No-Shop Clauses in M&A Agreements Explained
What Is a No-Shop Clause?
A no-shop clause prohibits a seller (typically a target company) from actively seeking, encouraging, or soliciting competing acquisition proposals from other potential buyers after signing a definitive agreement or letter of intent. It ensures the agreed-upon buyer can proceed toward closing without being outbid.
No-shop clauses are standard in merger agreements and are a key tool for deal certainty.
What a No-Shop Typically Prohibits
- Actively soliciting alternative acquisition proposals
- Initiating discussions with other potential acquirers
- Providing confidential information to competing bidders
- Encouraging or facilitating third-party offers
The Fiduciary Out Exception
Almost all no-shop clauses in public company M&A include a "fiduciary out" — an exception allowing the target's board to consider an unsolicited superior proposal if failing to do so would breach their fiduciary duties to shareholders. This exception typically requires:
- The competing offer must be unsolicited (the target did not go looking for it)
- The board must determine in good faith (with advice from financial and legal advisors) that the offer could lead to a superior proposal
- The original buyer usually gets a matching right (3-5 business days to improve their offer)
No-Shop vs. Go-Shop
A no-shop restricts solicitation from the moment of signing. A go-shop clause does the opposite — it gives the target an active window (typically 30-45 days) to seek better offers before the no-shop kicks in.
What to Watch For
- Breadth of restrictions — Overly broad language could prevent even routine business conversations
- Matching rights — Multiple rounds of matching rights heavily favor the original buyer
- Breakup fees — The penalty for accepting a competing offer (typically 2-4% of deal value)
When to Consult a Lawyer
No-shop clauses interact with board fiduciary duties in complex ways. Consider consulting M&A counsel to ensure the no-shop provision balances deal certainty with the board's obligation to shareholders.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.