What is No-Shop Clause?
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A no-shop clause is a clause found in an agreement between a seller and a potential buyer that bars the seller from soliciting a purchase proposal from any other party. In other words, the seller cannot shop the business or asset around once a letter of intent or agreement in principle is entered into between the seller and the potential buyer. The letter of intent outlines one party's commitment to do business and/or execute a deal with another.No-shop clauses, which are also called no solicitation clauses, are usually prescribed by large, high-profile companies. Sellers typically agree to these clauses as an act of good faith. Parties that engage in 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.
Definition
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 parties. In other words, once a letter of intent or a principal agreement is reached between the seller and the potential buyer, the seller cannot market the business or assets to others.
Origin
The origin of the no-shop clause can be traced back to merger and acquisition transactions, designed to protect the buyer's interests by preventing the seller from engaging with other potential buyers during negotiations. As M&A activities increased, this clause became a common practice in large transactions.
Categories and Features
No-shop clauses are typically divided into two categories: strict no-shop clauses and limited no-shop clauses. Strict no-shop clauses completely prohibit the seller from contacting other buyers, while limited no-shop clauses allow limited contact under specific conditions. Their features include protecting the buyer's exclusive negotiation rights and increasing transaction certainty, but they may also limit the seller's opportunity to receive better offers.
Case Studies
Case 1: In 2016, during AT&T's acquisition of Time Warner, a no-shop clause was signed to ensure that Time Warner would not engage with other potential buyers before the transaction was completed. Case 2: In 2019, Anheuser-Busch InBev used a no-shop clause in the sale of its Australian business to Asahi Group to ensure the smooth progress of the transaction.
Common Issues
Investors might worry that no-shop clauses limit the seller's flexibility, potentially leading to missed better offers. Additionally, the duration of the clause is a key issue, as an overly long duration might affect the seller's market competitiveness.
