Skip to main content

Shoppers Drug Mart in downtown Toronto, July 15, 2013.

Gloria Nieto/The Globe and Mail

Shareholders of Shoppers Drug Mart Corp. seem happy enough with the $12.4-billion takeover bid from Loblaw Cos. Ltd., with its tasty premium, but they could be forgiven for wondering if the company left some money on the table.

Shoppers yesterday said it agreed to the price in one-off negotiations, rather than as the result of an auction. The transaction includes an agreement from Shoppers not to look around for a better price.

Generally, shareholders prefer that you check around to get the top bid when selling a company. If the board can't do it before the deal, because of secrecy concerns or because the acquirer insists, often the target negotiates what is called a "go shop" clause to enable the board to check the market for a better offer after the fact.

Story continues below advertisement

But in Shoppers-Loblaw, there was no market check right before the agreement was struck and there won't be one after the fact because Shoppers agreed to a so-called "no shop" clause. Shoppers explicitly agreed not to talk to other potential bidders. Shoppers said it had been considering its options for a couple years, so it may be able to point to its analysis in that process as a kind of market check. And for what it's worth, most analysts seem to think this bid is the likely winner.

It's no surprise that Loblaw would ask for a no-shop clause, and may have even offered a bit more money to secure one.

But what rationale would Shoppers have for agreeing to it, and how can it justify this to shareholders? One senior merger lawyer supplied a few possible answers. (The lawyer asked to remain anonymous, pointing out that while he is not involved in the transaction now, that could change.)

For starters, shareholders might want a market check, but there's no rule that says you have to do one immediately before or after an agreement. What's more, the Supreme Court of Canada ruled when BCE Inc. was in play that the board's only duty is not to shareholders, but to the whole entity – employees, bondholders, communities. In the same vein, a full on auction can get in the way of running the business, hurting the corporation. So if the board thought that selling to Loblaw, which plans to keep Shoppers as a standalone, is a better overall outcome than selling for a higher price to another bidder, that is defensible under the BCE precedent.

The board did negotiate a relatively low break fee of $300-million, payable to Loblaw if another bidder comes in and steals Shoppers away. That's only 2.4 per cent of the deal value, at the low end of the general range. So it shouldn't dissuade a really motivated suitor.

What recourse do shareholders have?

They get a vote, because the transaction requires the approval of investors holding two-thirds of Shoppers shares. Knowing that, the board of Shoppers would feel comfortable accepting the offer because shareholders would have the final say.

Story continues below advertisement

"If Loblaw thinks it is done negotiating price, it better think again," the lawyer said. "The Shoppers board was undoubtedly keenly aware of that, and took comfort from the fact that shareholders can 'just say no' – or more likely, 'just say not enough.'"

(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)

Return to Streetwise home page.

The Globe has launched a Streetwise and ROB Insight newsletter, with content available exclusively to Globe Unlimited subscribers. Get the best of our exclusive insight and analysis delivered straight to your inbox in a daily e-mail curated by our editors. Sign up for it and other newsletters on our newsletters and alerts page.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter