‘S-Corp’ is a popular entity classification among small business owners for good reason, but with the benefits come specific requirements and harsh penalties for noncompliance — and buyers may not want to inherit issues from prior ownership. So, this Torys alert says:
Because of the potential downsides of failing to be a “good” S-Corp, prior to closing an acquisition, it has become popular practice to reorganize the target in a pre-closing reorganization to protect the buyer from any mistakes the target’s owners may have made from a tax perspective. These acquisitions are likely familiar to the skilled dealmaker, as these transactions are growing in popularity. Just as familiar, if not more, is that when a deal like this comes across the desk and the tax folks have been looped in, the first question is usually something along the lines of, “Have the parties considered a pre‑closing F‑reorganization?” Which immediately begs the question: “What is an F‑reorganization, and why are the tax folks always asking about this?”
To which the memo answers:
A pre‑closing F‑Reorg allows buyers to effectively achieve the same result as a 338(h)(10) election while also reducing the risk to the buyer that the target’s S‑Corp status was inadvertently terminated or never effective in the first place [. . .] The purpose of an F-Reorg is to allow a corporation to reincorporate, change its name, or move its place of organization without triggering gain or loss recognition. In the end, the resulting corporation is considered the same as the original corporation, which allows it to maintain the tax attributes of the old corporation and possibly carry back NOLs or net capital losses.
It goes on to describe the roughly five steps to an F-reorganization, which, while seemingly simple, has some regulatory requirements and traps for the unwary, including the following (shortened from the memo):
– Stock of Newco can initially be issued only to existing owners of Oldco stock.
– Identity of stock ownership must remain the same.
– Newco cannot hold any property or have any tax attributes before the potential F-Reorg.
– Oldco must liquidate completely for tax purpose (but not for corporate purposes).
– Newco must be the only acquiring corporation.
– Oldco must be the only acquired corporation.
– Timing is key.
Timing, the memo says, is one of the most common mistakes. Specifically:
Newco must be formed before the acquisition—ideally at least two days prior. After Oldco transfers its equity to Newco, the QSub election for Newco should be filed no later than one day before the acquisition. If the parties also intend for the QSub to elect to be treated as an LLC, that election likewise must be completed one day prior to closing.
– The trend toward “jumbo” deals
– Earnouts in the current environment
– Purchase price adjustment trends
– Developments in reps & warranties
– Escrow & holdback trends
– Trends to keep an eye on
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at mervine@ccrcorp.com or John at john@thecorporatecounsel.net. We’re wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
On May 5, the SEC proposed amendments that would allow public companies to elect to file semiannual reports on new Form 10-S, rather than filing quarterly reports on Form 10-Q. For companies that may be interested in taking advantage of optional semiannual reporting or acquire companies that take advantage of semiannual reporting (should the proposed rules be finalized), there are many considerations to work through — including some M&A-related considerations. For example, this Akin alert says:
The SEC’s proposed amendments would likely make public mergers & acquisitions (M&A) more diligence-intensive, bespoke and sensitive to timing. Prospective buyers may be less willing or able to rely on recent filed financials and instead depend more heavily on internal company data and expanded diligence processes. Valuation could become harder to anchor, which could drive more frequent use of pricing protections such as collars, earnouts and contingent value rights. Merger agreements may include greater emphasis on interim operating covenants, KPI reporting and tighter representations, with expanded schedules, rather than periodic disclosure.
Deal timing could likely become less predictable given fewer natural windows tied to earnings releases. At the same time, financing and investor processes could become more complex due to misalignment with lender expectations and market practices. Overall, the SEC’s proposed changes may inadvertently push public M&A toward a more private equity–style model of risk allocation, which, in turn, could constrain a public company board’s ability to maximize shareholder value by forcing it to accept greater conditionality, pricing adjustments and execution risk that dilute deal certainty and headline value.
