Is It a Good Idea for a Company on Sale to Have a Go-Shop Period?

What is a Go Shop Period?

June 25, 2021, | AtoZ Markets – A go-shop period is when a publicly-traded company becomes on sale. It looks for bidders with a higher offer even after already receiving an initial offer from another company. The initial offer now becomes a basis for other interested buyers when placing a bid. A go-shop period can last anywhere from 20 to 50 days.

A scenario that can explain how a go-shop period works

Red company is on sale. Later on, Blue Company gives an offer to buy the Red company at $20 per share. Now, Red Company decides to go on a go-shop period after Blue Company’s proposal that may last anywhere from 20 to 50 days. Red company inquired about other companies that might be interested in acquiring their company. After the said survey, several more companies made offers to buy Red Company. Yellow Company offered $21 per share, while Purple Company placed a higher bid of $22 per share.

Red Company needs to decide whether they will match or put a higher price on the offers. They can also walk if they want to. Go-shop periods have different terms of the agreement. On some go-shop period agreements, if Red Company is not happy with Blue Company’s offer of $20 per share and didn’t receive any bid higher than that, they may have to pay a termination fee.

Doubts on go-shop periods

According to some critics, a go-shop period can be just for the show where board members try to come clean to their stockholders when in reality, most go-shop periods don’t have any results. It is rare to see additional offers since the time frame given is minimal. Mostly, initial proposals are always the priority before any other bids.

Importance of go-shop periods

Let’s go back to our previous example. The red company made a dangerous decision with a go-shop period, but in a way, it avoided potential problems that may come along after its sale. Red Company board members should inquire about the highest acquisition price before selling due to their fiduciary obligation, and their stockholders may complain or even file lawsuits. So, the Red Company’s decision to go on a go-shop period might still be a good idea for the acquiring company not to have any problems.

It is a challenging position for potential buyers since the time frame is limited. However, serious companies with higher offers are still being allowed in some rare cases even after the time limit.

No shop provisions

While a go-shop period is open to companies with a better offer, the case is different with no shop periods. The company on sale should not sell to other companies, or else it will have to pay the company with an original offer a termination fee.

In this case, the sale company isn’t allowed to share information, initiate conversations or inquire about higher offers to other companies. However, they can answer unsolicited offers since they did not begin it, and after all, board members have a financial responsibility to their stockholders. No shop periods are prevalent in most mergers and acquisitions.

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