No-Shop Provision
A no-shop provision is a clause in a merger agreement that prohibits the target company from soliciting, initiating, or encouraging alternative acquisition proposals from third parties after signing, protecting the buyer's investment of time and capital during the period between signing and closing.
Once a target company and an acquirer sign a definitive merger agreement, the buyer has invested substantial resources in due diligence, negotiation, financing, and transaction costs. Without contractual protection, the target board could use the signed agreement as leverage to attract competing bids while leaving the original buyer exposed. The no-shop provision prevents this by contractually restricting the target from shopping the deal to other potential acquirers.
The standard no-shop provision prohibits the target and its representatives — including management, financial advisors, and legal counsel — from initiating, soliciting, encouraging, or participating in discussions or negotiations with any third party regarding an alternative acquisition. The target also cannot provide non-public information to a potential competing bidder or enter into any alternative acquisition agreement.
However, virtually all US merger agreements include a 'fiduciary out' exception within the no-shop provision. This exception allows the target board to respond to an unsolicited acquisition proposal — one the target did not solicit — if the board determines in good faith, after consultation with legal and financial advisors, that the proposal constitutes or is reasonably likely to lead to a 'superior proposal.' The fiduciary out recognizes that a board cannot contractually abdicate its ongoing duty to act in shareholders' best interests in the face of an unexpectedly better offer.
The mechanics of the fiduciary out typically require the target to notify the original buyer of the competing proposal, provide the original buyer a specified match right period (typically three to five business days) to revise its own offer to match or exceed the competing bid, and pay a termination fee if the target ultimately elects to pursue the superior proposal. These provisions create a last-look right for the original buyer and ensure that the target bears a meaningful financial cost for switching bidders.
The no-shop provision, combined with the break-up fee and the match right, collectively define the 'deal protection' provisions of a merger agreement. Sophisticated deal lawyers spend considerable time calibrating these provisions because overly aggressive deal protection may be challenged by shareholders as entrenching management or discouraging competing bids.