buyer and seller can negotiate a go-shop provision which, in contrast to the no-shop, gives the seller the ability to actively solicit competing proposals (usually for 1-2 months) while keeping it on the hook for a lower should a superior proposal emerge.
Since the go-shop provision rarely leads to an additional bidder emerging, it is often criticized as being “window dressing” that stacks the deck in favor of the incumbent buyer. However, there have been exceptions where new bidders have emerged.
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