No-Shop Clause

No-Shop Clause: Meaning and How It Works

A no-shop clause (also called a no-solicitation clause) is a provision in an agreement between a seller and a prospective buyer that prohibits the seller from soliciting or negotiating with other potential buyers for a defined period. It is commonly used in mergers and acquisitions (M&A) and typically appears in letters of intent or agreements in principle.

No-shop clauses give a potential buyer time and exclusivity to evaluate a deal without the seller seeking competing offers. They are usually limited in duration so neither party is indefinitely bound.

Key Elements

• Exclusivity: The seller agrees not to solicit or negotiate other offers during the clause’s term.
• Time limit: Clauses often include a short expiry date to balance exclusivity with the seller’s interest in continuing to market the asset if the deal fails.
• Good-faith obligation: Sellers typically accept a no-shop clause as a gesture of good faith toward the buyer, while buyers use it to protect their investment of time and resources during due diligence.
• Remedies and fees: Agreements may include break-up fees or other penalties if the seller accepts another offer in violation of the clause.

Why Buyers and Sellers Use It

• Buyer advantages:
• Prevents competing bids that could raise the purchase price.
• Allows confidential evaluation without signaling interest to the market.
• Seller considerations:
• Limits ability to seek higher offers during the clause’s term.
• Sellers may insist on a short exclusivity period or protective carve-outs to avoid being left without alternatives if the buyer withdraws.

Example

When Microsoft negotiated to acquire LinkedIn in 2016, both companies agreed to a no-shop clause. Microsoft also negotiated a break-up fee: if LinkedIn accepted another buyer, LinkedIn would owe Microsoft $725 million. The transaction completed in December 2016.

Exceptions and Limits

• Fiduciary duties of public company boards: A public company’s board has a duty to pursue the best interests of shareholders. If a higher, better offer emerges, the board may be obliged to accept it despite an existing no-shop clause. Clauses can include fiduciary out provisions to address this.
• Practical limits: No-shop clauses cannot indefinitely bind a seller; most courts and counterparties expect reasonable time limits and carve-outs for fiduciary obligations.

Pros and Cons

Pros
* Provides buyers with time and certainty to complete due diligence.
* Reduces risk of a bidding war and preserves confidentiality.

Cons
* Restricts the seller’s ability to seek higher offers.
* Can create leverage imbalance; sellers may demand compensating terms (e.g., higher initial price or break-up fee).

Key Takeaways

• A no-shop clause prevents a seller from soliciting other offers for a defined period, commonly used in M&A.
• It protects buyers by reducing competition and preserving confidentiality during negotiations.
• Typical safeguards include short expiry dates and provisions that preserve a board’s ability to fulfill fiduciary duties.
• Break-up fees or other remedies are often included to address potential breaches.