No-Shop Clause: Meaning, Examples, and Exceptions

What Is a No-Shop Clause?

A no-shop clause is a provision in an agreement between a seller and a potential buyer that prohibits the seller from soliciting purchase proposals from any other party. In other words, the seller cannot shop the business or asset to anyone else after a letter of intent or agreement in principle is signed between the seller and the potential buyer. A letter of intent spells out one party’s commitment to do business and/or enter an agreement with the other.

No-shop clauses, which are also called no-solicitation clauses, are often stipulated by large, high-profile companies. The seller typically agrees to these clauses as an act of good faith. The parties that enter into a no-shop clause often include an expiration date in the agreement. This means they are only in effect for a short period of time and cannot be set indefinitely.

Understanding a No-Shop Clause

A no-shop clause gives power to a potential buyer, preventing the seller from seeking other, more competitive offers. Once signed, the buyer can take the necessary time to consider the options of the deal before agreeing or backing out. They also prevent the potential seller from being targeted by unsolicited proposals that could provide a better opportunity. No-shop clauses are commonly found in merger and acquisition (M&A) deals.

No-shop clauses typically have short expiration dates so neither party is tied into an agreement for an extended period. A no-shop clause is useful from the potential buyer’s perspective because it can prevent the seller of a business or asset from soliciting other offers, which could lead to a higher purchase price or a bidding war if there are multiple interested parties. On the other hand, a seller may not want a no-shop period to be too long, especially if there is a risk that the potential buyer will back out of the deal during or after completing extensive due diligence.

A buyer that is in a strong position may require a no-shop clause so as not to drive up the value or signal a buyer's interest. In high-value transactions, anonymity is an important factor. Conversely, a potential seller may agree to a no-shop clause as a gesture of good faith to the buyer, especially a buyer the seller would rather transact with.

Examples of No-Shop Clauses

Although there are many applications for a no-shop clause, they are quite common in merger and acquisition deals. For example, Apple may require a no-shop clause while it evaluates a potential acquisition. As Apple, the seller may agree to the no-shop clause in the hopes that Apple's bid is strong or that the other potential combination provides enough value to justify agreeing to the clause.

In mid-2016, Microsoft announced its intention to acquire LinkedIn. The two companies agreed to a no-shop clause, which prevented the professional social network from soliciting other offers. Microsoft included a breakup fee in the clause, under which LinkedIn would have to pay Microsoft $725 million if it closed a deal with another buyer. The deal was finalized in December 2016.

Key Takeaways of a No-Shop Clause

• A no-shop clause is a condition in an agreement between a seller and a potential buyer that prevents the seller from entertaining an offer from another buyer.
• These clauses are commonly found in merger and acquisition deals.
• A no-shop clause prevents bidding wars or unsolicited offers that can shake a potential buyer's position.
• Companies may refuse a no-shop clause if they have a fiduciary responsibility to their shareholders.

Exception to the No-Shop Clause Rule

There are some cases where a no-shop clause may not apply even if both parties have signed. A public company has a fiduciary responsibility to its shareholders and, therefore, may wait for the highest possible bidder. It may therefore reject a no-shop clause even if the company’s board of directors has signed an agreement with a potential buyer.

Conclusion

A no-shop clause gives power to a potential buyer, allowing them to perform their due diligence on a deal without the risk of a third party coming in and outbidding them. In short, it keeps the seller from "shopping" the deal around to other potential buyers. While they are a standard part of M&A agreements, they aren't always enforceable, especially if a higher bid comes along from a new party. In those cases, the seller may opt to pay a breakup fee to the original buyer, allowing them to pursue the new, more lucrative offer.