Here’s the latest edition of our “Understanding Activism” podcast. This time around, Cleary’s J.T. Ho and I were joined by Joshua Black, Editor in Chief of Diligent Market Intelligence, to discuss Diligent’s recent activism publications. Topics covered in this 23-minute podcast include:
– Identification of the most prolific activists this proxy season.
– How to evaluate and weigh activist rankings.
– The dominance of settlements over proxy fights.
– The shift toward financial versus operational activism.
– The rise of digital campaigning by activists.
– Regional divergence in activism trends, especially Japan versus Europe.
– The increase in “sell the company” activism.
– The growth and evolution of short activism.
– Key takeaways from data on activism challenging M&A deals.
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We continue to record new podcasts, and they’re full of practical and engaging insights from true experts – so stay tuned!
In Paragon Metals Holdings v. Smith, (Del.; 7/26), the Delaware Supreme Court reversed a Superior Court decision precluding buyers from relying on seller’s reps & warranties in a common law fraud claim due to due diligence gaps that the lower court concluded amounted to their “willful blindness” to the inaccuracy of those reps.
The case arose out of a 2018 acquisition of Paragon Metals from its founder and CEO by an investor group. In the purchase agreement, the founder represented that he was unaware of any material changes in business terms with the company’s major customers. Despite that representation, two of Paragon’s largest customers had in fact indicated plans to significantly reduce their business with the company. The buyers failed to discover the customers’ plans during due diligence, despite several warning signs. After the closing, the buyers learned of the impending loss of business and ultimately sued the founder for common law fraud based on his alleged misrepresentations.
The Superior Court agreed that the founder had made false representations to the buyers, but it held that the buyers were unable to justifiably rely on those allegedly fraudulent representations because their failure to conduct reasonable due diligence constituted “willful blindness” with respect to the falsity of those warranties.
In rejecting the Superior Court’s conclusion, the Supreme Court observed that willful blindness requires a party to “take deliberate actions to avoid confirming a high probability of wrongdoing and who can almost be said to have actually known the critical facts.” The Court said that the lower court went to far in applying that stringent standard in these circumstances:
Determining what constitutes “reasonable” reliance can be difficult, as the line lies somewhere between actual knowledge and negligence. On one hand, “it is axiomatic that a plaintiff does not justifiably rely on a defendant’s misrepresentation if the plaintiff knows that the representation is false.” On the other, a plaintiff’s “failure to discover the fraud through due diligence does not excuse it.”
Although Delaware reveres freedom of contract, “contracts may not insulate a party from damages or rescission resulting from the party’s fraudulent conduct.” Nothing on the face of §§ 3.23 or 3.8 gave [the buyers] reason to doubt the truth of the warranties. Instead, when [the buyers] raised questions, Smith concealed the truth. When [the buyers] questioned Smith about the strike-through language that said ZF was “going to decrease their purchases,” Smith was untruthful. He told [the buyers] that ZF and FCA were going to shift their purchase orders from one bracket type to another and would not decrease the total quantity of brackets they purchased.
Smith stresses that he placed [the buyers] on notice of Paragon’s declining orders by sending it an email that referred to the ZF Letter and that [the buyers] should have read the email. Yet, in the same email, Smith wrote that he would review the listed items with [the buyers] in ten days. It therefore should not have altered the court’s analysis that [the buyers] did not prioritize reading and digesting the email when Smith stated in the same email that he would discuss it with [them] at a later date.
Ultimately, the Supreme Court concluded that the record didn’t establish that the buyers took deliberate actions to avoid learning of the changes in Paragon’s business terms with its customers, and that while their trust in the founder may have been naïve, it did not amount to deliberate action to avoid discovering the truth.
Back in April, Corp Fin’s Office of Mergers and Acquisitions issued an exemptive order providing issuers and, in some cases, third party bidders with the flexibility to shorten the time period during which tender offers for equity securities must be open from 20 to 10 business days.
Yesterday, the Office of Mergers and Acquisitions revisited its existing relief for certain types of non-convertible debt tender or exchange offers in a new exemptive order, expanding the availability of a five business day minimum offering period that had been established through a series of no-action letters. The exemptive order permits a tender or exchange offer for any class or series of non-convertible debt securities to remain open for a minimum period of five business days, so long as several conditions are met, including that the offer is made by the issuer of the subject non-convertible debt securities, a direct or indirect wholly owned subsidiary of such issuer, or a parent company that directly or indirectly owns 100% of the capital stock (other than directors’ qualifying shares) of such issuer, and the offer is made for cash and or consideration consisting of certain “Qualified Debt Securities.” The commencement of the offer and any material changes to the terms of the offer must be announced via a press release, and the issuer must provide certain withdrawal rights.
