The updates to the Schedule 13D/G CDIs for the 2023 rule amendments I blogged about earlier this week aren’t the only recent development coming out of Corp Fin that’s relevant to M&A practitioners.
– Back in March, I noted that the discussion on acquired company financial statements in the SEC’s Division of Corporation Finance’s Financial Reporting Manual hadn’t been updated since before the 2020 overhaul of the S-X acquired company financial statement rules. That’s no longer the case!
– And for folks who regularly reference the SEC’s Compliance & Disclosure Interpretations, check out this new page on the SEC’s website where Corp Fin has consolidated all of its CDIs in one place so, per this LinkedIn post, everyone now has the ability to search for potentially relevant guidance simply by clicking Ctrl + F.
This recent HLS Blog from A&O Shearman does a deep dive on earnouts. Quoting Vice Chancellor Laster’s words, “an earn-out often converts today’s disagreement over price into tomorrow’s litigation over the outcome,” the blog notes that “disputes resulting from earn-out provisions mean that the parties’ negotiations over price are effectively only postponed until after closing.” When more money is allocated to the earnout and the duration is longer, disputes are more likely. And, in fact, disputes often also arise out of the dispute resolution process itself.
Pointing to a 2023 decision in which the Third Circuit overruled the District Court’s ruling that compelled arbitration, the blog notes that these disputes often center on distinguishing between arbitration and expert determination as outlined in the contract. Here are the blog’s tips for dispute resolution:
Include a dispute resolution mechanism. The agreement should set for the method and venue for handling any disputes. Arbitration tends to be quicker and more cost effective and include greater confidentiality. However, litigation includes availability of appeal and may alleviate concerns over arbitrator competency or compromise judgements.
Clearly define whether the third-party decider is acting as an arbitrator or an expert. Use explicit language such as “acting as an expert, not an arbitrator” to avoid ambiguity.
Limit the authority of the expert to specific factual disputes within their technical expertise. For example, specify that the expert’s role is confined to resolving accounting-related issues relating to the calculation of EBITDA, revenues or other financial milestone as applicable, and not broader disputes as to whether the buyer used the requisite level of efforts to achieve the milestone or complied with the applicable covenants regarding the conduct of business during the earn-out period.
The parties may want to limit what the independent accountant can review to minimize the time and expense of engaging the independent accountant to resolve the dispute. For example, they can limit the independent accountant’s review to: (i) items raised in the objection notice that have not been resolved by the parties and (ii) factual or mathematical errors contained in the information provided to or by the buyer.
The parties may also want to have the independent accountant base its decision only on those materials provided to it by the buyer and seller (rather than conducting its own independent investigation). However, if a party believes that these limitations could be disadvantageous, it should consider being silent on this issue in the agreement and negotiating it when a dispute arises.
Include or exclude procedural rules to signal the intended dispute resolution process. Arbitration provisions should reference formal procedural rules (e.g., AAA rules), while expert determinations should avoid such references and outline a less formal process.
Consider including escalation or mediation provisions, although, generally, not both, as a required preclude to litigation or arbitration, with any escalation or mediation being subject to clear and reasonably short timelines and escalation being to senior executives within each organization who have the authority to quickly resolve a dispute.
Yesterday, the Corp Fin Staff released 18 revised CDIs on the filing of Schedules 13D and 13G. Thanks to the helpful redlines provided by Corp Fin, it looks like the changes are largely clean-up, clarification and updates necessary to align the CDIs with the October 2023 amended rules that shortened the deadlines for initial and amended Schedule 13D and 13G filings, among other things. Here’s the full list of the updated CDIs, with links directly to the redlines.
Last November, I blogged about the Chancery Court’s post-trial opinion in Jacobs v. Akademos, Inc. (Del. Ch.; 10/24) in which Vice Chancellor Laster found that the sale of a distressed company to a controlling stockholder where the common stockholders received no consideration was entirely fair. Plaintiffs appealed to the Delaware Supreme Court, arguing three errors. The Court affirmed the Chancery Court’s decision by swiftly dispensing with two arguments but addressing the third — that the Chancery Court failed to address fair dealing in its entire fairness analysis — with a three-page discussion.
