1. Under what circumstances, if any, is signing a merger or acquisition agreement with a go-shop clause an effective substitute for a pre-signing market check by the seller?
Under Revlon duties, directors are expected to take steps to obtain the best transaction reasonably available for the stakeholders. The Delaware Supreme Court has stated, “there is no single blueprint that a board must follow to fulfill its [Revlon] duties” (citation). After the Smurfit-Stone case, it became clear that board did not need to do a pre-signing market check to fulfill their fiduciary duties. Therefore, “go-shop” provisions have been used more often in place of pre-market checks.
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Thus, by choosing a go-shop provision instead of a pre-market check, the target company is still able to canvas the market to help ensure that are receiving the best price. Furthermore, the seller may choose a go-shop provision if the buyer prefers one. Private-equity firms often prefer a go-shop because they like to avoid auctions, believing they are often at a disadvantage to strategic buyers. Professor Subramanian also concludes that go-shop clauses without a pre-signing check, “yield a higher bidder 17% of the time” and “target shareholders receive 5% higher returns” relative to no-shop clauses. These statistics show that go shop clauses can have a positive effect and thus, are an effective substitute.
For example, the go-shop clause was included in the Lear Corporation Shareholder Litigation. The board debated whether to engage in an auction but decided against it believing it would disrupt business and customer relations. Carl Icahn (the buyer), also said he would withdraw his bid if there was a pre-signing market auction. The court notes that the company’s status as one of the 150 largest U.S. corporations, which had a large amount of analyst coverage, elimination of the poison pill, and Icahn’s substantial purchase in 2006 had signaled to the market it was for sale and that a pre-market check was not required. The go-shop provision included a 45-day period, a match right, a fiduciary out provision, and a window shop period, which are important aspects to make a go-shop provision an effective substitute for a pre-signing market check. These same attributes were also found in the Topps case where Vice Chancellor Strine approved the decision to rely on a post-signing market check (although he found that the board violated its duty by not taking advantage of the flexibility of the go-shop). Similar to Lear, the go-shop was an effective substitute because the market seemed aware that Topps was up for sale due in part because of its public dispute with a hedge fund investor and its decision not to adopt a poison pill. Also, the board had reasons to not want to go through another failed auction especially since Michael Eisner declared he would withdraw his bid if there was an auction. The court found that there was an effective post-signing market check with a 40-day go-shop period, the ability to accept an unsolicited bid after the forty days, and a matching right.
Both of these cases contained a go-shop period that were adequate and considered an effective substitute by the courts. In a recent study (insert citation), of those surveys, only 33% engaged in pre-signing market checks in 1H2012 compared to 65% in 2011. Those that did not have a pre-signing check, 100% had a go-shop provision, which further justifies that go-shop clauses can be an effective substitute for sellers based on the circumstances.
. How should the boards of directors of sellers (or committees of those boards) deal with the issues raised by success fees for...