Yesterday, in In re R1 RCM Inc. Merger Litigation (Del. Ch.; 10/26), the Chancery Court refused to dismiss allegations that a minority stockholder in a public company that possessed extensive contractual governance rights, including the ability to veto a variety of transactions and to nominate a majority of the company’s board, was a “Controlling Stockholder” within the meaning of Section 144 of the DGCL.
In assessing the plaintiffs’ allegations, Vice Chancellor Laster first noted that there are three potential triggers for controlling stockholder status set forth in Section 144’s definition of the term. The first trigger is ownership or control of a majority of the stockholder voting power (the “Stock-Majority Trigger”). The second trigger is the ability to cause the election of directors who can exercise a majority of the director voting power (the “Board-Majority Trigger”). The final trigger has three requirements: (1) ownership or control of at least one-third of the stockholder voting power, (2) power functionally equivalent to a majority stockholder, and (3) the ability to exercise managerial authority over the business and affairs of the corporation (the “Non-Majority Trigger”).
Because the stockholder beneficially owned less than a majority of the company’s voting power, the Stock Majority Trigger did not come into play. The Vice Chancellor rejected the plaintiffs’ allegation that the stockholder was a controller under the Non-Majority Trigger because it did not hold one-third of the company’s stockholder voting power unless warrants to purchase the company’s stock were included in the calculation, which the statute did not permit.
However, the Vice Chancellor refused to dismiss the plaintiffs’ allegations that the stockholder was a controller under the statute’s Board-Majority Trigger. In arguing that the Board-Majority Trigger was not satisfied, the defendants argued that statutory language requiring a stockholder to have “the right . . . to cause the election of [its] nominees” meant that a stockholder had to have the ability to make the election of its nominees a fait accompli, and that contractual conditions limiting the exercise of its right kept it from satisfying this requirement. The plaintiffs argued that this trigger could be satisfied by a stockholder having the functional ability to elect nominees.
Vice Chancellor Laster concluded that the plaintiffs had the better of the argument. The two conditions limiting the stockholder’s exercise of discretion with respect to its right to elect a majority of the board were one requiring the board to be comprised of a majority of independent directors if the company’s stock was listed on an exchange (the “Conditional Floor”) and one requiring that any nominee must be “reasonably acceptable” to the company (the “Acceptability Condition”).
As to the first condition, the Vice Chancellor observed that Nasdaq’s independence rules focus on company relationships and do not meaningfully limit the stockholder’s ability to nominate candidates. The defendants argued that Delaware law’s definition of a disinterested director as codified in the Section 144 safe harbor imposes further restrictions that needed to be taken into account.
The Vice Chancellor disagreed, noting that Delaware looks at the disinterestedness requirement on a transaction-specific basis and not through the abstract independence test required by the Conditional Floor. He went on to point out that treating potential transaction-specific conflicts as a total bar to independence would be unworkable, so Delaware law’s approach to disinterestedness should not apply. Accordingly, he did not view the Conditional Floor as imposing limitations on the stockholder’s discretion to nominate candidates sufficient to prevent the Board-Majority Condition to be satisfied.
The Vice Chancellor reached the same conclusion with respect to the Acceptability Condition, noting that the implied covenant of good faith and fair dealing, the common law imposes a reasonableness requirement on the exercise of a discretionary contractual right, and that the Acceptability Condition therefore simply restated what “background principles of law would require.”
The plaintiffs contended that once the Board Majority condition had been satisfied, the issue of controlling stockholder status also needed to be assessed under prior common law standards. Vice Chancellor Laster also rejected that argument, and concluded that satisfaction of the Board Majority Condition automatically resulted in classification of a stockholder as a “Controlling Stockholder” under the definition set forth in Section 144 of the DGCL.
The proposed rule retains the core architecture of the [Outbound Investment Security Program] in that it prohibits or requires notification of certain types of transactions with sufficient touchpoints to countries of concern and activity in covered sectors. That said, Treasury’s proposal would significantly expand the program’s reach in terms of both geographic scope and technological areas of focus. Most notably, the proposed rule:
– treats all development of artificial intelligence (now referred to as “super intelligence”) systems as prohibited rather than notifiable, regardless of compute power or use case;
– adds three technology sectors: hypersonic systems, high-performance computing and supercomputing, and biotechnology;
– extends the program to five additional countries of concern;
– broadens the definition of “covered foreign person”; and
– creates, for the first time, a process for parties to seek non-binding feedback from Treasury on whether a specific, live transaction would be prohibited.