In the order, the Court took issue with one statement made in the Chancery Court’s opinion:
Here, the Court of Chancery stated that “the fair price evidence is sufficiently strong to carry the day without any inquiry into fair dealing.” Our Court has not gone so far. Rather, in Tesla, we stated that “[e]ntire fairness is a unitary test, and both fair dealing and fair price must be scrutinized by the Court of Chancery.”
That said, the decision confirms that the Chancery Court can consider the “evidence as a whole” and that the fairness of the price may be a “paramount consideration” in some cases, which the Court was satisfied was true in this case. It also found that VC Laster did make extensive factual and credibility determinations that supported fair dealing, citing the following evidence considered by the Vice Chancellor:
– The director defendants explained persuasively that the company lacked the funds to support a full-blown MFW process.
– During the first half of 2020, Akademos and its financial advisor conducted a dual-track process to seek outside investment or an acquisition proposal.
– The term sheet contemplated a go-shop period and committed the KV Fund to support any transaction that the directors unaffiliated with the KV Fund (“Unaffiliated Directors”) deemed superior.
– After the go-shop period concluded, the Unaffiliated Directors determined that none of the counterparties had made a superior offer.
– A majority of the Unaffiliated Directors voted in favor of the transaction (with Jacobs casting the only “no” vote).
– A majority of the Akademos directors voted in favor of the transaction (with Jacobs casting the only “no” vote).
Yes, the circumstances surrounding the U.S. Steel & Nippon Steel deal were unprecedented. You’re unlikely to ever face a similar combination of challenges in your career. But the Wachtell team via this CLS Blue Sky blog says there are some lessons to be learned from the deal — and the successful closing:
A transaction may face strong opposition, despite being a win for all key stakeholders: The U. S. Steel – Nippon Steel combination will deliver resources, advanced technology and durable, well-paying domestic jobs, allowing U. S. Steel to grow and prosper. Stockholders also benefited from one of the highest deal premia ever paid in an industrial transaction, a reflection of the successful turnaround recently executed by the U.S. Steel Board and management. None of this was enough to insulate the transaction from becoming a political football, drawing opposition from state and federal elected officials and candidates from both political parties.
Trust your judgment and focus on the long-term: The U.S. Steel Board and management team never wavered from their focus on delivering the transaction. The chattering classes said the transaction was dead. The Board was neither deterred nor distracted, pursuing a mix of strategies, including litigation, active public messaging and continued outreach to key constituencies. Others do not have all the facts a well-informed board and management team will have, and directors and management should not let outside judgments replace their own, well-informed view. Focus on the long game.
Regulatory contract terms matter, but strategic alignment and deal logic dominate: Transacting parties need to be prepared for regulatory scrutiny, even if the risk is considered low. In the current global environment, politics or other exogenous factors can easily come into play, often in unexpected ways. Not all partners will be as fully committed as U.S. Steel and Nippon Steel, especially when deals take longer than expected. Contractual efforts commitments by parties and outside dates will be critical when deals are tested, and must be considered with respect to foreign direct investment clearances, including our own CFIUS regime, in addition to antitrust requirements. When unexpected barriers appear, the strength of the strategic and financial logic of the deal are paramount. Such developments require innovative (“unprecedented”) solutions, often not capable of being addressed in advance in deal documentation nor anticipated at signing—strategic alignment and industrial logic may be determinative.
Communications and transparency matter: U.S. Steel approached its internal and external communications transparently and candidly. Employee communication was essential, but shareholders, customers, business partners and politicians were all critical constituencies that made a difference in the outcome. A well-designed, clear, cogent messaging campaign, through both traditional and innovative media, achieved the necessary goal of cutting through the widespread misinformation about the transaction, speaking with one voice and gaining the enthusiastic support of much of the rank-and-file union membership, who became effective advocates for the combination.
One of the most unusual aspects of the deal was that, “in addition to a national security agreement, the transaction resulted in a first-of-its-kind’ golden share,’ with highly customized, specific rights issued to the U.S. government.”
The Administration wanted a strong mechanism to complement commitments being made in the national security agreement also being agreed by the parties as part of the CFIUS process, and to reinforce the continued American character of U.S. Steel. The golden share provides the government with the right to appoint one director, and affords the President or his designee consent rights over specified matters, including reducing the capital commitments made by Nippon Steel, changing U. S. Steel’s name or headquarters, transferring jobs abroad, and certain decisions involving closing or idling of facilities, trade and labor matters and sourcing outside the United States. These rights are in addition to a commitment to a board of directors comprised of a majority of U.S. citizens.