This new exemptive order supersedes the Staff’s no-action letter Cahill Gordon & Reindel LLP (January 23, 2015) and any similar letters relating to abbreviated offering periods in tender or exchange offers for non-convertible debt securities.
Programming Note: Our blogs will be off tomorrow and back Monday after the holiday weekend. Wishing you a safe and happy Semiquincentennial Fourth of July.
As John and Liz shared on TheCorporateCounsel.net, the Delaware General Assembly passed this year’s amendments to the Delaware General Corporation Law in May, and Delaware Governor Matt Meyer signed the amendments into law in mid-June. They will, as usual, go into effect on August 1st. Everything about this year’s amendments – from process to substance – is far less controversial than the last few years. As John noted, nobody’s been running around with their hair on fire about proposed changes to the DGCL this year. It was kind of nice that at least this one thing was a bit back to business as usual.
In fact, this Greenberg Traurig alert — their annual alert on the ways the DGCL changes are relevant to drafting corporate and M&A documents — characterizes the changes as relatively minimal. The relevant changes include:
– An important clarification regarding the voting standard for class votes required to change the amount of authorized stock of that class.
– A required agreement by a dissolving corporation for service of process after dissolution.
Here’s what the alert says about the class votes clarification:
Section 242(b)(2) provides that a class vote is required to increase or decrease the authorized number of shares of that class, unless the certificate of incorporation includes a provision that such change in authorized shares may be approved by holders of a majority of the total outstanding shares irrespective of Section 242(b)(2). For decades, such “opt-out” provisions were relatively common in certificates of incorporation. In 2023, however, subsection (d) was added to Section 242, and subsection (d)(2) provides that, under certain circumstances for corporations with publicly listed stock and unless otherwise expressly provided in the certificate of incorporation, approval by only a majority of votes cast is required for those votes on changes to authorized shares of a class.
Some uncertainty arose in practice and case law over whether provisions in certificates of incorporation opting out of the class vote requirement under subsection (b)(2) would also operate to opt out of the votes cast standard under subsection (d)(2). As a result, Section 242(d)(2) has been amended to clarify that only a provision that expressly states that the corporation is not to be governed by Section 242(d)(1) or (2) (or both) or requires a greater or additional vote than the majority of total outstanding voting standard contemplated by subsection (b)(2) will effectively opt out of the subsection (d)(2) votes cast standard. This amendment should provide greater clarity and comfort for corporations with certificates of incorporation that include traditional Section 242(b)(2) opt-out provisions, while providing a roadmap for language to include in newly adopted and amended certificates of incorporation.
This D&O Diary blog from Kevin LaCroix discusses last week’s decision from the Delaware Superior Court in MSG Networks v. Federal Insurance Co. (Del. Superior; 6/26) that a policy’s ‘bump-up’ provision precluded coverage for the settlement of a shareholder suit related to the acquisition of Madison Square Garden Networks. The bump-up provision read as follows:
Loss does not include any portion of such amount that constitutes any: … (3) amount that represents, or is substantially equivalent to, an increase in the consideration paid (or proposed to be paid) in an acquisition (or proposed acquisition) of more than 50% of the outstanding securities or other ownership interest of an entity, including an Organization, or in the right to vote for election of, or to appoint, more than fifty percent (50%) of the directors or limited liability company managers or members, or the equivalent of such positions, of an entity, including an Organization; except for any amount otherwise covered under Insurance Clause (A).
Madison Square Garden Networks had settled two shareholder suits related to the merger, alleging that the merger process was unfair and that their stock was undervalued in the transaction. After the insurers argued that the “bump-up” precluded coverage, Madison Square Garden Networks brought this action, seeking a judicial declaration that the settlement amounts were covered by its D&O insurance.
Judge Wallace first determined that the settlement represents both an increase in consideration and the substantial equivalent of an increase of consideration. In concluding that the settlement amount represents an increase in consideration, Judge Wallace considered four factors: (1) the Settlement’s language; (2) indications that the Settlement amount represents consideration for an inadequate deal price; (3) the stage of the litigation at the time of the settlement; and (4) the settlement class’s composition. Judge Wallace found that each of these factors supported the conclusion that the settlement represented an increase of the deal consideration, though also noting that “none are dispositive.” [. . .]