The proposed rule also introduces several new exceptions and renames the OIR’s “covered transactions” as “covered national security transactions.”
In August, I blogged about Verisk Analytics v. ExactLogix (Del. Ch.; 8/26), in which the Delaware Chancery Court held that because a prospective buyer’s actions were the “primary cause” of the FTC issuing a second request that prevented the HSR waiting period from expiring before the “drop dead” date, it could not terminate the merger agreement, and ordered the buyer to continue using commercially reasonable efforts to obtain antitrust clearance and to close the transaction if it was obtained. As Vice Chancellor David’s decision indicates:
The facts of this case stand apart from other broken deal cases in which a buyer tried to avoid its obligation to close. The trial record here revealed virtually no evidence suggesting that Verisk intended to scuttle the deal. Verisk witnesses credibly testified that but for the uncertainty and cost presented by a lengthy Second Request process, AccuLynx remained an attractive acquisition target for Verisk, and no contemporaneous evidence suggests otherwise [. . .]
Verisk met with the FTC nearly 30 times; hired experienced legal advisors, expert economists, and a government affairs firm to advocate for FTC clearance; and spent nearly $8 million in legal fees to review roughly four million documents from 16 custodians under the quick look agreement.
VC David still ordered specific performance because the merger agreement foreclosed termination by a party whose “willful conduct” was the “primary cause” of “the failure to satisfy any condition to the obligations of the Parties,” and “willful conduct” required neither breach nor impropriety. Verisk appealed, and on Friday, in Verisk Analytics v. ExactLogix (Del.; 10/26), the Delaware Supreme Court affirmed the Chancery Court’s decision in a one-paragraph order.
The Cooley blog John shared after the Chancery Court decision had some drafting tips to consider:
Define mental state language deliberately. “Willful conduct,” “willful breach,” “knowing breach” and “intentional breach” are not interchangeable decorations. In Verisk, using different formulations in the same termination section caused the court to assign them different standards. A party that intends termination to be blocked only by deliberate contractual misconduct should say that clearly. Conversely, a seller seeking maximum deal certainty may want a broader conduct-based blocker.
Negotiate the causation standard with the same care. “Prevented,” “materially contributed,” “primarily resulted in” and “primary cause” can produce different burdens. Verisk paired a relatively low mental state threshold with a relatively high causation threshold. The buyer cleared the first hurdle for the seller simply by acting voluntarily; the factual record cleared the second by tying a throughline from one communication by Verisk directly to the FTC’s subsequent investigation.
I blogged last week on TheCorporateCounsel.net about a new batch of CFI updates that Corp Fin posted on Wednesday. Some of the updates are cleanup, but there are three new CFIs addressing Item 2.01 of Form 8-K, which I’ve summarized below.
Exchange Act Form 8-K, Section 105. Item 2.01 Completion of Acquisition or Disposition of Assets, New Question 105.01
Explains that registrants need only apply the applicable paragraph in Instruction 4 to Item 2.01 of Form 8-K when determining whether an acquisition or disposition is deemed to involve a significant amount of assets. Specifically, (1) a business development company that did not acquire or dispose of a business as determined under Rule 11-01(d) of Regulation S-X would only apply paragraph (iii) of Instruction 4, (2) a registrant that acquired or disposed of a business as determined under Rule 11-01(d) of Regulation S-X would apply only paragraph (ii), and (3) a registrant that is not a business development company and did not acquire or dispose of a business as determined under Rule 11-01(d) of Regulation S-X would apply only paragraph (i).
Exchange Act Forms 8-K, Section 105. Item 2.01 Completion of Acquisition or Disposition of Assets, New Question 105.02
Clarifies that Instruction 4 does not require registrants to include probable acquisitions of related businesses, real estate operations, and funds with the related businesses, real estate operations, and funds that have already been acquired when assessing aggregate significance for purposes of Item 2.01 reporting because Item 2.01 of Form 8-K only requires disclosure regarding completed acquisitions.
Exchange Act Forms 8-K, Section 105. Item 2.01 Completion of Acquisition or Disposition of Assets, New Question 105.03
Provides that registrants should use their most recent balance sheet required to be filed at or prior to the date of the acquisition or disposition, which may be an interim balance sheet, to derive “the total assets of the registrant and its consolidated subsidiaries” required for the significance test outlined in paragraph (i) of Instruction 4 to Item 2.01 of Form 8-K.
