On Friday, the Chancery Court added to the list of recent case law addressing aiding & abetting breach of fiduciary duty claims when Vice Chancellor Laster issued his decision in In re: EngageSmart Stockholder Litigation, (Del. Ch.; 2/26). In that case, the Vice Chancellor dismissed aiding & abetting claims against the buyer, but refused to dismiss similar claims brought against the target’s financial advisor.
The case arose out of a take-private transaction in which the company’s public stockholders were cashed out at a price of $23 per share. The controlling stockholder sold a portion of its shares, but rolled over its remaining shares into a 35% ownership interest in the surviving company. The controller also allegedly received an undisclosed $500 million post-closing dividend on the shares it rolled over.
The plaintiffs alleged breach of fiduciary duty and aiding & abetting against the parties involved in the transaction. In support of those claims the plaintiffs contended that the controlling stockholder dominated the transaction process and discouraged competing bids, that the target’s advisors were conflicted, and that the deal delivered non-ratable benefits to the controller at the expense of the public stockholders.
Despite the parties’ efforts to fit within the strictures of MFW (this was a pre-SB 21 transaction), Vice Chancellor Laster concluded that because the complaint plausibly alleged disclosure shortcomings, he would not apply MFW at the pleading stage, and the claims would be evaluated under the entire fairness standard. Since the defendants didn’t move to dismiss based on satisfaction of that standard, the Vice Chancellor allowed most of fiduciary duty claims to move forward.
In contrast, Vice Chancellor Laster dismissed aiding & abetting claims against the buyer, citing the Delaware Supreme Court’s recent decisions in Mindbody and Columbia Pipeline. However, he refused to dismiss such claims against the target’s financial advisor.
In reaching that conclusion, he cited allegations regarding the financial advisor’s collaboration with the controlling stockholder in structuring the transaction and in designing the marketing process, its “tipping” the buyer concerning an acceptable price, and its exclusion of the special committee’s financial advisor from involvement in the sale process. He also pointed to existing business relationships between the financial advisor, the controller and the buyer.
The plaintiffs also alleged that the financial advisor aided & abetted disclosure violations by the target. Vice Chancellor Laster deferred ruling on this claim, based on what he considered tension between the Delaware Supreme Court’s rulings in RBC Capital and its more recent decisions in Mindbody and Columbia Pipeline. Here’s an excerpt from his opinion:
If RBC Capital remains good law, then the allegations against Goldman state a claim for aiding and abetting a breach of the duty of disclosure. This decision has found that the Proxy Statement failed to disclose the full extent of Goldman’s relationships with General Atlantic, Vista, and Summit. This decision has also found that the Proxy Statement failed to provide an accurate picture of Goldman’s role.
At the pleading stage, it is inferable that Goldman withheld the pertinent information, putting this case on all fours with RBC Capital and stating a claim on which relief can be granted. That outcome also comports with Electric Last Mile, a post-Mindbody, post-Columbia Pipeline decision that upheld a claim for aiding and abetting disclosure violations against a financial advisor on similar facts.
Admittedly, the logic of Mindbody and Columbia Pipeline pulls in the other direction, at least for the Restatement element that considers the nature and amount of assistance given by the secondary actor. Under those decisions, Goldman would have to owe a duty to the public stockholders. Although RBC Capital supports the existence of such a duty, it does so in passing and only in three words.
Vice Chancellor Laster went on to say that RBC Capital has not been widely read to recognize this direct duty of disclosure to stockholders, and that reading it this way would break new ground. He also pointed out that under a more conventional theory based on the financial advisor’s duty of disclosure to the target, Mindbody and Columbia Pipeline indicate that failing to provide information in the face of a known duty amounts only to passive inaction, which is insufficient to impose aiding & abetting liability.
In light of these uncertainties, and because he allowed the other aiding & abetting claims against the financial advisor to move forward, the Vice Chancellor determined to defer addressing the disclosure-based claims until trial.
On Friday, the Delaware Supreme Court issued its decision in Rutledge v. Clearway Energy, (Del. 2/26), in which the Court unanimously concluded that SB 21’s amendments to the DGCL were constitutional.
During the contentious debate over SB 21, academic commentators raised the issue of whether the statute limited the equitable powers of the Chancery Court in a way that violated provisions of Delaware’s constitution. Shortly after the amendments were enacted, plaintiffs filed constitutional challenges to SB 21, and the Chancery Court subsequently certified the following constitutional questions to the Delaware Supreme Court:
1. Does Section 1 of Senate Bill 21, codified at 8 Del. C. § 144— eliminating the Court of Chancery’s ability to award “equitable relief” or “damages” where the Safe Harbor Provisions are satisfied—violate the Delaware Constitution of 1897 by purporting to divest the Court of Chancery of its equitable jurisdiction?