MSGN had tried to argue that the settlement agreement itself stated that the parties had settled solely to avoid the costs and burden of litigation. Judge Wallace said that this “doesn’t wholly foreclose the conclusion that the Settlement represented an increase in consideration.” Judge Wallace also noted that the shareholders had, in fact, sued for an increase in consideration, and that the class that received the benefit of the settlement consisted exclusively of persons who sought an increase in consideration. Judge Wallace noted that “upon a hard look at what the Settlement represents, the Insurers have shown it constitutes an increase in consideration.”
Judge Wallace also concluded, consistently with the Delaware Supreme Court’s opinion in its recent Harman decision, that the reverse triangular merger transaction was an “acquisition” within the meaning of the Bump-Up provision, as it is “an acquisition effectuated via a merger mechanism.” MSGN had tried to argue that the transaction was not an acquisition, because the Dolans controlled both companies before and after the transaction, and therefore there was no change in control. Judge Wallace rejected this argument because it depended on a “change in control” requirement that was not in fact in the Bump-Up provision.
These cases don’t always come out this way, as Kevin notes, even with the same judge.
As I noted at the outset, the potential preclusive effect of the Bump-Up provision may be one of the most hotly and frequently contested issues in the world of D&O insurance coverage. The provision is so frequently disputed for several reasons: the amount of money at stake is often huge; and the transactions involved are often highly complex, allowing room for the parties to argue about what the transaction represented. Moreover, there is almost always an argument about what the underlying settlement represents – is it really an increase in consideration?
That means, Kevin concludes, that “the outcome of a Bump-Up dispute is going to be a reflection of the policy wording, the deal structure, and the governing law.”
Last week, Reuters reported that the SEC’s Division of Enforcement is investigating potential conflicts of interest for private equity firms and other money managers related to continuation vehicles as well as “how managers are valuing the assets, and whether investor disclosures are sufficient and consistent.” CVs have been particularly popular recently, with PE firms having a hard time finding buyers willing to pay purchase prices that match their expected valuations.
Traditional private equity funds have a finite life cycle, usually about a decade. CVs allow managers to find new investors and transfer assets from older funds into a new vehicle, extending the holding period while giving existing investors the option to cash out.
As a result, the vehicles give managers a way to return cash to investors without being forced to sell assets at a deep discount in weak markets or to a competitor — or realize potential losses. CVs predominantly deal in equity assets, although the share of credit assets is growing.
Starting last year, the SEC expanded their intra-division coordination on the private credit market.
While SEC examiners have been scrutinizing private fund issues, including continuation vehicles, for some time, the escalation to the enforcement division and the cross-division collaboration underscore growing concerns among watchdogs over potential problems in private markets.
This Yahoo! Finance article says “only about 11% of continuation fund deals in 2025 were set against a competing, arm’s-length bid,” even though there can be major conflicts when the sponsor is the seller and continuing manager.
Gibson Dunn & Crutcher partner Kate Timmerman said, “The structure of CV deals is unlikely to change. Sponsors are considering how to best manage the core conflict of a continuation vehicle in light of the ongoing SEC attention.”
“Now more than ever, sponsors need to demonstrate defensibility and be able to demonstrate a fair, well-documented, arm’s-length-like CV process,” she said.
The May-June issue of the Deal Lawyers newsletter was just sent to the printer and is also available online to members of DealLawyers.com who subscribe to the electronic format. This issue includes the following articles:
– Dual-Track Processes: How to Turbocharge Your Exit
– Earn-Outs and Other Forms of Contingent Consideration: Recent Delaware Decisions and Drafting Takeaways
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at info@ccrcorp.com or call us at 800-737-1271.
In Energy Founders Fund v. Daskevich, (Tex. Bus.; 5/26), the Texas Business Court rejected a minority investor’s claim that drag-along rights contained in Energy Founders Funds’ (EFF) LLC agreement were not triggered by the controller’s sale of its interests to a third party.
The drag-along provision did not apply to transactions with an affiliate of EFF, and the plaintiff claimed that the substantial contractual control rights that EFF would acquire with respect to the buyer following the sale made the buyer an “Affiliate” of EFF. The agreement used the following common formulation to define the term “Affiliate”:
“Affiliate” means, when used with reference to a specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the Person specified. For purposes of the foregoing, “control,” “controlled by” and “under common control with” with respect to any Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person . . . whether through the ownership of voting securities, partnership interests or other equity interests, or by contract or otherwise.