As noted in this Governance Beat blog, the direction in Question 105.03 to use the most recent (including an interim) balance sheet differs from the asset test in Reg. S-X, which refers to “the end of the most recently completed fiscal year” and which practitioners had looked to before this CFI.
The September-October 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:
– Delaware Court of Chancery Provides Amended Section 144 Analysis in Dodiya v. Franklin – Delaware Court of Chancery Rejects Board’s Attempt to Read Disclosure Requirements into Advance Notice Bylaws
– Delaware Court Orders Specific Performance of $2.35 Billion Merger After Buyer’s Willful Conduct Triggered FTC Second Request
– No Swerving from Fraud: Delaware Tests the Post-Fortis Landscape
– It’s Renewal Season!
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.
Earlier this month, Meredith blogged about the Chancery Court’s decisions in two earnout cases, ACON Igloo Holdings, LLC v. Dometic Corporation, (Del. Ch.; 9/26), and In re Saama Technologies Litigation (Del. Ch., 9/26). This Taft memo says that these two decisions highlight the risks associated with earnouts, and identifies these key insights to be drawn from the decisions:
First, the decisions illustrate the importance of clearly allocating operational control during the earnout period. Earnouts frequently require continued involvement by seller-side management, whose financial incentives may not align with those of the buyer or acquired business. Saama demonstrates the potential consequences when executives exercise that authority to pursue personal financial interests at the company’s expense.
ACON Igloo confirms that a buyer may enforce negotiated ordinary-course limitations even when doing so prevents the seller from achieving an earnout. Transaction documents should therefore expressly address management authority, pricing and discount discretion, operating restrictions, and the circumstances in which buyer approval is required.
Second, earnout disputes are not just contract cases. Saama shows that the same conduct can expose continuing management to personal fiduciary-duty liability. Contractual authority to pursue a target does not shield an executive who knowingly sacrifices the company’s interests to maximize contingent pay. Buyers and sellers should build post-closing governance that addresses these conflicts, including oversight procedures, approval requirements, and careful treatment of management incentives.
Third, both decisions underscore the importance of contemporaneous evidence in post-closing disputes. In each case, the Court closely examined internal communications, financial projections, pricing decisions, and management’s stated reasons for pursuing or rejecting particular business strategies. Those records were central to determining whether the conduct reflected legitimate business judgment, compliance with contractual limitations, or an improper attempt to influence the earnout.
For litigators, the decisions underscore importance of obtaining evidence concerning management’s motivations and the economic consequences of challenged decisions. Transactional counsel should carefully establish clear decision-making procedures and document the business rationale for material operating decisions during the earnout period.
In September, I blogged about the Delaware Chancery Court’s decision in the ATG Capital Opportunities case, in which the Court held that the board of Empery Digital improperly rejected an activist’s slate based on disclosure requirements that Vice Chancellor Will concluded weren’t contained in the company’s advance notice bylaw. This Cooley blog discusses the Chancery Court’s decision, and identifies the following things to keep in mind when dealing with advance notice bylaws:
– Draft bylaws with precision.Delaware courts will enforce clear advance notice bylaws, but they will not supply missing disclosure obligations. Stockholders are not expected to deduce disclosure requirements or “guess” what a board might interpret bylaws to require. Boards should consult with counsel to ensure that advance notice bylaws are clear, appropriately comprehensive and reasonably constructed so as not to inequitably interfere with the stockholder franchise.
– Use advance notice bylaws to inform stockholders, not to displace them. Advance notice bylaws help boards evaluate nominations and communicate with stockholders. They do not authorize incumbents to exclude nominees because they disagree with an activist’s strategy, incentives or expected business plan. Ultimately, advance notice bylaws cannot be misused to thwart stockholder choice or entrench existing directors.
– Make rejection decisions disciplined and record-based. Rejecting a nomination notice is a consequential step. It involves legal, reputational and strategic considerations. Boards should work closely with counsel to identify material deficiencies tethered to the bylaws’ plain language, document the specific grounds in the deficiency letter and avoid shifting theories later. In providing a rejection or deficiency letter to an activist, boards do well to provide a letter that is based in fact, even handed and prepared in good faith. As the court emphasized, “Advance notice bylaws are not moving targets.”
Barclays’ latest review of quarterly activism developments covering the third quarter and 2026 year-to-date was released earlier this month. Activity was down somewhat, and the U.S. was driving that trend. Here are some key findings:
– 179 campaigns were launched in 2026 YTD, down 7% year-over-year (192), but largely in line with the four-year average– 43 campaigns in Q3 represented a 42% drop from 74 in Q2, reflecting a more normal “seasonal slowdown” compared to what was an unusually busy Q3 2025 (62).