What’s the broader lesson from this first-of-its-kind? Flexibility. The blog says staying flexible is key to identifying a creative path to closing that aligns with your “go-forward plans and strategy.”
This Troutman Pepper Locke memo reviews the DOJ’s recent settlement of litigation involving the merger between HPE and Juniper Networks. The settlement requires HPE to divest a business line to a pre-approved buyer and requires at least one license of certain Juniper technology to DOJ approved licensees. This excerpt from the memo discusses the DOJ’s willingness to use licensing as part of the remedy:
The settlement also assures that any winning licensee will have the right to any improvements to and derivatives of the licensed technology and the right to grant rights of use to the technology to its end users and service providers as reasonably needed. If the auction results in multiple bids exceeding $8 million, Juniper will be required to license to at least one additional bidder. This novel approach by the Justice Department reflects a commitment to solving unique challenges in mergers.
While not routine, license remedies have been used previously. For example, in 2017, the Federal Trade Commission (FTC) accepted a license remedy for its challenge to a pharmaceutical company’s acquisition of the U.S. rights to the drug Synacthen. The FTC alleged there that the acquisition would prevent the development of a U.S. competitor to the buyer’s monopoly. In another instance, a licensing remedy was approved in a post-consummation merger challenge.
While the licensing arrangement represents a key component of the settlement, the memo says that it is unlikely that it would have been sufficient to resolve the litigation without the accompanying divestiture, and cautions companies against assuming that a license alone will satisfy regulators.
The memo also points out that this represents the third time in the last month that the Antitrust Division has signed off on structural remedies to settle a lawsuit challenging a merger, and that its willingness to resolve merger challenges in advance of litigation should be considered when assessing the risks associated with a transaction, designing clearance strategies, and negotiating risk allocation provisions in acquisition agreements.
In a recent Business Law Today article, Woodruff Sawyer’s Yelena Dunaevsky highlights an unusual complaint that an RWI insurer recently filed against a seller and certain of its officers in an effort to enforce the insurer’s right of subrogation. Here’s an excerpt:
The complaint relates to a transaction where [Liberty Surplus Insurance Corporation] served as the representations and warranties insurance (“RWI”) carrier and paid a $12.2 million claim pursuant to an RWI policy after the purchaser in the transaction discovered that the seller had engaged in fraudulent activities. While RWI policies typically cover seller fraud, they also reserve a right for the insurer to subrogate against the seller if fraud occurs. Insurance carriers very rarely exercise this right because (1) fraud is very difficult to prove and (2) carriers do not want to earn a reputation of being tough on the sellers. However, in this case, the facts must have been such that Liberty could not avoid subrogating.
In a LinkedIn post about the lawsuit, Hunton Andrews Kurth’s Geoffrey Fehling highlights a key takeaway from the complaint’s naming of individual D&Os as defendants:
Those claims against individual D’s and O’s underscore the importance of maintaining robust D&O tail coverage after M&A deals for alleged/unproven fraud (conduct exclusions) and a range of potential losses (definition of “Loss” and related carve outs), among other issues. Because the insurer also points to post-closing acts in its complaint, the lawsuit could also result in D&O coverage issues if the runoff/tail endorsement did not account for “straddle” claims based in part on acts or omissions after the deal closed.
Over on The M&A Law Prof Blog, Prof. Brian Quinn looked at the recent amendments to Texas’s corporate statute and came away unsure about whether the state has any idea what it’s doing. He points out that The Lone Star State claims to be competing with Delaware, but he doesn’t think that’s really the case:
In fact, they aren’t competing against Delaware, they are competing against Nevada! The corporate law amendments they recently adopted mimic the law of Nevada and not the law of Delaware. For example, in order to sustain a shareholder claim against a director you have to have Nevada-like facts:
To prevail in a cause of action claiming a breach of duty, the claimant must (a) rebut one or more of these presumptions and (b) prove (i) the act or omission was a breach of the person’s duties as a director or officer and (ii) the breach involved fraud, intentional misconduct, ultra vires acts, or knowing violations of law.