Analyzing this language, Judge Brian Stanger pointed to three factors that led to the conclusion that the buyer should not be regarded as an Affiliate prior to the closing. First, he observed that the definition speaks in the present tense. In order to be an Affiliate, the entity must “control”, be “controlled by” or be “under common control with” the specified person. In order to for such control to exist under the agreement, Judge Stanger concluded that the party must presently have “possession” of the power to direct management and policies. In the Judge’s view, the term “possession” means “current, existing authority, not a future or contingent entitlement to it.”
The second factor Judge Stanger identified was that the definition focused on actual operational governance, and that the relevant inquiry was “therefore straightforward: before closing, who could actually run [the buyer],” and that under the terms of the contract, it was clear that any rights EFF had with respect to the buyer’s business did not arise until after the closing.
Finally, the Judge noted that the plaintiff placed significant weight on the language indicating that the control necessary to be regarded as an Affiliate could exist “by contract or otherwise.” While he agreed that this kind of catch-all language was intended to prevent parties from concealing affiliate relationships “behind clever labels or corporate subterfuge,” it did not override the need for the specified person to current have control. Such a conclusion would have the result of reading the term “possession” out of the definition entirely.
Accordingly, Judge Stanger granted the defendant’s motion for summary judgment and dismissed the plaintiff’s claims.
Yesterday, Corp Fin posted new Securities Act Sections CFI 142.01, which addresses the contents of a registration statement of securities underlying rights that are to be listed on an exchange. Here’s the text of the CFI:
Question: A company seeks to list rights on a national securities exchange in connection with a business combination transaction without the underlying securities also being listed. As required by the exchange, the company must have an effective registration statement, prior to the rights being listed, that registers the issuance of the underlying securities upon exercise of the rights. Must the registration statement contain information regarding the specific transaction and the business to be acquired?
Answer: Yes. The registration statement must contain information about the contemplated business combination transaction and the business to be acquired. [June 23, 2026]
I don’t have a lot of experience in this area, but I think some practitioners have argued that if an issuer is only listing rights and not the underlying stock, it could file a “generic” registration statement to satisfy exchange listing requirements and defer detailed disclosures about the potential business combination until the rights were exercised. To my knowledge, the Staff has never signed off on that approach, and this new CFI appears to effectively foreclose it.
In a market where it seems like anyone who sprinkles the magical AI fairy dust on their start-up immediately attracts a swarm of VC interest, it isn’t surprising that founders of promising AI start-ups have a lot of leverage with potential VC investors. This Goodwin memo says they aren’t afraid of using it when it comes to negotiating the economic and governance terms of these investments.
The memo notes that while there’s nothing new here, founders are seeking favorable terms in earlier rounds than in the past, and they’re also not content to settle for concessions on just one or two points. This excerpt discusses some of the governance terms that founders are negotiating for:
The core objective for founders in venture financing is to maintain operational control — over the CEO role, board composition, and overall voting. The governance mechanisms they use to maintain that control vary by deal, but the most commonly negotiated provisions include:
– Board composition and voting rights: founder-majority or founder-designated board configurations that give founders effective control over the board’s decisions, whether through a majority of seats or super-voting rights attached to founder-held seats. These protections don’t require continued service, so they survive a founder’s transition out of an operating role.
– Super-voting structures: typically, 10 votes per share on founder-held common stock, allowing founders to exert structural vetoes through voting power alongside any explicit protective provisions.
– Common stock protective provisions: founder veto rights — exercised as a stockholder rather than as a board member, which reduces fiduciary duty concerns — over M&A, future financings, material changes in company direction, executive hiring and firing, and other key governance controls. These provisions are often negotiated to be narrower in scope than what investors would typically receive as standard preferred stock protections, but their mere existence as common stock veto rights is atypical when viewed in historical context.
– Limits on investor protective provisions: the converse of the common stock protective provisions, investor protections are often scaled back or limited by explicit economic thresholds — for example, limiting the veto on an exit transaction to situations in which a transaction would return less than a defined multiple of invested capital, effectively removing the investor check on exits that generate meaningful returns.
Economic terms sought by founders include terms providing them with structured secondary liquidity opportunities, participation in investor secondaries, and multiple-round structures with valuation step-ups for a subsequent tranche baked into the initial deal documents.