No-Shop Provision
A contractual provision prohibiting the seller (or one party) from soliciting, encouraging, or accepting competing offers during a defined period, typically while a transaction is being negotiated and documented. Standard in M&A letters of intent, definitive agreements, and venture term sheets. Public-company no-shops typically include "fiduciary out" provisions allowing acceptance of superior unsolicited offers consistent with directors' fiduciary duties. A private-company no-shop may have no fiduciary out, though directors of a private corporation still owe fiduciary duties.
A No-Shop Provision is a contractual provision prohibiting the seller (or one party) from soliciting, encouraging, or accepting competing offers during a defined period, typically while a transaction is being negotiated and documented. No-shops are standard in M&A letters of intent, definitive agreements, and venture term sheets. They protect the buyer's investment in due diligence and legal costs by ensuring exclusive negotiation. Public-company no-shops typically include "fiduciary out" provisions allowing acceptance of superior unsolicited offers consistent with directors' fiduciary duties; a private-company no-shop may have no fiduciary out, though directors of a private corporation still owe fiduciary duties.
Standard no-shop terms
Comprehensive no-shop provisions include: (1) scope of prohibited activity, solicitation, negotiation, providing information; (2) covered transactions, competing acquisition, merger, recapitalization, joint venture; (3) covered counterparties, typically includes intermediaries, advisors; (4) duration, typically 30-90 days for term sheets; through closing for definitive agreements; (5) notification obligations, duty to notify of unsolicited inquiries; (6) break-up fee, payment if seller terminates for competing offer; (7) specific performance, equitable remedies for breach; (8) fiduciary out, narrow exception for public-company directors.
Public-company fiduciary out
For a Delaware corporation, Revlon, Paramount/QVC and Omnicare hold that deal protections, including a no-shop, may not limit the directors' fiduciary duties. A Texas corporation's directors are governed by Texas law. Standard fiduciary-out provisions: (1) unsolicited proposal received without breach of no-shop; (2) superior proposal determination, economically superior, reasonably likely to close; (3) matching right, original buyer can match; (4) termination right with break-up fee. Under Omnicare, deal protections that, without an effective fiduciary out, make approval of a merger a foregone conclusion are unenforceable. Under QVC, a no-shop is invalid to the extent it is inconsistent with the directors' fiduciary duties.
Private-company no-shops
Directors of a private corporation also owe fiduciary duties, so a no-shop that would keep them from carrying out those duties raises the same concern. Private-company no-shops are often: (1) absolute during stated period; (2) with strict notice obligations for unsolicited approaches; (3) with break-up fees in some structures; (4) supported by specific performance remedies. Private-company sellers retain more flexibility through negotiation but typically agree to genuine exclusivity to access buyer's diligence investment.
Break-up fees
Break-up fees compensate the buyer if the seller terminates the transaction for a competing offer: (1) amount, negotiated and usually stated as a percentage of deal value; (2) structure, payable on execution of competing definitive agreement OR completion of competing transaction; (3) reverse break-up fee, paid by buyer if buyer fails to close (financing, regulatory); (4) matching rights, original buyer's right to match competing offer before triggering break-up fee. Break-up fees compensate buyer for diligence and opportunity costs.
Drafting considerations
No-shop provisions commonly address: (1) broad activity scope, cover discussions, negotiations, providing information; (2) broad counterparty scope, include intermediaries, financial advisors; (3) notice obligations, for any inquiry; (4) response obligations, typically reject and inform original buyer; (5) specific performance available; (6) survival, through closing or termination. Sophisticated drafting balances buyer protection with seller flexibility for fiduciary obligations.
In Texas M&A and venture transactions, the no-shop is often heavily negotiated. Buyers tend to seek broad activity and counterparty coverage, notice of unsolicited approaches, a break-up fee and specific performance. Sellers tend to seek a shorter exclusivity period, a narrower set of covered transactions, matching-right limits and, where directors' duties require it, a fiduciary out. Vague language can let a seller hold competing discussions without technically breaching the provision.
Companion article: Selling Your Business