This Jones Day alert from October, when the proposed rules were only anticipated, also listed these potential M&A impacts:
Targets and acquirors will need to consider implications if the acquiror completes voluntary quarterly auditor reviews but the target does not.
Financing cooperation covenants may need to be adjusted to require specified financial statements during the period between signing and closing. Similarly, access to information covenants and notice of certain events covenants may change.
With regard to the presentation of pro forma financial information or acquired business financial statements, corresponding changes to Rule 3-12 of Regulation S-X may need to be made to maintain symmetry between the Securities Act of 1933 and the Securities Exchange Act of 1934 regarding the age of financial statements.
The due diligence process may change. Acquisitive companies, or companies considering pursuing a strategic transaction, will need to determine whether to have quarterly financial statements prepared that have been reviewed by the auditors and that can be presented to potentially interested parties.
There may be additional financing or due diligence challenges for potential acquirors that are considering an unsolicited offer. Companies will need to identify and develop an action plan for addressing these challenges.
With respect to Rule 3-12 of Regulation S-X, the proposal does contemplate this update. Under the proposal, the SEC contemplates consolidating the requirements of Rule 3-12 into Rule 3-01 and eliminating Rule 3-12.
In late April, following a consultation last year, the European Commission released new merger control guidelines that would supersede the Horizontal and Non-Horizontal Merger Guidelines from 2004 and 2008, respectively. This Wachtell alert calls the proposed guidelines “the most significant proposed reform to EU merger control policy of the past two decades,” noting that they “aim to modernize how the EC assesses mergers,” while the statutory test (whether a merger may significantly impede effective competition) remains unchanged. Here’s more from the alert:
Under the new Guidelines, a merger’s benefits “will play a key role” in the EC’s competitive assessment. The EC proposes to give “adequate weight” to a merger’s impact on scale, innovation, investment and resilience, all “procompetitive factors that can benefit from a degree of consolidation.” In particular, the Guidelines embrace industrial scale as procompetitive where it allows companies to “reach the necessary size to compete in global markets,” especially in innovation-heavy sectors.
The Guidelines also seek to balance concerns that mergers may harm competition by eliminating innovation rivalry or weakening investment incentives with the recognition that mergers can lead to “dynamic efficiencies” that increase the combined firm’s abilities or incentives to invest and innovate.
For example, the guidelines include:
– A proposed “innovation shield,” a “safe harbor for certain deals involving small innovators where the merging parties do not exceed certain market share thresholds or the acquirer is not considered a ‘gatekeeper’ in the relevant industry;”
– That the EC will “consider other non-price effects, such as a merger’s impact on supply‑chain resilience, sustainability, and consumers’ privacy, in its competitive assessment of a potential merger’s harms and benefits;” and
– An updated framework for the analysis of market power that takes a more “holistic” approach, including looking “beyond a static assessment of market power to other factors, such as the competitive potential of the merging parties’ R&D activities, level of R&D investment, and innovation track record” in innovation-heavy sectors.
The alert suggests that the proposed changes might result in the approval of more “scale-enhancing mergers” but also might “increase the risk of divergent outcomes between Europe and the United States.”
Last week, Vice Chancellor Laster of theDelaware Court of Chancery published a piece in the HLS Forum on Corporate Governance on controlling stockholders — specifically, whether the decisions in Match, Sears Hometown, and Tornettawere a significant departure from the historical approach of Delaware courts to judicial oversight of controlling stockholders. The article is in response to an academic paper, Control and its Discontents, by Professors Jill E. Fisch and Steven Davidoff Solomon, arguing that they were. VC Laster disagrees and argues that:
– Entire fairness was never limited to freeze-outs and asset sales;
– Controlling stockholders have long owed fiduciary duties when voting; and
– Non-majority control was always functional.
