Morgan Stanley recently addressed how activist campaigns are raising AI-related criticisms. Complaints usually reflect the activists’ belief that companies should be more aggressively using AI to cut costs or to move into new markets.
Activists are making specific asks around AI, including:
– Margin improvement tied to AI-enabled efficiency
– More explicit articulation of AI strategy in investor materials
– Use of AI to improve sales productivity, onboarding or customer engagement
– Capital allocation changes linked to AI transformation
In some cases, they are even seeking board changes to strengthen oversight of technology‑enabled operational transformation.
While not yet a common point, the article predicts that spending discipline might start popping up in campaigns.
Morgan Stanley says that usual channels of communications – earnings calls, investor presentations and market updates – should be treated as opportunities to communicate the following to investors, plus how you’re positioned relative to peers:
– How is AI being deployed to improve efficiency or margins?
– Where can it drive incremental growth or open new revenue streams?
– How will progress on AI be monitored and communicated over time?
Last Friday, in CIBC Bank v. Barker(Del. Ch.; 5/26), the Delaware Chancery Court addressed claims brought by a creditor after a failed sales process that resulted in an Article 9 sale “for pennies on the dollar.” The court held that the fiduciary duty claims were derivative, and the creditor plaintiff had standing, but dismissed them for failure to plead demand futility. The facts are as follows:
A PE fund invested over $25 million in BERA Brand Management’s preferred stock with a liquidation preference. It appointed two directors. BERA started in a financial decline at the time of this investment and soon breached a credit agreement covenant. Its creditor, CIBC, agreed to a forbearance agreement that gave the company a reasonable opportunity to sell substantially all of its assets. BERA hired a financial advisor and received some offers, but the board was deadlocked during the sales process. Some directors found all offers received to be too low and were divided over the purchase price allocation since it was insufficient to cover the PE investor’s liquidation preference.
Finally, after BERA was insolvent under the balance sheet test, CIBC gave notice that it was proceeding with an Article 9 sale. This also did not go well. While two offers were received, one materially higher than the other, BERA’s CEO contacted a bidder and threatened to divert key assets, undermining the process. Ultimately, the board notified CIBC that it voted to liquidate, and CIBC scheduled an Article 9 auction, which resulted in BERA paying only $650,000 of the over $7 million it owed CIBC.
CIBC filed suit against BERA, BERA’s current and former directors and the PE fund. It alleged that the directors breached their duties by bypassing “viable acquisition offers” seeking a higher valuation for the preferred stockholder’s liquidation preference and allowing the company’s CEO to sabotage a viable deal. Defendants argued that the creditor lacked standing to bring fiduciary duty claims directly and, if derivative, that demand was not excused.
Vice Chancellor Will found that “destroying the value of BERA by rejecting value-maximizing transactions is a ‘classically derivative’ injury to the corporation from corporate mismanagement.”
A creditor’s claims do not become direct simply because it suffered a harm secondary to the corporation’s. Since any injury to CIBC is “dependent on an injury” to BERA, the alleged harm is derivative in nature.
Claims of corporate mismanagement that destroy enterprise value are classically derivative because the corporation is the initial beneficiary of any recovery. Corporate insolvency, and the reality that a creditor may ultimately capture the recovered funds, does not transform a derivative claim into a direct one. Because CIBC’s claims center on BERA’s lost enterprise value, it cannot “prevail without showing an injury to the corporation.”
This meant that CIBC had standing (since a creditor of an insolvent corporation has standing to pursue derivative, but not direct, breach of fiduciary duty claims). But VC Will held CIBC to the usual pleading standard and found that it failed to meet its burden.
CIBC suggests that insolvency inherently compromises a director’s impartiality. It believes that such directors are less receptive to a demand “when the corporation’s financial condition has weakened its ability to provide indemnification and insurance.” Relatedly, CIBC asserts that directors of an insolvent corporation may have clouded judgment because they face the prospect of losing their roles. But Delaware law already accounts for these dynamics. If a director faces a substantial likelihood of personal liability on a non-exculpated claim and lacks indemnification, for example, that director will be deemed interested.