That’s Nevada, right? Fraud, intentional misconduct, ultra vires or knowing violations of the law. What signal does it send to investors if the board proposes to move from Delaware (especially after SB 21) to Texas? Nothing good for minority investors, that’s for sure.
Based on my own experience, I think Prof. Quinn’s commentary hints at a potential problem looming for Nevada and Texas, and that’s institutional investor hostility toward states that are perceived to be overly protective of incumbent directors. Long, long ago, in a flyover state far, far away, the Ohio legislature adopted what came to be known as the “Goodyear Amendments” to the state’s corporate statute. These were put into place as part of a frantic and ultimately successful effort to fend off Sir James Goldsmith’s hostile bid for Goodyear.
One of the changes to Ohio’s statute adopted as part of these amendments was a provision holding that directors could only be liable in damages for breaches of fiduciary duty if a plaintiff could prove, by clear and convincing evidence, that the challenged actions were undertaken with the “deliberate intent to cause injury to the corporation or undertaken with reckless disregard for the best interests of the corporation.” Does that look sort of familiar? Well, when you added that to a panoply of antitakeover statutes that Ohio adopted, institutional investors came to be very wary of Ohio as a jurisdiction of incorporation.
Perhaps the best example of that is Abercrombie’s failed attempt to move from Delaware to Ohio in 2011. The company took a lot of heat from its investors and the media for this effort and ultimately abandoned it. To my knowledge, no large Ohio-headquartered public company has tried to reincorporate in The Buckeye State since Abercrombie’s aborted attempt.
Ohio’s sweeping antitakeover statutes have contributed to its toxic reputation among institutional investors, and recent evidence suggests that opting out of takeover statutes may help get companies looking to move from Delaware to Nevada or Texas over the line with their stockholders. But even if Delaware’s recent moves to insulate boards and controlling stockholders make investors more open to reincorporation pitches, Ohio’s experience suggests that there’s a line when it comes to insulating insiders that Nevada and Texas should be careful not to cross.
Will the new safe harbors for transactions with insiders enacted as part of SB 21 prompt more plaintiffs to pursue appraisal claims in lieu of other challenges to deals? That’s the argument that Boise Schiller’s Renee Zaytsev makes in this LinkedIn post:
Given SB 21’s safe harbor and the general climate (see DExit), I think we’re more likely to see companies take risks and engage in more conflict transactions/poorer sale processes, which will give rise to better arguments against deferring to the deal price. We may already see this playing out, as there has been a slight uptick in appraisal cases filed in the first half of this year, including what may be the largest appraisal case in Delaware history (Endeavor).
Renee says that the open question is how the Chancery Court will react to these arguments. Will the Court be more receptive in an environment where their ability to equitably review fiduciary duty claims has been limited or, given the current climate, will it be less willing to issue company unfriendly decisions in any setting?
In October 2023, the DOJ announced the initiation of a “Mergers & Acquisitions Safe Harbor Policy” intended to incentivize voluntary self-disclosure of wrongdoing uncovered during the M&A process. This recent Cleary blog says that last month, the DOJ issued its first declination to prosecute based on that policy. Here’s the intro:
On June 16, 2025, the Department of Justice’s National Security Division (“NSD”) and the U.S. Attorney’s Office for the Southern District of Texas announced a landmark declination to prosecute private equity firm White Deer Management LLC following its voluntary self-disclosure of sanctions violations committed by an acquired company. This marks the first application of the safe harbor provisions for voluntary self-disclosure in connection with mergers and acquisitions—a policy put in place during the previous administration—and demonstrates the benefits of NSD’s enforcement policies while highlighting continued enforcement priorities across administrations.
The White Deer declination, coupled with the non-prosecution agreement entered into with the acquired entity Unicat Catalyst Technologies LLC, provides critical guidance for companies navigating potential sanctions and export control violations discovered during post-acquisition integration. It underscores that the voluntary self-disclosure framework established under the previous administration remains fully operational and continues to offer substantial benefits to companies that act swiftly and responsibly upon discovering misconduct.
The blog says that key factors in the DOJ’s decision include voluntary self-disclosure, exceptional cooperation, timely implementation of comprehensive remedial measures, and the fact that the misconduct involved former Unicat employees who acted without the knowledge of new management.