A "no shop" is a covenant in a merger or acquisition agreement that prevents the target company (or seller) from entering into discussions or negotiations and solicitation of competing bids with third parties, for a specific period of time. This common deal-protection device is used by buyers to increase certainty of closing and to protect their investment of time, money and resources. Depending on its language, the no-shop clause can (i) require the target company to stop all discussion with third-party bidders; (ii) prohibit the target company from disclosing information to third-parties regarding a potential competing bid; and (iii) obligate the target company or seller to notify the buyer if it receives unsolicited bids from any third-party.
In general, when the board of directors of a public company agrees to sell the company in a cash deal, the board becomes subject to a heightened duty of care (the "Revlon duty"). This duty requires the board to obtain the highest value reasonably available to the company's stockholders. Thus, even if the directors may negotiate deal-protection mechanisms such as a no-shop, they will have to be able to accept a better deal for stockholders without being subject to an absolute lock-up by the terms of the agreement. As a result, target companies will usually want a fiduciary out and exception to the no-shop that gives them certain rights to review other transactions or intervening events. Some common exceptions to the no-shop are as follows:
Please note that this article is for informational purposes only and does not constitute legal advice. If you have questions regarding your particular situation, please contact a qualified attorney.