This recent Goodwin alert discusses two ongoing cases in the Bankruptcy Court in the District of Delaware, Ideanomics and First Mode, that address bid protections that the bidder traditionally receives when it makes a binding “stalking horse bid” for the assets of a Chapter 11 debtor in anticipation of a 363 sale. These usually include a breakup fee of 1-3% of the stalking horse bid’s purchase price and reimbursement of reasonable and documented expenses. The debtor gets bankruptcy court approval of the bid protections — usually when it seeks approval of the procedures for the 363 sale. Here’s background on both cases:
In Ideanomics, the stalking horse bidder served as the debtors’ pre- and post-bankruptcy secured lender and had ties to the board. Sales to insiders are subject to heightened scrutiny. As with many insider sales, the debtors sought court approval of reimbursement of the stalking horse bidder’s expenses (up to $500,000) but did not seek approval of a breakup fee. In First Mode, the stalking horse bidder is not an insider, and the debtors sought court approval of a 3% breakup fee and reimbursement of expenses (up to $550,000). In each case, the debtors sought superpriority status under the Bankruptcy Code for bid protection claims of the stalking horse. Superpriority status entitles claims to payment ahead of other costs of administering a debtor’s estate (i.e., administrative expense claims).
The US Trustee objected to the proposed bid protections in both cases.
In Ideanomics, the UST argued the expense reimbursement did not benefit the estates because, due to the stalking horse bidder’s status as the debtors’ pre- and post- bankruptcy secured lender, it needed a successful auction to monetize its collateral and consequently would make a bid even without bid protections . . . [T]he court rejected the UST’s argument that the expense reimbursement claims are not “actual and necessary costs to preserve the estate” but held that expense reimbursement claims would be entitled only to administrative priority instead of superpriority. In denying superpriority status, the court explained that the main trade-off of being a secured lender and a purchaser in a Section 363 sale is that the secured lender must provide for the payment of all costs to administer the debtor’s Chapter 11 estate.
The Ideanomics lender/stalking horse’s requirement that its bid protection claims be paid before administrative claims suggested to the court that the lender/stalking horse might fear administrative insolvency, which would give credence to dismissing the bankruptcy cases and not proceeding with the Section 363 sale. The Ideanomics stalking horse accepted the court’s ruling, and the sale process with the stalking horse bidder is moving forward.
In First Mode, the UST argued that the breakup fee might not benefit the debtors’ estates because it could be earned in circumstances other than a sale to an alternative purchaser, such as withdrawal of the sale motion or conversion or dismissal of the Chapter 11 cases. The UST also argued in both cases that the court should not approve superpriority status for bid protection claims because superpriority status for a bid protection claim allegedly has no basis in the Bankruptcy Code . . . [T]he debtors, stalking horse bidder, and UST consensually resolved the UST’s objection, and the bankruptcy court approved the modified bid protections. As with the litigated outcome in Ideanomics, the parties in FirstMode agreed that bid protection claims would have administrative priority instead of superpriority.
The alert says that both cases show that bankruptcy courts value stalking horse bids and recognize the appropriateness of certain bid protections but that Ideanomics “leaves uncertain the ability of stalking horse bidders to obtain superpriority status for bid protection claims.”
In late February, the White House issued the America First Investment Policy Memorandum. It previews future policy changes intended to counter threats to national security while preserving an “open investment environment” intended to “ensure that artificial intelligence and other emerging technologies of the future are built, created, and grown right here in the United States.”
This Debevoise update identifies nine significant policy measures from the memo, including a fast-track review for investments from “yet-to-be-specified allied and partner sources,” new rules prohibiting PRC-affiliated investors from buying critical American assets and a possible expansion of CFIUS jurisdiction. It says these policy measures will have a number of potentially significant implications for investors and businesses. Those include:
Difficult choices for investors seeking “fast-track” access. Because eligibility for expedited investment reviews will be conditioned in part on investors’ distance from the PRC, firms may have to pare back their PRC-related investments to gain “fast track” access.
A restrained approach to CFIUS mitigation agreements. The administration may have heeded the concerns of investors from allied countries, many of whom have grown frustrated with lengthy CFIUS reviews and burdensome mitigation agreements. As a result, CFIUS may take a more targeted and less resource-intensive approach to mitigation. However, the impact of the memorandum’s mitigation provision may be limited as it relates to investments from foreign adversary countries; CFIUS can perhaps be expected to prohibit these outright, rather than entering mitigation agreements.
Increased scrutiny of PRC- and other foreign adversary-affiliated investments, including through private equity and complex acquisition structures. As the administration seeks to further restrict PRC and other “foreign adversary” investment in the United States, we may see increased CFIUS attention to investments from these jurisdictions, with limited availability of ongoing mitigation to address any identified national security risks. This may include heightened scrutiny of minority investments from these jurisdictions to assess whether such investments in private equity funds and other complex acquisition structures are sufficiently “passive” to overcome concerns regarding “affiliation.”
