Go-Shop Period Definition

A go-shop period is a clause in a Mergers and Acquisitions (M&A) agreement that permits a public firm to seek rival offers after receiving a purchase offer from an acquirer.

The time might extend up to two months in most cases.

How Does it Work?

The go-shop period allows the target company's board of directors to discover the best bargain for its shareholders. Additional offers from other suitors would logically be higher than the original Bid Price; hence the initial acquirer's bid serves as the acquisition floor.

The new acquirer pays the previous acquirer a breakup fee which usually ranges from 1% to 4% of the equity value of the transaction. If the target firm is able to find a suitor with a higher bid and the initial acquirer does not match or submit a better proposal.

Why is it Important?

The go-shop period is generally used by the target corporation to maximise shareholder value. Higher bids are likely to emerge in an active M&A case. As the go-shop period is so short, interested bidders often don't have enough time to undertake sufficient due diligence on the target firm in order to propose a better bid price.

Aside from the short duration of a go-shop period deterring prospective bidders, the following reasons also contribute to the absence of additional bids during the period:

• High opening bid
• Mandatory payment of break up fee by the new bidder
• Potential bidders do not want to provoke a bidding war by disrupting the current transaction.

Given the lack of additional bids during the go-shop period, such a clause is more typically regarded as a formality demonstrating that the target company's board of directors is fulfilling its fiduciary Obligation to maximise bid value for shareholders.

Go-Shop Vs. No-Shop

A go-shop period enables the acquiring business to shop around for a better deal. The acquirer has no such choice during the no-shop period. If a no-shop clause is included, the acquiring business will be required to pay a significant breakup fee if it decides to sell to another company after the offer has been made.

No-shop clauses prevent the firm from actively shopping the transaction, which means it can't provide information to potential purchasers, conduct talks with them, or request offers, among other things. Companies, on the other hand, can reply to unsolicited proposals as part of their fiduciary responsibility. A no-shop provision is standard practice in many M&A transactions.

For instance, suppose Apple announced to buy Facebook for $5million, and their agreement had a no-shop provision. If Facebook found another buyer, he would have to pay Apple a significant breakup fee, say $100 million.