What is a no‑shop clause?
A no‑shop clause (also called a no‑solicit or exclusivity clause) is a provision in a sale or acquisition agreement or letter of intent that prevents the seller from actively soliciting or negotiating offers with other potential buyers for a defined period. Its purpose is to give the prospective buyer a protected window to conduct due diligence and negotiate without the seller “shopping” the target to competing bidders.
Why buyers and sellers use no‑shop clauses
– Buyer perspective: Reduces the risk of a competing bid emerging and preserves the buyer’s negotiating leverage and confidentiality while it spends time and money on diligence.
– Seller perspective: Agreeing to a short exclusivity period can demonstrate good faith and facilitate a faster, cleaner sale—sometimes attracting preferred buyers who require certainty.
– Tradeoffs: Buyers want long-enough protection; sellers want flexibility to solicit better offers. Typical resolution: limited term plus carve‑outs and liquidated damages (break‑up fees).
How a no‑shop clause typically works
– Trigger: Often included in a letter of intent (LOI), term sheet, or definitive purchase agreement.
– Duration: Short, defined period (commonly 30–90 days in M&A), not indefinite.
– Scope: Bars active solicitation (e.g., contacting potential buyers, inviting bids) but often permits:
– Passive responses to unsolicited approaches, or
– Consideration of unsolicited bona fide offers if a “fiduciary out” or similar carve‑out applies.
– Carve‑outs and exceptions: Parties usually negotiate express exceptions for existing confidentiality obligations, permitted bidders, or a board’s fiduciary duties.
Common variations and related clauses
– No‑Solicit vs. Exclusivity: “No‑solicit” may focus on not actively reaching out to buyers; “exclusivity” more broadly prevents any negotiations with other parties.
– Go‑shop clause: Seller is allowed (for a limited post‑signing window) to solicit superior offers; often paired with a break‑up fee to compensate the original bidder if the seller accepts a better bid.
– Fiduciary‑out (fiduciary duty exception): Allows the board of a public company to consider a superior proposal if its fiduciary duty to shareholders requires it.
– Break‑up fee (termination fee): Amount payable if seller accepts another bid in violation of the clause or exercises a go‑shop; can be mutual or one‑sided.
– Reverse break‑up fee: Buyer pays the seller a fee if the buyer backs out for specified reasons.
Practical example
– Microsoft and LinkedIn (2016): Both parties agreed a no‑shop clause during negotiations. LinkedIn agreed to a break‑up fee of $725 million payable to Microsoft if it closed with another buyer—providing Microsoft significant protection while the transaction proceeded. (Source: Investopedia)
When a no‑shop clause may not bind a seller
– Public companies: Boards owe duties to shareholders and may be required to solicit or accept higher bids; fiduciary outs and state corporate law (e.g., Delaware) can limit the enforceability of a strict no‑shop if it would prevent acting in shareholders’ best interests.
– Regulatory or contractual constraints: Antitrust conditions, change‑of‑control provisions with third parties, or other legal obligations can override exclusivity.
– Breach remedies may be limited or involve equitable defenses.
Enforcement and remedies
– Damages: The non‑breaching buyer may seek money damages reflecting lost bargain or increased purchase price resulting from the breach.
– Specific performance: In some cases a buyer may seek a court order requiring the seller to perform (rare in M&A due to equity considerations).
– Break‑up fees: Pre‑negotiated fees can provide a quick remedy and discourage breaches.
– Litigation risk: Enforcement depends on contract language, jurisdictional law, and whether equitable relief is appropriate.
Negotiation considerations — what to negotiate
– Duration: Keep it as short as feasible (e.g., 30–60 days) unless justification exists for longer.
– Scope: Precisely define “solicit,” “invite,” and “negotiate” to avoid ambiguity.
– Permitted activities: Allow passive receipt of unsolicited offers, continuation of pre‑existing discussions with specified third parties, or approval rights.
– Fiduciary out: If the seller is a public company, expect a fiduciary‑out carve‑out to preserve board duties.
– Break‑up fee: Negotiate amount and triggers (e.g., paid only if seller accepts another bid in violation vs. any change of control).
– Go‑shop: Buyers may accept a short go‑shop in exchange for a higher break‑up fee.
– Confidentiality: Reinforce confidentiality commitments to avoid leaks that could trigger unwanted bids.
– Remedies and jurisdiction: Define remedies and governing law to reduce uncertainty.
Practical steps for sellers
Before signing:
1. Assess whether granting exclusivity is necessary to obtain the desired buyer and alignment of deal terms.
2. Limit the term — propose a specific, short duration tied to concrete milestones (e.g., completion of diligence).
3. Build in sensible carve‑outs: permitted passive responses, pre‑existing negotiations, and a fiduciary out for public companies.
4. If accepting a no‑shop, seek a break‑up fee or minimum acceptable offer threshold if the board must consider higher bids.
5. Coordinate with advisers to check for contractual or regulatory constraints.
During the exclusivity period:
1. Keep the buyer informed and cooperate to avoid the buyer walking away.
2. Do not initiate contact with prospective buyers or solicit offers beyond negotiated exceptions.
3. Track and document any unsolicited approaches and consult counsel before responding.
If a better offer arrives or your board must consider alternatives:
1. Review fiduciary duties and the contract’s fiduciary‑out or go‑shop provisions.
2. Consult legal counsel immediately before engaging with a competing bidder.
3. If a break‑up fee applies and you accept another deal, calculate and disclose that obligation.
Practical steps for buyers
Before signing:
1. Insist on a no‑shop to protect diligence investment and preserve confidentiality.
2. Set a reasonable exclusivity term and consider including a go‑shop prohibition or limiting any go‑shop window.
3. Request a break‑up fee to deter shop-and-dump behavior.
4. Define permitted seller activities narrowly; include a requirement to notify the buyer of any unsolicited approaches.
During the exclusivity period:
1. Move diligence and negotiation efficiently to avoid wasting time.
2. Monitor seller communications that might indicate breaches or leaks.
3. If the seller’s board is public, expect a fiduciary out and prepare to respond to auction dynamics.
If the seller breaches:
1. Evaluate remedies in the contract (break‑up fee, liquidated damages, injunction).
2. Consider business and reputational impacts of litigation versus settlement.
Checklist for drafting/negotiating a no‑shop clause
– Start and end dates (or milestone‑based termination)
– Clear definition of prohibited activities (solicit, initiate, encourage)
– Express exceptions (passive inquiries, pre‑existing discussions)
– Fiduciary‑out language for public targets or boards
– Break‑up fee and triggers (amount, payment timing)
– Go‑shop terms, if any (duration, compensation)
– Notification obligations for unsolicited approaches
– Confidentiality, non‑disparagement, and escrow/termination provisions
– Remedies and governing law
Key takeaways
– A no‑shop clause gives a prospective buyer a limited, contractual exclusivity period to pursue a transaction without competition.
– Sellers agree to no‑shop clauses to demonstrate good faith but will seek limits: short terms, carve‑outs, fiduciary outs, and break‑up fee arrangements.
– Public company sales are subject to board fiduciary duties; strict no‑shop clauses may be constrained by the need to maximize shareholder value.
– Careful drafting of scope, exceptions, duration, and remedies is essential to balance buyer protection and seller flexibility.
Source
– Investopedia, “No‑Shop Clause,” https://www.investopedia.com/terms/n/no-shop-clause.asp
If you’d like, I can:
– Draft a short model no‑shop clause (non‑legal form) you can review with counsel, or
– Create a negotiation playbook tailored to a buyer or seller in a specific industry or deal size. Which would be most helpful?