Key Takeaways

  • A no shop clause prevents a seller from soliciting or negotiating offers with other potential buyers for a set period, giving the initial buyer exclusive rights to pursue the transaction.
  • The clause is commonly used in mergers, acquisitions, and venture deals to protect the buyer's investment of time and resources.
  • No shop clauses can include important exceptions, such as window shop and go shop provisions, to balance the seller’s fiduciary duties.
  • Key considerations include the duration, scope, and legal enforceability of the no shop clause, as well as potential remedies for breach.
  • Both buyers and sellers should understand how no shop clauses affect negotiation leverage and the potential for deal certainty or lost opportunities.
  • Consulting an attorney is crucial to ensure that the no shop clause aligns with your business and legal interests.

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.

Purpose and Importance of a No Shop Clause

A no shop clause is designed to give a buyer confidence that their investment in negotiations, due diligence, and drafting agreements will not be undermined by the seller soliciting or accepting competing bids. By locking in the exclusive right to negotiate, the buyer can proceed without fear that another party will swoop in with a better offer. This exclusivity is especially valuable in competitive industries or when large sums are at stake.

From the seller’s perspective, agreeing to a no shop clause may demonstrate seriousness and good faith in pursuing the deal, but it can also limit their ability to maximize the sale price by fielding other offers. Therefore, the negotiation around a no shop clause is often a balance between providing certainty to the buyer and maintaining flexibility for the seller.

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.

Key Elements of a No Shop Clause

Typical no shop clauses include several essential elements:

  • Duration: Specifies how long the exclusivity period lasts, often ranging from 30 to 90 days.
  • Scope: Defines what activities are restricted, such as soliciting, negotiating, or entertaining offers from third parties.
  • Notification Requirements: May require the seller to inform the buyer if they receive unsolicited third-party proposals.
  • Exceptions: Outlines permissible situations where the seller may consider or negotiate alternative offers, usually to satisfy fiduciary duties to shareholders.
  • Remedies for Breach: Details the consequences if either party violates the clause, such as termination fees or specific performance.

Exception Types

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.

Legal Risks and Enforceability

While no shop clauses are generally enforceable, there are circumstances where they may be challenged or limited by courts. For instance, if the clause is deemed overly restrictive or violates the fiduciary duties of a company's board (such as maximizing shareholder value in a public company), it may be set aside. Courts typically scrutinize these clauses to ensure they do not prevent directors from acting in the best interests of shareholders, especially during a change of control.

Key legal risks include:

  • Unreasonable duration or scope that may be considered anti-competitive.
  • Failure to include fiduciary out provisions for public companies.
  • Potential liability for damages if the seller breaches the clause.

To minimize these risks, no shop clauses are often carefully negotiated, and legal counsel should review the language to ensure enforceability and alignment with applicable law.

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.

No Shop Clause vs. Go Shop Clause

A no shop clause is often contrasted with a "go shop clause." While a no shop clause prohibits the seller from seeking alternative deals, a go shop clause expressly allows the seller to solicit competing offers for a limited period after an initial agreement is signed. This can benefit sellers who want to ensure they obtain the best possible deal, while still providing some exclusivity to the initial buyer.

Key differences:

  • No Shop: Prohibits soliciting or negotiating with others.
  • Go Shop: Allows soliciting other offers for a specific timeframe.
  • Window Shop: Permits passive receipt and limited response to unsolicited offers but prohibits active solicitation.

The choice between these provisions depends on deal dynamics, the relative bargaining power of the parties, and the competitive landscape.

Practical Examples of No Shop Clauses

  • In a private company sale, the purchase agreement may state: “Seller shall not, directly or indirectly, solicit, initiate, or encourage inquiries or proposals for the purchase of any equity or assets of the company for a period of 60 days.”
  • In a merger agreement involving a public company, the clause may require the board to notify the buyer of any unsolicited superior proposal, but allow the board to consider it if necessary to fulfill their fiduciary duties.

Such real-world examples illustrate how the no shop clause is tailored to the specific transaction and parties involved, with custom language and exceptions built in as needed.

Frequently Asked Questions

1. What is a no shop clause and why is it important?

A no shop clause gives a buyer exclusive negotiating rights for a specified period, preventing the seller from soliciting or negotiating with other potential buyers.

2. How long does a typical no shop clause last?

It usually ranges from 30 to 90 days, but the exact duration is negotiated based on deal specifics.

3. Are there exceptions to a no shop clause?

Yes. Exceptions like window shop and go shop provisions may allow sellers to consider or solicit other offers in certain situations, especially to meet fiduciary duties.

4. What happens if a party breaches a no shop clause?

Remedies may include termination fees, damages, or other penalties outlined in the contract. Enforcement depends on the clause’s language and applicable law.

5. Should I consult a lawyer before agreeing to a no shop clause?

Absolutely. An attorney can ensure the clause protects your interests and is legally enforceable, and help tailor exceptions or remedies to fit your needs.

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.