VC & PE Glossary
What Is Fiduciary Out?
Updated
Definition
A fiduciary out is contract language allowing a board or party bound by exclusivity to consider superior proposals when required to fulfill fiduciary duties to shareholders.
Useful for: Founders, Investors
A fiduciary out is a provision in a merger agreement or letter of intent permitting the target board to entertain alternative proposals—despite exclusivity or no-shop covenants—when fiduciary duties to shareholders require consideration of a superior offer.
How it works
Public and private sale processes often begin with exclusivity favoring one bidder. Delaware and market practice recognize that boards cannot blindly ignore a materially superior proposal. Fiduciary out language defines triggers: unsolicited bona fide written offers, board determination after legal counsel that continuing exclusivity would breach fiduciary duty, and procedures for notifying the original bidder.
Buyers negotiate matching rights—time to equal the new offer—and may receive a break-up fee if the seller terminates for a superior proposal. Venture-backed companies in strategic sales replicate similar constructs in stock purchase agreements and LOIs.
Fiduciary outs are not unlimited go-shops; they activate under defined circumstances with documented board process.
Why it matters
- Founders: Preserve board flexibility to maximize shareholder value; document deliberations if switching bidders.
- Investors: Investor directors rely on fiduciary outs to support higher exits; lead buyers factor break fees and matching periods into pricing.
Common mistake
Founders assuming any inbound call can be entertained during exclusivity. Without a fiduciary out or expired exclusivity, switching buyers exposes the company to litigation and fee liability.
Related ideas
See fiduciary duty, exclusivity, break-up fee, and superior proposal.
Related terms
- Break-Up Fee — A break-up fee is a contractual payment owed if one party terminates an M&A agreement under specified conditions — often when the seller accepts a superior offer after signing exclusivity with a first buyer.
- Exclusivity — Exclusivity is a negotiated period—often in a term sheet or letter of intent—during which a company agrees not to shop the deal to other buyers or investors while the counterparty completes diligence and documentation.
- Fiduciary Duty — Fiduciary duty is the legal obligation to act in another party's best interest with loyalty and care—board members owe it to the company and shareholders; fund GPs owe it to LPs per the partnership agreement.
Common questions
Short answers for founders, LPs, and operators