There is no ground—textual or equitable—for lowering the pleading standard when creditors pursue derivative claims. Rule 23.1’s requirements apply to any “derivative action” brought by any “derivative plaintiff.”
She found that CIBC had to plead “particularized facts supporting a reasonable inference that the directors acted disloyally or in bad faith to demonstrate that they face a substantial likelihood of liability,” and it did not do so for the demand majority. She dismissed its derivative claims for failure to plead demand excusal.
Delaware law does not require directors of an insolvent corporation to abandon efforts to maximize enterprise value simply because creditors stand to capture any incremental recovery. Even accepting that the Board wished to clear Peak’s liquidation preference to generate a return for junior stockholders, that goal aligns with maximizing BERA’s value. That BERA failed to close a going-concern sale and ultimately liquidated does not mean that the directors acted in bad faith when evaluating earlier proposals.
In case you missed it, last week the SEC proposed changes that, if adopted, would significantly decrease the regulatory burden of Exchange Act reporting for most public companies by extending current SRC and EGC accommodations to 80% of filers and make it much easier for public companies to raise capital in registered offerings. For this crowd, be aware that there are some ‘Easter Eggs’ in there for companies that went public through a de-SPAC. As this Davis Polk alert notes:
A company that goes public through a deSPAC transaction would no longer be considered an “ineligible issuer” under Securities Act Rule 405, which means it would be eligible to use Form S-3 like a traditional IPO company provided it meets the other eligibility criteria under the form. It would also benefit from other flexibility, including the ability to use free writing prospectuses like traditional IPO companies and be eligible for SELI and ELI status just like traditional IPO companies, unlike the current framework where WKSI status is not available until at least three years after closing of the deSPAC transaction.
That said, there will remain some significant challenges for de-SPAC public companies if the proposal is adopted since it doesn’t tackle these two issues:
Notably, the proposals do not seek to amend either Rule 144(i) or Rule 145. Rule 144(i) currently imposes a rolling 12-month current public information requirement for persons seeking to rely on Rule 144’s safe harbor in reselling securities issued by a deSPACed company, and that requirement never falls away no matter how long the company has been an SEC registrant. Rule 145 currently deems statutory underwriter status on certain parties involved in a deSPAC transaction. So, deSPACed companies would continue to be treated differently in these two respects.
But here’s hoping those are on the SEC’s agenda as well!
This recent FTI Consulting article highlights the increasing role that geopolitics and national security considerations play in the dealmaking process and how they are shaping deal strategy. The article highlights several areas of geopolitical risk that should be on dealmakers’ radar when doing deals in EU member jurisdictions, including the implications of receiving foreign subsidies, increasingly stringent foreign direct investment regulation, and industrial policy pressure.
This excerpt offers tips on how buyers should integrate these policy considerations into their strategy and decision making to position themselves to withstand this regulatory scrutiny:
– Redesign your processes by embedding antitrust early in the strategy development, whether planning for an M&A or launching a new product, while assessing geopolitical risk alongside financial and strategic due diligence.
– Build geopolitical intelligence into your regulatory strategy by understanding and anticipating how the broader geopolitical environment may affect the perception of competition authorities and policymakers.
– Engage proactively, not reactively position your transaction and constructively help the relevant authorities to support informed decision-making and mitigate the risk of negative politicisation of deals.
– Plan for different scenarios early in the process, incorporating legal and geopolitical dimensions before formal filings and anticipating concerns that could become formal objections.
– Have a dynamic strategy, that allows for adaptions due to changes in the political environment or legal discussions which could affect the perception of the transaction and the regulatory approvals.
In Guilbeau v. Footprint International Holdco, Inc.,(Del. Ch.; 4/26), the Chancery Court addressed, among other things, the fiduciary duties of a director appointed by a particular shareholder or group. The case arose out of a challenge by Class A preferred stockholders to a proposed cram-down financing plan. In connection with his assessment of the plaintiffs’ implied covenant claims, Vice Chancellor Laster was called upon to address the fiduciary duties of the directors appointed by the Class A holders. This excerpt sets forth his analysis of the duties of constituency directors:
Delaware law does not generally recognize constituency directors. Delaware law rests on the bedrock principle that directors of a Delaware corporation owe fiduciary duties to act carefully, loyally, and in good faith to promote the value of the corporation for the benefit of its stockholders.