– The U.S. remained the primary market for activism with 91 campaigns (51% share of global activity), above its four-year YTD average of 86.
– A record level of concentration in the top five sectors targeted by activists (82%), led by Industrials (30%) and Technology (20%).
– The overall number of activists continued to track lower in 2026, down 14% year-over-year to 99– Elliott launched the most campaigns YTD with 16 across seven countries; three of its Q3 launches were among the largest in 2026.
– 58% of Q3 demands were M&A-related; the surge of M&A demands lifted the YTD mark to 44% of all demands, now in line with the four-year average after a slow start to the year.
– Activists won 87 board seats YTD, 10% below the four-year average, with wins concentrated among Elliott, Starboard and Engine, which accounted for one-third of the total.
Well, that didn’t take long! When I blogged about the Delaware Chancery Court’s Cloudflare decision yesterday, I said that I expected law firms to weigh in on the case. Wachtell appears to be the first out of the gate, and yesterday it published its take on the decision. This excerpt discusses the Court’s willingness to bifurcate the proceedings to address issues concerning the applicability of the safe harbor prior to a full-blown entire fairness proceeding:
Consistent with its rejection of the plaintiffs’ gross negligence claim, the Court emphasized that its assessment of the special committee’s good faith remained preliminary, without the benefit of live testimony from the directors. Recognizing that the Section 144 safe harbors were designed to avoid the costs and burdens of entire fairness review, the Court concluded there was “good reason to think that the defendants should not be put through the burden of trying an entire fairness case” until it could be determined on a full record whether the safe harbor applied.
The Court thus offered the defendants the choice of bifurcating the proceedings and conducting an initial trial focused on whether the special committee approved the transaction in good faith and thereby qualified for safe harbor protection. That innovative ruling is a welcome signal that the Court may seek to resolve safe harbor questions before imposing the burdens of a plenary fairness trial with all the expense, complexities, and uncertainty of an after-the-fact inquiry into whether a transaction was entirely fair as to both fair dealing and fair price—even where the preliminary record suggests the possibility of the plaintiffs establishing a lack of good faith at trial.
The memo characterizes Vice Chancellor Laster’s decision as “a faithful interpretation of the amended Section 144 and its promise of greater predictability for transaction planners,” and stresses that “even where a preliminary record suggests that a special committee’s process was imperfect, the safe harbors of Section 144 may be invoked at later stages of litigation before incurring the uncertainty and expense of a plenary trial on the entire fairness of the transaction.”
On Friday, in In re Cloudfare Stockholders Litigation, (Del. Ch.; 10/26), the Chancery Court granted the stockholder plaintiffs’ motion to preliminarily enjoin Cloudflare’s proposed dual class recapitalization. The plaintiffs allege that the proposed recapitalization involved breaches of fiduciary duty by both the company’s board and its controlling stockholder. The decision is the most significant to date interpreting the statutory safe harbors for insider transactions established last year by SB 21.
What’s most interesting about Vice Chancellor Laster’s 142-page opinion is that although he appears to have largely accepted the defendants’ reading of the safe harbors in Section 144 of the DGCL, the Vice Chancellor nevertheless concluded that there was a reasonable probability that the special committee may not have acted in good faith:
The evidence makes it reasonably probable that the plaintiffs can show that the committee failed to act in good faith. How? By acting to placate the founders and give them what they wanted, rather than striving to obtain a transaction that served the best interests of the company and its stockholders as a whole.
Contemporaneous meeting notes suggest that the committee’s advisors knew from the start that the recapitalization would happen and set out to craft a narrative to support that result, including gives from the founders that would look like gets for the committee. There was also a critical point where one of the committee members had an unauthorized conversation with one of the founders in which he told the founder that he expected the committee to give the founder what he wanted.
When the committee’s next proposal differed from what the founder expected, he exploded. He berated the committee members in a text tirade, made threats, and appealed to boardroom allies not on the committee. Two of his allies inserted themselves into the committee’s process. The terms ended up where the founder wanted, and there is good reason to think that the founders’ concessions were less significant than portrayed.
While this isn’t the first Chancery Court decision interpreting the SB 21 safe harbors, it’s clearly the important and I expect that many law firms will weigh in on its implications in the near future. When they do, we’ll post those memos in our “Controlling Shareholders” Practice Area.