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. Private-company no-shops are typically absolute.
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; private-company no-shops are typically absolute.
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
Delaware law (Revlon, Paramount/QVC, Omnicare) imposes fiduciary duties on public-company directors that limit no-shop enforceability. 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. Without fiduciary out, no-shop may be unenforceable as breach of fiduciary duty (Omnicare). Practical implication: public-company sellers cannot agree to absolute no-shop.
Private-company no-shops
Private companies face fewer fiduciary constraints. Private-company no-shops are typically: (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. Private-equity sellers and strategic sellers face different tactical considerations.
Break-up fees
Break-up fees compensate the buyer if the seller terminates the transaction for a competing offer: (1) typical range, 1-3% 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
Effective no-shop drafting: (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.
For Texas M&A and venture deal-makers, no-shop provisions are critical negotiation points. Best practice for buyers: (1) require comprehensive no-shop with notice obligations; (2) include break-up fee for substantial diligence/legal investment; (3) include specific performance remedy; (4) for public-company targets, accept fiduciary out within limits. For sellers: (1) negotiate no-shop duration carefully, 30-45 days typical for term sheets; (2) for public-company targets, ensure proper fiduciary out provisions; (3) limit covered transactions to actual competitors; (4) negotiate match rights. For private equity: (1) standardize no-shop templates by deal type; (2) coordinate with reverse break-up fees and financing contingencies. Common pitfall: vague no-shop language allowing seller to engage in competing discussions without technically violating provision.
Companion article: Selling Your Business