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Go-Shops Revisited

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A go-shop process turns the traditional M&A deal process on its head: rather than a pre-signing market canvass followed by a post-signing “no shop” period, a go-shop deal involves a limited pre-signing market check, followed by a post-signing “go shop” process to find a higher bidder. A decade ago one of us published the first systematic empirical study of go-shop deals. Contrary to the conventional wisdom at the time, the study found that go-shops could yield a meaningful market check, with a higher bidder appearing 13% of the time during the go-shop period. In this Article, we compile a new sample of M&A deals announced between 2010 and 2019. We find that go-shops, in general, are no longer an effective tool for post-signing price discovery. We then document several reasons for this change: the proliferation of first-bidder match rights, the shortening of go-shop windows, CEO conflicts of interest, investment banker effects, and collateral terms that have the effect of tightening the go-shop window. We conclude that the story of the go-shop technology over the past ten years is one of innovation corrupted: transactional planners innovate; the Delaware courts signal qualified acceptance; and then a broader set of practitioners push the technology beyond its breaking point. In view of these developments in transactional practice, we provide recommendations for the Delaware courts and corporate boards of directors.

Introduction

Until approximately 2005, the traditional sale process for U.S. public companies involved a broad market canvass and a merger agreement with the winning bidder, followed by a “no shop” obligation for the seller between the signing and the closing of the merger. In the mid-2000s, however, the introduction of the “go-shop” technology turned this standard deal template on its head. In its purest form, a go-shop process involves an exclusive (or nearly exclusive) negotiation with a single buyer, followed by an extensive post-signing “go shop” process to see if a higher bidder can be found.

The first go-shop transaction appeared in Welsh, Carson, Anderson & Stowe’s buyout of US Oncology in March 2004.1×1. See Mark A. Morton & Roxanne L. Houtman, Go-Shops: Market Check Magic or Mirage? (Potter, Anderson & Corroon, LLP, Wilmington, Del.), Feb. 2008, app. at 43. Go-shops proliferated quickly after that, particularly in private equity (PE) buyouts of public companies. Many commentators at the time were skeptical of go-shops.2×2. See infra note 16 and accompanying text. The conventional wisdom held that go-shops amounted to nothing more than a fig leaf to provide cover for management to seal the deal with its preferred bidder, while insulating the board against claims that it failed to satisfy its obligation to maximize value for the shareholders in the sale of the company.

A decade ago, one of us published the first systematic empirical assessment of go-shops (Original Study).3×3. Guhan Subramanian, Go-Shops vs. No-Shops in Private Equity Deals: Evidence and Implications, 63 Bus. Law. 729 (2008) [hereinafter Original Study]; see also Jin Q Jeon & Cheolwoo Lee, Effective Post‐Signing Market Check or Window Dressing? The Role of Go‐Shop Provisions in M&A Transactions, 41 J. Bus. Fin. & Acct. 210, 213 (2014) (“Subramanian (2008) is the first study that empirically examines the go-shop provision in takeover agreements.”). The sample included all PE buyouts announced between January 2006 and August 2007 (n=141), including forty-eight deals that involved go-shop processes.4×4. Original Study, supra note 3, at 730, 742. In contrast to practitioner and academic commentary at the time that was generally skeptical of go-shops, the Original Study found that go-shops frequently identified higher bidders during the go-shop period, and that sellers extracted slightly higher prices from the original bidder in exchange for pre-signing exclusivity.5×5. Id. at 748–50, 753–55. Subsequent studies have generally confirmed these empirical findings.

Today, go-shops are a common tool for PE buyouts of public companies. In view of the earlier empirical findings and the general view today that go-shops can be meaningful, the continued deployment of go-shops might be viewed as a positive development in the evolution of public-company mergers and acquisitions (M&A). However, in this Article we present new evidence suggesting that go-shops have become less effective as a tool for price discovery since the time frame of our earlier empirical analysis. The Original Study, which examined deals announced in 2006–2007, reported that a higher bid emerged during the go-shop period 12.5% of the time (6 instances out of 48 go-shop deals).6×6. See id. at 744 fig.1, 749 tbl.3. Using a new database of M&A transactions over the past ten years, we find that the jump rate in the 2010–2019 time frame was 6.1% (7 out of 114 go-shops), declining to 4.3% (2 out of 46) in the period from 2015–2019.7×7. See infra pp. 1230–31.

