Merger Pacts Sanction: “Go-Shop” Sprees: “Go-shop” clauses may try buyers’ nerves, but allowing public targets to look for higher prices may discourage shareholder suits

Most M&A lawyers representing a publicly held target aren’t comfortable closing a merger agreement without a “market check” to determine whether anyone is willing to pay more than an initially favored bidder. As dealmaking has gotten more contentious and litigious, just looking for a better bid isn’t good enough. In a developing trend, an increasing number of deal contracts enshrine the “market check” by including a “go-shop” clause, which essentially endorses a far-reaching search for the best offer available. This belt-and-suspenders approach doesn’t always pay off in a higher-price or a more competitive bidding process and it can give buyers the jitters while delaying a close. But, according to the July issue of M&A Spotlight, published by the Transaction Services practice at KPMG, “go-shop” buys some legal protection by setting the originally agreed-on price as a floor and creating an auction environment after that. “Go-shop requirements have been included in part to protect boards from shareholder allegations that their companies are being sold to the wrong buyer at the wrong price,” says Daniel Tiemann, national operations leader for the practice. “And although it’s not clear that these provisions will become commonplace, it’s possible they will become more prevalent as boards remain cautious in the face of increasing shareholder activism and heightened regulations,” he adds. In at least two cases, the report says, the “go-shop” authorizations didn’t generate higher prices – the planned acquisition of hotel and casino operator Kerzner International Ltd. by a management-led investor group and the Leonard Green & Partners buyout of Sports Authority Inc. But a 30-day “go-shop” provision was instrumental in a bidding contest that led to the $1.7 billion merger of home appliance producers Whirlpool Corp. and Maytag Corp., which was not the original bidder. In any event, Tiemann says “go-shop” offers a seller’s board some comfort that it has received the best possible price for shareholders. It’s difficult, he says, for shareholders to claim that “the sellers did not exhibit adequate due diligence in selling the company.” “Go-shop” comes with some strings attached for both sides. The seller usually must agree to a break fee if the initial bidder gets frozen out and the initially favored buyer has to reconcile itself to a potential bidding contest. But Tiemann notes that the first bidder still has an edge. New bidders, he says, have only a limited time to make an offer, and the clauses “are often paired with termination fees, meaning that the new bidder not only has to raise its offer but also has to compensate the company they are taking the deal from.” (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com