Mendoza School of Business

Deal for J. Crew Allows It to Go Shopping

Published: November 23, 2010 / Author: Steven Davidoff

J. Crew is on sale for the holidays.

The retailer’s agreement to sell itself includes a go-shop provision, which allows it to solicit other bidders even though its $3 billion deal with two private equity firms has been announced. In other words, J. Crew can go shopping for a higher bid.

The provision’s purpose in an acquisition agreement is to compensate for a company’s failure to fully canvass other possible third-party bidders prior to the transaction’s announcement. A company will perform a post-announcement market check of the price through a go-shop as part of the board’s effort to satisfy its Revlon duties under Delaware law. These duties require the company to sell itself for the highest price reasonably available. Though Delaware courts have said that go-shops are not required, boards still negotiate them to show that they are trying to fulfill their sale obligations.

Go-shop provisions are fairly common in private equity deals. According to Factset Mergermetrics, go-shops were used in about 50 percent of the private equity deals announced so far this year with a transaction value greater than $100 million. This compares with 3.3 percent of the deals that did not involve private equity.

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Topics: Mendoza, Undergrad