MERGERS & AQUISITIONS BULLETIN
MARCH 2013
DRAFTING GO-SHOP CLAUSES IN
CANADIAN M&A TRANSACTIONS
While still used sparingly, there has been a slight increase in the use of “go-shop”
clauses by Canadian targets in friendly acquisitions over the past few years. The few
issuers that used go-shops were able to sign an acquisition agreement and conduct a
market check after signing, thereby enabling them to secure an offer for the company
while still preserving their ability to actively seek higher bids.
In most friendly acquisitions of Canadian
companies, however, the target will conduct a
market check before entering into an acquisition
agreement. Since the target has already
conducted a market check, the buyer will
insist that the acquisition agreement contain
a “no shop” provision that, subject to limited
exceptions, prohibits the target from soliciting or
dealing with competing offers.
Two potential risks of conducting a pre-signing
market check are: (i) some buyers may not be
willing to participate in an auction or market
check process which could result in the loss of
a potential offer, and (ii) during the time it takes
to conduct the market check, equity and/or debt
markets could change such that the target’s
stock becomes less desirable or valuable, or a
potential buyer may no longer be able to secure
debt financing or use its own stock as acquisition
currency. This could result in not only the loss of
a potential offer, but if the market check was, or
becomes, public, the target can be considered
damaged or unwanted and experience a
significant decrease in its stock price.
Despite the potential benefits of a go-shop, or
the fact that they have become fairly common in
the United States, particularly in deals involving
private equity buyers, go-shops are used only
sparingly in Canada - there have only been 21
announced deals since 2007 which included
a go-shop clause. Furthermore, the empirical
evidence in Canada, though somewhat limited,
shows that it is very rare for a topping bid
to emerge as a result of a go-shop. Over the
past five years, the only deal with a go-shop
that resulted in a topping bid was the October
17, 2011 offer by by Cara Operations Limited
to acquire Prime Restaurants Inc. In that
transaction, Fairfax Financial Holdings Limited
made a topping bid during the go-shop period
that Cara did not match.
It is not clear why go-shops have not
resulted in more topping bids, though a
few possibilities include:
(i) high initial bids, perhaps as a result of the
pressure of the go-shop,
(ii) investors, particularly private equity investors, not willing to participate in a
process where there is an existing bid, or
(iii) investors not participating in the postsigning market check as a result of the short
go-shop period together with the fact that
they must not only top an existing bid, but
do so factoring in the break fee as well as
any matching rights.
Given the potential benefits and limitations to
go-shops, it is critical that targets and their
advisors carefully negotiate and draft go-shops
to maximize effectiveness. Some of the key
points that should be considered include:
• Length of the Go-Shop Period – A go-shop
should provide sufficient time to conduct a
meaningful market check which will depend
on factors such as the complexity of the
target and the pool of potential bidders. Goshop periods in Canada are typically between
30-45 days though we have seen as short as
14 days and as long as 60 days.
• Two Tiered Break Fee – Most go-shops
include a two tiered break fee that provides
for (i) a reduced break fee during the go-shop
period or thereafter with an excluded person (discussed below), and (ii) a
full break fee following expiry of the go-shop period. The go-shop break fee
is generally about 40-60% of the full break fee.
• Excluded Person – The majority of the 21 Canadian deals announced
since 2007 permitted the target to continue to negotiate with an “excluded
person” during the no-shop period and to pay the lower, go-shop break
fee if a transaction was announced with an excluded person. While the
precise definition is subject to negotiation, an “excluded person” is a
bidder that submitted an acquisition proposal to the target during the
go-shop period that the target board determined is, or is reasonably l
ikely to lead to, a superior proposal.
• Matching Rights – In most public acquisitions, a bidder is given a right
to match a superior proposal during the non-solicit (or no-shop) period.
However, in approximately one-third of the transactions involving a
go-shop, the initial bidder was not given the right to match a superior
proposal during the go-shop period even though they were able to do
so during the non-solicit period.
AUTHOR
Jason Saltzman
Toronto
416.367.6196
jsaltzman@blg.com
MERGERS & AQUISITIONS GROUP
Calgary
Dan Kolibar | 403.232.9559 | dkolibar@blg.com
Brad Pierce | 403.232.9421 | bpierce@blg.com
Montréal
Fred Enns | 514.954.2536 | fenns@blg.com
John Godber | 514.954.3165 | jgodber@blg.com
Toronto
Paul Mingay | 416.367.6006 | pmingay@blg.com
Jeff Barnes | 416.367.6720 | jbarnes@blg.com
Vancouver
Warren Learmonth | 604.640.4166 | wlearmonth@blg.com
Fred Pletcher | 604.640.4245 | fpletcher@blg.com
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