“In a world with many types of stock— preferred stock, tracking stock, common stock with special rights, common stock with diminished rights (such as non-voting common stock), plain vanilla common stock, etc.—and many types of stockholders—record and beneficial holders, long-term holders, short-term traders, activists, momentum investors, noise traders, etc.—the question naturally arises: which stockholders?” “The answer is the stockholders in the aggregate in their capacity as residual claimants, which means the undifferentiated equity as a collective, without regard to any special rights.”
Directors thus owe fiduciary duties to the entity and the entire body of stockholders generally rather than to individual stockholders or stockholder subgroups.
The Vice Chancellor went on to say that Delaware decisions have consistently rejected the argument that a director can or should serve the interests of the group that appointed that person, and that directors who act to benefit the investors who appointed them instead of acting in the best interests of the corporation and all of its stockholders breach their duty of loyalty.
For more details about this decision, check out Francis Pileggi’s recent blog.
As SpaceX’s high-profile IPO moves toward the launch pad, I think it’s fair to say that interest in space-related investments has reached levels not seen since my fellow Boomers and I were begging our moms to buy Tang for us at the grocery store. But before private equity investors get ahead of themselves, they should check out this Debevoise blog on the diverging regulatory approaches to space-related investments in the EU & the US.
Debevoise says that the EU’s proposed Space Act is intended to “establish a unified legal framework among Member States and to promote interoperability of critical space infrastructure,” while the US is taking an “On your mark, get set, GO!” regulatory approach to space-related investments, subject to the usual national security concerns regarding foreign ownership. Here’s an excerpt from the memo’s discussion about the implication of these diverging regulatory approaches for PE investors:
These developments have several implications for private equity investors considering an acquisition in the space sector. First, investors should assess at the outset which regulatory frameworks are likely to apply to the target’s business and geographic footprint. The proposed Space Act reaches not only EU-based operators but also third-country providers offering space-based data or services in the European Union. In the United States, companies face heightened scrutiny of foreign ownership, data access and national security safeguards, even as implementation remains uncertain and technology may outpace regulatory clarity. Investors should diligence not only where a target operates today, but also which jurisdictions may become relevant as the business scales.
Second, investors should evaluate whether the target has the technical and organizational capacity to manage evolving and potentially conflicting requirements across jurisdictions. The proposed Space Act, in particular, may impose near-term costs through spacecraft redesign, contract renegotiation and new reporting processes, while dual U.S.-EU exposure may create additional challenges where regulatory equivalency remains uncertain. There is also the possibility of having to adapt to regulatory countermeasures one jurisdiction might take against the other. FCC Chairman Brendan Carr, for example, has warned that the United States could consider reciprocal measures if the European Union adopts policies favoring European satellite providers over U.S. competitors.
The blog goes on to say that in an environment like this, compliance risk should be viewed as a dynamic issue that will need to be addressed not just as of the closing, but throughout the operational life of the investment. Regulatory changes may the increase cost and execution risk associated with the investment over time and could also trigger contractual disputes over cost allocation or claims that regulation is disproportionate or discriminatory.
This Fenwick memo says that the IRS has reinstated its “significant issue” private letter ruling program, which was suspended in 2024. Here’s the IRS’s Rev. Proc. reinstating the program and here’s an excerpt from Fenwick’s memo on the decision:
The program will allow taxpayers to seek letter rulings on significant, specific issues relevant to either tax-free spin-off under § 355 of the tax code. Under this program, the IRS may, for example, issue a letter ruling addressing significant issues presented by the application of § 355(e), even though the ruling does not address overall qualification of the transaction as a tax-free spin-off under § 355.
In addition to tax-free spin-offs under § 355, significant issue rulings are also available for transactions (or parts of transactions) governed by §§ 332, 351, 368, or 1036.
This decision is helpful to transaction planners because with the suspension of the program, companies considering a spin-off or other transaction with significant tax issues had to request a ruling from the IRS on the entire transaction. Under the significant issue ruling program, companies can ask the IRS to address only a particular issue, instead of asking the IRS to bless the entire deal – and that can save time & resources.
‘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.