You may be wondering if this is all purely academic at this point, following SB-21. And I think the answer to that is, “no.” In fact, VC Laster details the situations in which case law predating the 2025 DGCL amendments continues to be relevant:
That does not mean the debate over control is over. The safe harbor amendments establish remedial immunity for corporate fiduciaries who comply with their terms. Prior law remains relevant for aiding-and-abetting claims and for transactions that fall outside the safe harbors. The amendments also do not change the law governing LLCs, limited partnerships, or general partnerships. And the safe harbor amendments do not apply to other jurisdictions.
We’ve recently posted another episode of our “Understanding Activism with John & J.T.” podcast. This time, J.T. Ho and I were joined by Bill Fiske, who leads Georgeson’s M&A and Contested Situations Group, and David Farkas, who serves as Head of Investor Intelligence, North America for Computershare. Bill and David discussed some of the key findings in Georgeson’s Global Activism Report. Topics covered during this 23-minute podcast include:
– Factors driving the 2025 environment and activists’ response
– The changing mix of activist objectives in U.S. campaigns
– How activists are adapting their stake building strategies to the changing environment
– How the decline of ESG activism in the U.S. has shifted activist messaging
– The behavior of large index and quasi index investors in contested U.S. elections
– Common mistakes boards make when responding to early activist engagement
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!
The plaintiffs’ alleged that after being barred by the Georgia Lottery Commission, the company’s founder and its COO secretly siphoned assets and contracts from the company and caused it to repurchase them at inflated values. They further alleged that after acquiring control, the new owner joined the scheme by leveraging these inflated financials to raise debt and fund over $400 million in distributions to insiders, ultimately saddling the company with unsustainable debt that led to its bankruptcy.
The defendants responded to the plaintiffs’ fraudulent transfer claims by contending that the company’s lenders ratified the challenged transfers, and that the plaintiffs failed to state a claim because they did not plead fraud with particularity. This excerpt from Debevoise’s memo on the case explains the court’s refusal to dismiss the plaintiff’s fraudulent transfer claims:
The Court declined to dismiss the actual fraudulent transfer claims, demonstrating the relative ease with which such claims might survive a motion to dismiss even in the face of what may be strong defenses to those claims on the merits: ratification and the failure to state a claim.
Ratification posits that a lender’s authorization, or “ratification,” of a transfer estops the lender, or those suing on its behalf, from later challenging the transfer. The Plaintiffs rebutted this theory by alleging that material facts were withheld from the lenders at the time of authorization. The Court agreed, holding that dismissal would require a fuller examination of the totality of the facts and circumstances of what the lenders knew at the time they authorized the transfer.
The Court also rejected the Defendants’ second argument, that the complaint failed to state a claim. As the Court noted, “[b]ecause debtors rarely admit fraudulent intent, courts must usually infer it” through circumstantial evidence. Such circumstantial evidence is typically pleaded through “badges of fraud, i.e., circumstances so commonly associated with fraudulent transfers that their presence gives rise to an inference of intent.” Although at least some Defendants argued that Federal Rules of Civil Procedure Rule 9(b)’s (“Rule 9(b)”) heightened pleading standard for fraud claims should apply, the Court did not take up this line of argument or even mention Rule 9(b) in its opinion, instead appearing to adopt Federal Rules of Civil Procedure Rule 8’s more lenient pleading standards.
The Court declined to dismiss the claim based on the presence of two badges of fraud: (1) the transfers occurred while the debtors were insolvent; and (2) the transfers involved a substantial portion of the debtors’ assets. Together, these were sufficient to survive a motion to dismiss.
The memo says that the decision suggests that some courts might not require plaintiffs to satisfy the higher pleading standard that generally applies to fraud claims in federal court when addressing fraudulent transfer claims at the motion to dismiss stage. However, it also points out that while these claims may be relatively easy to plead in courts that take this approach, proving an actual fraudulent transfer has proven to be much more difficult.