H/Advisors Abernathy recently released its 5th annual report of pre-announcement leaks in M&A transactions. The report reviewed 509 transactions announced from January 2024 through December 2024 with $1 billion or larger in enterprise value. Here are some key findings from this summary:
– 31% of announced transactions valued at $1 billion and greater in 2024 leaked prior to the official announcement.
– Deals valued at $10 billion or greater continued to leak at a significantly higher rate, at 64% in 2024, a substantial increase from 43% in 2023.
– Transaction leaks are occurring earlier in the deal process, on average, 52 days in advance of an announcement, with 19% of leaks occurring within two days of the deal’s official announcement.
– Entertainment, Leisure and Media remained the “leakiest sector”, increasing to 62% of deals leaking to media before the official announcement, up from 45% in 2023. Deals in the Tech sector also leaked at a substantially higher rate, up to 46% leaking from 26% in 2023.
– On average, leaks rank among the top five most visible news moments of the year for both buyer and target companies.
– Nearly three in four mentions of a leak start with an online news story and then travel to social media, led by X (16% of leak mentions) and LinkedIn (10% of leak mentions) where attention spreads rapidly.
In mid-December, the AICPA & CIMA held a conference where representatives from the SEC, FASB and PCAOB shared their views on various accounting, reporting, and auditing issues. BDO recently released this helpful “highlights” document with a few hidden gems for public company advisors.
One such gem is the discussion of trends and best practices when submitting a waiver request related to financial statements of acquired businesses. The number of waiver requests has continued to trend downward since the SEC’s 2020 overhaul of the rules governing the financial information that public companies must provide for significant acquisitions & divestitures. But this topic is still frequently the subject of waiver requests and interpretive questions, and the Staff highlighted the following common issues:
– Anomalous results from the significance tests when a business is acquired
– The use of abbreviated financial statements in certain transactions that do not otherwise meet the criteria for their use in S-X Rule 3-05(e)
– The conclusion under S-X Rule 11-01(d) about whether the acquired entity meets the definition of a business
The Staff reminded attendees that:
– The definitions of a business under U.S. GAAP (or IFRS) and the SEC’s rules are different
– There is a presumption that a legal entity constitutes the acquisition of a business under S-X 11-01(d)
– Revenue is not required to meet the definition of a business (for example, the acquisition of a pre-revenue life science or technology entity may also meet the definition of a business)
They also provided these best practices for submitting waivers:
– Provide all relevant details of the significance tests and consider providing their actual calculations.
– Consider including an alternative request if the SEC staff does not agree with the registrant’s initial position. For example, registrants may consider including a waiver request for the historical financial statement requirements of an acquired entity if the SEC staff disagrees with a registrant’s conclusion that the acquired entity does not meet the SEC’s definition of a business.
– Involve all relevant stakeholders when drafting the letter, including the external auditor and its National Office, who possess technical experience and can assist with navigating interactions with the SEC staff.
– Carefully consider who the primary point of contact will be if the SEC staff reaches out to the registrant for clarification. The SEC staff encourages registrants to select an individual who can speak to the facts of the transaction as well as someone who understands the relevant rules and accounting guidance.
Side note: This is one topic for which I used to regularly reference the Financial Reporting Manual. If you don’t deal with this often and are told to check there, keep in mind that the discussion on acquired company financial statements in the FRM hasn’t been updated since before the 2020 overhaul.
With the new, more burdensome HSR rules now in effect, a recent Fried Frank memo offers some advice about the new rules that buyers and sellers need to take into account when negotiating a merger agreement. Here’s the intro:
The new Hart-Scott-Rodino (“HSR”) Act rules1 took effect on February 10, 2025 and fundamentally changed the HSR filing process. While there are ongoing legal challenges to the new rules, both in court and in Congress, the new rules are currently in effect and transacting parties need to take them into account when negotiating merger agreements.
Specifically, parties should (1) consider how the new rules will impact HSR filing deadlines, (2) strengthen cooperation covenants to address who will lead HSR strategy and require pre-filing, privileged, exchange of draft HSR filings and documents, (3) analyze the impact of the new disclosure requirements before agreeing on antitrust risk-shifting covenants, (4) consider whether carveouts to confidentiality covenants are needed to allow parties to contact their customers prior to potential antitrust agency inquiries, and (5) ensure that LOI and term sheet filings sufficiently describe the material terms of the contemplated transaction.
