The Enforceability of No Talk and No Shop Covenants under Delaware Law

The Enforceability of No Talk and No Shop Covenants under Delaware Law

 
This article focuses on the enforceability of "no shop" provisions that prohibit a target company from soliciting or encouraging third-party bids after signing an agreement with a prospective purchaser, and "no talk" provisions, that prohibit any discussions or negotiations between the target and unsolicited bidders.
 
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Parties to M&A transactions often agree to a range of provisions intended to protect a buyer from interloping bidders, including exclusivity provisions (in the form of no shop or no talk covenants), break-up fees, voting agreements, stock options, and many others. Such provisions are routinely challenged by other bidders or target company stockholders, and, as a result, Delaware courts have established an extensive body of jurisprudence on the enforceability of deal protection provisions. This article focuses on the enforceability of exclusivity provisions -- specifically "no shop" provisions that prohibit a target company from soliciting or encouraging third-party bids after signing an agreement with a prospective purchaser, and "no talk" provisions, the no shop's more draconian cousin that not only prohibits active solicitation, but also prohibits any discussions or negotiations between the target and unsolicited bidders.

Analytical Framework for No Shop / No Talk Provisions

Delaware courts generally accept that deal protection provisions have a place in deal making because they can enhance a target's stockholder value by incentivizing a purchaser to pay a higher purchase price in exchange for the assurance of not becoming a stalking horse for subsequent bidders. However, Delaware courts are also leery of the potential of deal protection devices to limit a target board's ability to respond to subsequent higher bids and the possibility of abuse resulting from conflicts of interest between board members, management, and stockholders. As a result, Delaware courts pay close attention to such provisions, analyzing them using similar approaches under either the business judgment rule or enhanced scrutiny framework.

Such reviews are fact dependent, however, and make it difficult to derive hard-and-fast rules about whether a specific exclusivity provision will be enforced. However, an analysis of the leading cases addressing no shops and no talks suggests some interesting patterns. The first of these patterns is that the decision of whether to apply the business judgment rule or enhanced scrutiny is not necessarily outcome determinative, and the facts of the case seem to be more important than the analytical framework a particular court applies.