This decline in jump rates cannot be explained by straightforward factors, such as uniformly shorter go-shop periods or an increase in go-shop termination fees. Delaware courts have emphasized the importance of these factors for structuring a meaningful go-shop process,8×8. See, e.g., In re Del Monte Foods Co. S’holders Litig. 25 A.3d 813, 818–19 (Del. Ch. 2011). and practitioners, not surprisingly, have taken that guidance. As with other areas of transactional practice, the lawyers, bankers, and principals are far better than that at burying their handiwork. The real explanation requires deeper digging into structural and contextual factors involving go-shops.

Match rights, for example, which were just beginning to appear at the time of the Original Study, are now ubiquitous. Match rights give the initial buyer the right to match any new offer received during the go-shop period. Basic game theory indicates that match rights will deter prospective third-party bidders. In addition, go-shop windows are no longer as sensitive to deal size as they were in the Original Study. The result is shorter go-shop windows in larger deals, which amplifies information asymmetries and “winner’s curse” concerns. Shorter go-shop windows also make consortium bids more difficult, which are particularly important for larger deals. These developments reduce the effectiveness of go-shops as a tool for price discovery.

Conflicts of interest for management also hinder the effectiveness of go-shop processes. CEOs often have a financial incentive to keep the deal price down, which means discouraging potential third-party bids during the go-shop process. And in some instances, CEOs have undisclosed qualitative reasons for discouraging third-party bids.

Conflicts of interest among the investment bankers can also reduce the effectiveness of go-shops. For example, in the incestuous world of PE, the sell-side banker’s financial incentives to please the buyer (who does not want an overbid) may be larger than the banker’s financial incentives to find a higher bidder during the go-shop period. Alternatively, or in addition, the buyer’s bankers may discourage prospective buyers from meaningful participation in the go-shop process. This Article presents a taxonomy of these conflicts and provides examples of each. This Article also documents how boards fail to form special committees that might adequately cleanse these conflicts.

A final category of reasons that can reduce the effectiveness of the go-shop process involves the technical details of the go-shop itself. Some deals have tightened the “Excluded Party” definition, making it more difficult for prospective third parties to perceive a pathway to success. Through a complex interaction of deal terms, some buyers have achieved a “back-door” tightening of the Excluded Party definition. These seemingly technical adjustments to the legal terms of the go-shop can significantly reduce the effectiveness of the go-shop as a tool for price discovery.

At the highest level, the story of the go-shop technology over the past ten years is one of innovation corrupted: transactional planners innovate, the Delaware courts signal qualified acceptance, and then a broader set of practitioners push the technology beyond its breaking point. This trajectory has a venerable pedigree. Mortgage securitization unquestionably created enormous value for society in the 1970s and 1980s, but practitioners pushed this technology too far by the 2000s, leading to the financial crisis of 2008–2009.9×9. See Eamonn K. Moran, Wall Street Meets Main Street: Understanding the Financial Crisis, 13 N.C. Banking Inst. 5, 44–51 (2009). Likewise, the proliferation of derivatives unquestionably created enormous value in the 1980s and 1990s, but the distortion and eventual corruption of this new technology led to the Enron debacle of 2003.10×10. Geoffrey Etherington & Brian P. Iaia, Regulation of Derivatives in a Post-Enron World, 18 Andrews Corp. Officers & Directors Liability Litig. Rep. 10 (2002). In view of this (no doubt) eternal dance between practitioners and their regulators, this Article concludes with specific recommendations for the Delaware courts and transactional planners in the realm of go-shop processes.

At stake are general policy goals involving allocational efficiency in the M&A marketplace. Economists generally agree that social welfare is maximized when assets flow to their highest and best use; while lawyers, bankers, and principals on the buy side (and sometimes on the sell side) want to maximize deal certainty rather than allocational efficiency. Corporate law must therefore police the deal process to ensure that business objectives and professional interests do not crowd out desirable policy goals. Go-shops can facilitate allocational efficiency if (but only if) they are structured properly. This Article presents evidence that the go-shop deal technology has moved away from fulfilling its potential as a tool for allocational efficiency over the past ten years. It also proposes specific interventions for practitioners and courts to set things back on course.

 


* Joseph Flom Professor of Law & Business, Harvard Law School; Douglas Weaver Professor of Business Law, Harvard Business School; Faculty Chair, Harvard Law School Program on Negotiation; Faculty Chair, Harvard Business School Mergers & Acquisitions Executive Education Program. Comments welcome at [email protected] Subramanian has served as an expert witness for petitioners in some of the transactions described in this Article. Some of the case study analyses contained in this article were originally prepared as part of Subramanian’s reports in those matters. The authors thank the participants in the Harvard Law School corporate law lunch group and the Harvard Law School Law & Economics seminar for helpful discussions and comments on earlier drafts.

** Fellow, Program for Research on Markets and Organizations, Harvard Business School.