Perhaps the most important advice offered by the memo is that in light of the additional time and burden of the new HSR filings, the parties should begin work on HSR filings earlier in the deal process, and that frequent buyers should work with counsel to prepare larger repositories of HSR-related information that can be leveraged when new filing obligations arise.
A recent Risk Management Magazine article discusses AI-related risks in business acquisitions. The article addresses the need for buyers to understand the functionality of AI tools used in the target’s business, as well as approaches to identifying and assessing their risks. The article also discusses methods by which buyers may mitigate their risks. This excerpt on contractual risk-mitigation terms indicates that market practices concerning AI-risk allocation are still evolving:
Representations and warranties are important. “Standard reps” are still developing as lawyers begin to understand the risk better. Too often, representations are overly broad and do not force the review and discussion of specific risks in the context of the transaction. A buyer should be wary of a target that uses AI in any meaningful way and readily agrees to a super broad representation. Also, a buyer should understand that traditional representations, like those involving product liability, may take on additional meaning and complexity where AI is involved. For example, the risk of an AI-enabled medical device that is constantly learning and evolving may be very different at the time of acquisition than it was last year.
The appropriate allocation of risk and responsibility between parties in AI-related transactions is still developing. A buyer should consider obtaining representation and warranty insurance to cover potential AI-related claims. However, keep in mind that this insurance market is evolving as there has not been enough time for generative AI’s risks to manifest into actual damages subject to coverage.
In addition to risk allocation, the article says that Buyers also need to assess whether the target’s AI-related risks can be mitigated by changing how the AI is used after the acquisition is completed. This may be particularly effective in situations where the buyer has robust training, compliance and quality controls that it can deploy in the acquired business.
I didn’t think that any controversy about proposed changes to the DGCL could top the war of words over last year’s amendments, but then the Delaware General Assembly said “hold my beer” earlier this month when it introduced Senate Bill 21. Among other things, that statute would substantially enhance the protections that boards & controlling stockholders of Delaware corporations have when engaging in transactions in which the controller has an interest. However, in getting to that result, the proposed legislation would undo decades of Delaware precedent.
Just how much case law could be overturned by SB 21? According to a running list compiled by Columbia law professor Eric Talley, the number currently stands at a staggering 34 Delaware Supreme Court decisions! If you’re interested in following the debate over this legislation, I’ve got a few sources to point you toward:
– Over on ProfessorBainbridge.com, UCLA’s Stephen Bainbridge has been blogging up a storm on a variety of topics related to SB 21 and, as always, his thoughts are worth considering. In particular, check out this blog laying out his preliminary reactions to the proposed legislation and this one on SB 21’s implications for conflicted transactions involving directors & officers.
– Tulane’s Ann Lipton has also devoted considerable attention to SB 21 and its implications – and she’s sharply critical of it. Check out this FT Alphaville article and this Business Law Prof Blog post.
– Anthony Rickey of Margrave Law has authored a LinkedIn article in which he reviews SB 21 and concludes that its provisions addressing controlling stockholder conflicts “will be less consequential than its proponents hope or its detractors fear.”
– While most of the attention has been focused on the proposed changes to Section 144 of the DGCL contained in SB 21, the proposed legislation also includes changes to Section 220’s provisions relating to books & records demands. Francis Pileggi has posted on that topic over on his Delaware Corporate & Commercial Litigation Blog.
– There are a handful of LinkedIn accounts I’ve been following for their analysis of SB 21. These include The Chancery Daily’s Lauren Pringle, Columbia Law School’s Eric Talley, and Equity Litigation Group’s Joel Fleming.
– We’re also posting an ever-growing collection of law firm memos on SB 21 in in our “State Laws” Practice Area.
Finally, I can’t close this blog without noting that the potential impact of SB 21 is significant enough that Delaware’s Chief Justice Seitz has taken the unusual step of weighing-in on the controversy, cautioning legislators about the need to respect judicial independence when considering actions to protect Delaware’s corporate franchise business.
The Biden administration significantly expanded CFIUS’s enforcement authority and implemented a separate regime for the review of certain outbound investments. WilmerHale’s 2025 M&A Report offers some thoughts on how the Trump administration will use these tools in the context of cross-border deals. This excerpt provides an overview of what to expect from CFIUS:
There was a time not too long ago when CFIUS was a voluntary regime that primarily impacted the defense, telecom, and aerospace sectors. But those days are gone. Today, the CFIUS regime has the potential to impact any foreign person’s acquisition of or investment in a US business involved in a wide range of technologies and economic sectors. CFIUS is keenly interested in nearly all advanced technology sectors, and the Committee made clear in 2024 that it would become far more aggressive about policing compliance with CFIUS mandatory filing requirements and mitigation agreement
obligations.
