No Shop Clause: Everything You Need to Know
A no shop clause is a clause contained within a contract between a buyer and seller that forbids a seller from solicitating a buyer proposal from other parties. 3 min read
2. No Shop Clause Functions
3. Exception Types
4. Venture Merger Contracts
No Shop Clause
A no shop clause is a clause contained within a contract between a buyer and seller that forbids a seller from solicitating a buyer proposal from other parties. The seller cannot shop the asset or business around once the agreement or letter of intent is factored into the agreement between the buyer and seller. A no shop clause is usually in place for a limited period.
A no shop clause can be useful from the potential buyer’s perspective since it may prevent an asset or business seller from solicitating various offers, leading to high purchase prices or bidding wars if other parties are involved. On the other hand, sellers should not want an undue and longer no-shop interval, especially if a potential buyer may exit from the deal upon completion or during due diligence. Even though potential sellers limit their choices by adhering to no shop clauses, they have no other choice in accepting the terms to move the deal forward.
With that, the no shop clause can work out for both parties if the buyer chooses to bargain with the seller. Buyers in a position can also demand no shop clauses to avoid the seller driving up the value of an asset. Transactions with higher stakes usually call for anonymity, which is an essential element. Potential sellers may agree to a no shop clause in good faith to the buyer, especially if it’s a buyer who a seller wishes to deal with.
No Shop Clause Functions
The no shop clause is also an agreement within an acquisition or merger agreement that limits a target company or seller from hearing competing bids from other parties. The no shop clause is a common protection mechanism that safeguards deals that can be used by buyers to enhance certainty in closing and protecting an investment of time, money, and resources.
Upon drafting the contract, the no shop clause can:
- Prevent parties from soliciting other offers from outside bidders
- Require the seller to notify a buyer if he or she receives unsolicited bids from another party
- Prevent sellers from giving information to outside parties regardless of a possible bid that competes with the main buyer
When a board of directors within a corporation agrees to offer the company in a cash-based deal, the board falls under Revlon duty, or heightened duty of care. The duty mandates the board to get the highest value that’s available to the company’s stockholders in a reasonable manner. Even though directors can negotiate various deal-protection safeguards (such as no shop), they still must accept a better deal for stockholders without being locked by the merger terms of the agreement. Therefore, sellers usually mandate an exception to no shop that allows them certain rights to review other transactions or respond to intervening factors after all parties sign the merger contract.
Be aware of the following exceptions:
- Window Shop: The exception permits a seller to discuss unsolicited offers under various circumstances.
- Go Shop: The exception permits sellers to discuss or seek other transactions for a certain period (ex. 30 to 60 days) after a merger agreement gets signed. It can be used to confirm to sellers and buyers that the seller has satisfied fiduciary requirements if it failed to get a chance to host an auction or other venue before agreeing to the contract. No shops are common in acquisition agreements involving private and public deals, and the exceptions to no shop provisions tend to be rare during private deals.
Venture Merger Contracts
Since stockholders of a private company agree to a sale directly, a board is not required to reserve an exception due to concerns of fiduciary duties to stockholders. In most public merger contracts, buyers have a right to improve an offer before the board changes recommendations for the merger and eliminates the contract.
The last remaining terms in the Nation Venture Capital Association (NVCA) term sheet would be the "no shop/confidentiality” section. The terms in the section are binding, even if the transaction is never finished. The no shop mandate requires a business and the founders not to solicit offers of company investment by parties other than that venture capital investor for a certain time. Investors may also mandate the company and founders agree not to solicit other offers pertaining to the acquisition, regardless of asset purchase or stock.
To learn more about a no shop clause, you can post your job on UpCounsel’s website. UpCounsel’s lawyers will provide more information on your rights as a buyer and seller, and they will review any contract before you are compelled to sign it. In addition, they will enlighten you on other contract provisions that may work to your advantage or disadvantage.