Forum Home Page [see Broadridge note below]

 The Shareholder ForumTM`

Fair Investor Access

See related case examples of

Dell Inc.

appraisal rights for intrinsic value realization

and

Walgreen Co.

stock buyback policies

"Fair Access" Home Page

"Fair Access" Program Reference

For graphs of specific company and related industry returns, see

Returns on Corporate Capital

For graphs of specific company voting for the past 5 years, see

Shareholder Support Rankings

 

 

 

Forum distribution:

Evidence supporting reliance on directors' business judgment instead of ritual

 

The article below was published in Agenda, a Financial Times private subscription service for corporate directors, and is presented with permission.

For a copy of the study referenced in the article, see

 

Source: Financial Times Agenda, October 14, 2013 article


When Is the Right Time to ‘Go Shop?’

By Ian Thomas October 14, 2013

When retailer Rue21 in May announced plans to sell itself to private equity firm Apax Partners for approximately $1.1 billion, the company said a special committee of its board would seek potential rival bidders during a 40-day so-called go-shop period.

 

During that time, the committee and its financial advisor, Perella Weinberg Partners, contacted 60 potential acquirers who they thought might be interested in an alternative transaction.

 

Just six of those 60 expressed enough interest to even pursue a deal, and none submitted an alternative acquisition proposal.

 

Go-shop provisions, which became popular during the buyout boom a decade ago, allow sellers to seek a better deal for about 30 to 50 days after reaching an agreement with another party. If the board secures a superior offer, it may terminate the original agreement and pay a lower termination fee for backing out.

 

While the option to shop may provide the board with a few advantages, a new study suggests that go-shop clauses are not likely to produce much better post-agreement offers, and can even reduce any acquisition premium from the initial agreement.

 

The study, conducted by Columbia Business School professors Charles Calomiris and Donna M. Hitscherich, along with Adonis Antoniades of the European Central Bank, analyzed more than 300 announced transactions between 2004 and 2011.

 

Taking into account deal size and the volatility of a company’s stock, the authors found that premiums offered to a target that has a go-shop clause are generally between 24% and 62% lower than in deals that aren't shopped.

 

“Any non-cash consideration that makes directors feel better is a good thing,” says Hitscherich. “But the fact of the matter is, it comes with a cost, and these types of options aren’t free.”

 

One of the main arguments for go-shop clauses is the reduction of litigation risk, she says. However, the study found no higher market price reaction to merger announcements that included go-shop clauses, or any other identifiable effect.

 

In fact, Hitscherich and Calomiris say, the impetus often comes out of a conflict of interest from the hired legal teams, who may be pushing go-shops on clients who don’t really need them.

 

Incorporating the clause in a merger agreement can make it easier to win court cases that may arise from the deal, helping lawyers look good and attract future clients, they say.

 

“It may be very hard for prospective clients to observe the size of the foregone acquisition premium that results from go-shop clauses,” Calomiris says. “And, much easier to observe the superior litigation outcomes produced by go-shops.”

 

Adding these sorts of “rituals” clouds the true goal for boards in a taxing situation, says Gary Lutin, chairman of the Shareholder Forum, an investor advocacy group.

 

“Directors should be encouraged to make decisions based on their business judgment about what actually works, rather than follow rituals designed for the sole purpose of defending litigation claims,” says Lutin. “Directors generally have no incentives to do anything other than find the best deal, so it’s really counterproductive to impose one-size-fits-all rules that limit their ability to do a good job.”

 

Similar situations were seen this year in deals at Dell, BMC Software and Smithfield Foods, all of which had go-shop clauses and failed to find a higher bid. But there are situations where having a go-shop clause could be beneficial, Hitscherich says.

 

In some cases, the price of including a go-shop clause could be less than costs arising from fiduciary duty suits, the authors say. One such instance would be where the company has a less concentrated ownership group and there is a higher likelihood of a deal's being challenged with conflict-of-interest claims.

 

A company that negotiated quietly with only a few parties or had multiple top executives involved in the buyout would also benefit from a go-shop clause, indicating that they checked the market for other offers, Hitscherich says.

 

Directors should ultimately take into consideration that the threat of litigation in connection with proposed mergers can never be entirely eliminated, regardless of any clause or language used, writes Christine Azar, a partner at Labaton Sucharow.

 

“The special committee must be ready to negotiate, and not merely act as a figurehead for the interested parties,” she says.

 

An Information Service of Money-Media, a Financial Times Company

 

 

This Forum program is open, free of charge, to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program was initiated to address issues and objectives defined by participants in the 2010 "E-Meetings" program relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of leadership relating to the issues being addressed.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to access@shareholderforum.com.

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.