We’ve previously blogged about FTC Chair Andrew Ferguson’s promise that the agency would “get the hell out of the way” of non-problematic merger transactions, and the latest edition of Dechert’s Antitrust Merger Investigation Timing Tracker suggests that he’s a man of his word:
The average duration of significant U.S. merger investigations concluded in Q1 2026 is 10.8 months, coming in below the 12.3 month record-high average in 2025. The year-to-date median investigation duration is 11.8 months, compared with a median of 11.6 in 2025. For deals announced in 2025 and reviewed entirely under Trump-led agencies, the average investigation duration is 10.2 months, indicating some movement toward a shortening in average duration under the current administration.
This shorter timeline may reflect an effort to recalibrate the pace of merger investigations, consistent with broader policy signals from agency leadership favoring a more streamlined approach to merger review – or, as FTC Chair Andrew Ferguson put it, a desire to “get out of the way” of unproblematic deals. Earlier this month, the FTC also reaffirmed in its that it will vigorously mission statement enforce the antitrust laws “without unduly burdening legitimate business activity,” a phrase that had been removed from the Biden FTC’s strategic plan.
Dechert’s report also points to the recent judicial decision vacating the FTC’s new HSR form and the reinstatement of the prior, more abbreviated form. While the agency also reinstated the early termination process, the report notes that early terminations account for a much smaller percentage of transactions than they did prior to the time the process was suspended.
– While global campaign activity was down 11% year-over-year (62 campaigns vs. 70 in Q1 2025), activism in the U.S. remained elevated and drove the lion’s share of the activity in the quarter, as Europe and APAC – particularly Japan –lagged.
– Technology and Industrials remained the most targeted sectors, accounting for 49% of campaigns (above the four-year average of 43%); Financial Institutions experienced a notable uplift in activity (15% vs. 8%) while campaigns in the Healthcare sector cooled (10% vs. 12%).
– While M&A-related campaigns in January and February tracked near their respective four-year averages, activity tempered in March, moderating the Q1 total to 29%, up year-over-year, but below the four-year average of 43%.
– 45 Board seats won in Q1 were down 12% vs. an elevated Q1 2025, but in line with the four-year average. In Q1, Biglari’s unsuccessful “withhold” campaign at Jack in the Box represents the only major proxy fight that went to a vote; there are currently eight upcoming major proxy fights and “withhold” campaigns for 25 Board seats (Americold, CarMax, First Trust, Lululemon, Pacira, Whitestone REIT, WEX and Ruger).
– Nine CEOs have resigned within one year of an activist campaign being initiated, at a similar level to the elevated four-year YTD average of 10 (Acadia Healthcare, Barrick, Charles River, Fortune Brands, Kyocera, SIG Group, STAAR Surgical and Workday).
Gallagher recently published an article tracking how the way buyers and sellers divide responsibility for Rep & Warranty Insurance premiums and retentions has evolved over the years. This excerpt summarizes how market practice with regard to premiums has changed since 2018:
If we step back to 2018-2019, RWI premium allocation was far more varied. Sellers often paid for the policy, or parties split the cost in what many practitioners saw as a “fairness-based” approach. But as the data clearly shows, that world is largely behind us.
By 2021, split premium structures had all but disappeared, and the market settled decisively into a new norm: Buyers cover the premium. Obviously, this trend aligns with a market that’s favorable to sellers. Since 2021, the market has evolved from seller-favorable to mixed, and premium payment is now highly dependent on the strength of the target.
Even today, sellers still pay occasionally — about 17% of the time as of 2025 — but the directional trend is unmistakable.
The article cites three reasons for the shift in payment responsibility over time – declining premiums, competitive deal dynamics, and sellers’ desire for a “clean exit.”
The article also points out that allocation of the retention has evolved as well. Initially, sellers were expected to have some “skin in the game,” and were frequently required to bear some or all of the loss until the retention was met. That’s much less common today, as pricing differences between “zero indemnity” deals and deals that contemplate partial seller indemnity have diminished, sellers have insisted on a true “walkaway,” and insurers have become more comfortable with low seller indemnity structures so long as they’re accompanied by quality disclosures.