Corporate boards' secret weapon

'Go-shop' provisions are turning up in more buyout agreements as boards look to protect themselves and their shareholders.

By Grace Wong, staff writer

NEW YORK ( -- As private equity comes under closer public scrutiny, corporate boards agreeing to buyouts are increasingly looking for ways to ward off shareholder criticism.

One way they've been doing that is by adding so-called go-shop provisions to deal agreements, private equity experts say.

The go-shop gives sellers a period of time - usually about 40 to 60 days - to seek out and accept higher bids even after they've reached an agreement with a buyer.

Such a provision essentially opens a company up to competitive bidding, giving investors comfort that the board is doing their job - and not just looking out for its own interests.

"If you're on the board of a company that's in play, you want to make sure you start an auction," said Phillip Phan, a professor at Rensselaer Polytechnic Institute's Lally School of Management and Technology. "It's very difficult for a shareholder to come back and say you didn't get us the best price. It's a clear defense," he said.

These sorts of clauses started cropping up in agreements a little more than a year ago, but have become more pervasive more recently.

Their growing popularity has also coincided with a growing belief among some shareholders that buyout outfits and management are reaping big rewards at their expense.

"Shareholders have become much more active when it comes to examining deals in general," said Eleanor Bloxham, president of the Value Alliance, a group that advises companies on corporate governance. And more and more shareholders across the board are coming out against management, she said.

When it comes to privatization deals, shareholders have reason to be watchful. Since it's a one-time deal, they want to make sure they're getting the maximum value for their shares. "Investors don't get a second bite at the apple when a company goes private," Phan said.

Protection against shareholder lawsuits and criticism may be one reason behind the prevalence of go-shop provisions. But boards are also looking out for shareholders. These terms, after all, allow sellers to hunt for more money.

"Boards are making sure they are fulfilling their fiduciary duties. This is one tool in the toolbox for them to maximize shareholder value," said Stephen Jacobs, a partner at law firm Kramer Levin Naftalis & Frankel who advises on private equity deals.

On Monday Triad Hospitals (Charts) said it agreed to be bought by hospital operator Community Health Systems (Charts) for $5.1 billion in cash, breaking up a deal Triad had previously entered into with private equity firms.

Triad had agreed in February to be taken private by CCMP Capital Advisors and the private equity arm of Goldman Sachs (Charts) for $4.5 billion but had 40 days to seek a better offer.

But go-shops don't always lead to rival offers, and sometimes including such a measure isn't enough to quell shareholder dissent.

Media firm Clear Channel (Charts), which is locked in a battle with shareholders over its proposed buyout, emphasized in its proxy statement that it had sought out other buyers.

"During the 'go-shop' period, the Company's financial advisor contacted a total of 22 potential strategic and private equity buyers, none of whom expressed interest in bidding for Clear Channel," the statement said.

But its go-shop period only lasted three weeks, and some shareholders still believe the $18.7 billion cash offer made by Bain Capital and Thomas H. Lee undervalues the firm.

It's still unclear whether that deal, which comes up for shareholder vote next month, will be approved.

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