The incoming Trump Administration is unlikely to change course in any material way because support for aggressive CFIUS enforcement is one of the few bipartisan commitments in Washington. What does all this mean for parties pursuing cross border M&A in 2025? CFIUS should be factored into deal strategy discussions earlier, and parties should be prepared for more post-deal scrutiny for transactions that are not submitted to the Committee.
Here’s what the memo has to say about “reverse-CFIUS” review of outbound deals:
Broadly speaking, this outbound investment review regime is intended to deter investment in Chinese technologies and products that are perceived as constituting a national security threat to the United States. Pursuant to the new rules, US investment in (i) Chinese companies engaged in quantum computing, (ii) Chinese companies developing AI systems with certain military or mass-surveillance end uses, and (iii) Chinese companies trained using certain computing thresholds and certain semiconductor activities may be prohibited. Other investments in Chinese AI and semiconductor businesses are permissible but subject to a mandatory Treasury Department notification requirement within 30 days of the investment’s closing.
In light of this new regime, US persons and entities pursuing investment in Chinese technology companies must put significant due diligence processes in place to ensure compliance with the new rules. There is no safe harbor under the rule, which means companies and individuals that knew or should have known they made a covered investment will be subject to potential prohibitions and notification requirements. The Treasury Department has stated that its evaluation of the sufficiency of an investor’s due diligence “will be made based on a consideration of the totality of relevant facts
and circumstances.”
Here’s a scenario that’s guaranteed to put a knot in any M&A lawyer’s stomach – on the eve of a target’s stockholders meeting to vote on a proposed stock deal, the buyer’s board announces that it’s conducting an internal investigation in response to a whistleblower complaint and that one of the buyer’s directors, who was also the CEO of the subsidiary implicated in the whistleblower complaint, has resigned. So, do you move ahead with the vote or postpone it? In this case, the target opted to move forward with the vote, and whether the target’s board breached its fiduciary duties in failing to delay the vote was the issue addressed by the Chancery Court in Campanella v. Rockwell, (Del. Ch.; 2/25).
The plaintiff alleged that both the investigation and the director’s resignation were material facts that should have prompted a decision to postpone the stockholder vote in order to conduct further due diligence and provide supplemental disclosure. In support of allegations that the investigation was material, the plaintiff contended that its existence “imparted a new and significant slant” on disclosures in the proxy relating to the buyer’s general regulatory compliance & whether it conducted adequate due diligence when it acquired the subsidiary whose product line was the subject of the internal investigation. It also pointed to the fact that the buyer’s stock price dropped significantly after the investigation was announced.
Vice Chancellor Will rejected these arguments. She noted that the investigation focused on a single, relatively small product line and that the buyer had disclosed that it did not believe the investigation would have a material adverse effect on its business. She also noted that the plaintiff’s complaint contained no specific allegations calling into question the due diligence that the buyer conducted when it acquired the subsidiary. Finally, she wasn’t impressed by the plaintiff’s sexiest argument – the post-announcement drop in the buyer’s stock price:
Campanella also suggests that the Investigation is material because Desktop Metal’s stock price declined after it was disclosed. His reasoning is circular: the stock price dropped because material information was announced, and the information was material because the price dropped. But a drop in stock price does not excuse a plaintiff from meeting her burden to identify a disclosure deficiency. Campanella’s theory is even shakier since the affected stock price is of a transaction counterparty and the stock of both companies was declining even before the Investigation was announced.
The Vice Chancellor similarly rejected the plaintiff’s arguments concerning the materiality of the director’s resignation. The most intriguing of those arguments was the plaintiff’s contention that the director’s resignation was linked to the internal investigation, but Vice Chancellor Will didn’t take the bait:
Campanella views El-Siblani’s departure as linked to the Investigation, bolstering the materiality of both events. But the only fact he presents for this belief is Desktop Metal’s refusal to answer a question from a reporter about any connection between the two events. This is the sort of “inferential leap” Delaware courts routinely reject. And even if it could be reasonably inferred that the events were connected, Campanella has failed to demonstrate that either event—taken alone or together—had a material effect on Desktop Metal’s financials that would have been important to ExOne stockholders.
The Vice Chancellor ultimately concluded that the plaintiff had not adequately pled that the stockholder vote was not fully informed, and therefore held that the transaction was subject to review under the business judgment rule in accordance with Corwin.
The January-February issue of the Deal Lawyers newsletter was just sent to the printer. It is also available online to members of DealLawyers.com who subscribe to the electronic format. This issue includes the following articles:
– M&A Buyers Beware: Who Bears the Cost of Defense of a Third-Party Claim?
– Practice Points Arising from Albertsons’ Claims Against Kroger for Breach of their Merger Agreement
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 sales@ccrcorp.com or call us at 800-737-1271.