2. Does Section 3 of Senate Bill 21—applying the Safe Harbor Provisions to plenary breach of fiduciary claims arising from acts or transactions that occurred before the date that Senate Bill 21 was enacted—violate the Delaware Constitution of 1897 by purporting to eliminate causes of action that had already accrued or vested?
The Court, in an opinion written by Justice Traynor, held that neither of the challenged provisions violated Delaware’s Constitution. Here’s an excerpt from Justice Traynor’s discussion of the first certified question:
SB 21 does not divest the Court of Chancery of jurisdiction of any cause of action, nor does it direct any claim or category of claims to another court. Breach of fiduciary duty claims remain within the undisputed jurisdiction of the Court of Chancery. Indeed, Rutledge’s claim itself remains within the Court of Chancery’s jurisdiction, albeit subject to a review framework he finds unfavorable.
Although the relief—equitable relief or damages—the Court of Chancery formerly would consider is now unavailable when it determines that a challenged transaction has been approved by one of the two statutorily designated cleansing mechanisms, SB 21 does not strip the court of its jurisdiction over equitable claims. Instead, SB 21 represents, in our view, a legitimate exercise of the General Assembly’s authority to enact substantive law that, in its legislative judgment, serves the interests of the citizens of our State.
The Court also concluded that SB 21 did not divest the plaintiff from a cause of action that had already accrued:
[C]ontrary to what Rutledge contends, SB 21 does not extinguish his right of action. He may yet challenge the Clearway transaction based upon allegations that Clearway’s CEO and majority stockholders breached their fiduciary duties. To be sure, the court must now review the challenged transaction under statutory standards that changed after the transaction closed but before Rutledge filed suit. It is highly questionable, however, that the statutory change effected the extinguishment of Rutledge’s vested right. His interest, to the contrary, appears to be more “an anticipated continuance of the existing law” than a vested property right.
While there are undoubtedly many battles to come over the scope and operation of the changes to the DGCL enacted in SB 21, it appears that Friday’s decision from the Delaware Supreme Court at least puts the constitutional issues to rest.
In mid-February, in Fortis Advisors v. Stillfront (Del. Sup; 2/26), the Delaware Supreme Court determined that a merger agreement’s alternative dispute resolution provision requiring an accounting firm to resolve disputes regarding the “calculation of the earnout amount” provided for “arbitration” rather than “expert determination” (an often disputed and consequential distinction) and determined that the firm had authority to resolve all earnout issues — including legal ones. This meant that the accounting firm appropriately addressed whether the buyer acted in bad faith to reduce the earnout amount or breached operational covenants related to the earnout, even though these determinations involved no “calculations.” The Court upheld the Chancery Court’s decision enforcing the outcome of arbitration (concluding all earnout-related disputes in the buyer’s favor), which was determined fully by the accounting firm.
It has happened before (and will happen again) that a merger agreement uses the word “arbitration” when referring to an accounting firm resolving disputes, and one party argues that the firm should have only been permitted to make an “expert determination.” As this Fried Frank alert notes, that’s not what happened here. The use of the word “calculation” plus testimony factored heavily into the Court’s decision.
Delaware courts have interpreted ADR provisions similar to the Stillfront ADR […] as calling for an expert determination, not an arbitration. The Stillfront opinion, which notes these decisions, suggests that the Supreme Court also would have found that the Stillfront ADR called for an expert determination, if not for the unique fact that the plaintiff, in oral argument at the Court of Chancery, had conceded (indeed, had been “emphatic”) that the parties had agreed to arbitrate their earnout disputes. The plaintiff changed this view only after the accounting firm arbitrator determined that no earnout amount was owed [. . .] The Supreme Court stated that it would “hold” the plaintiff to its initial position.
It also notes that ambiguity often arises when the ADR provisions provide for resolution of “calculation” disputes.
[T]he Supreme Court viewed disputes about compliance with earnout-related operational covenants and good faith requirements as coming within the ambit of the ADR provision governing resolution of disputes over “calculation” of the earnout, as such compliance affected what the amount of the earnout would be. [. . .] The Supreme Court viewed “calculation” disputes as subsuming disputes that related to “the accuracy of the buyer’s earnout determination” (i.e., the amount of the earnout owed). Stillfront’s conduct underlying the Bad Faith Claims “had a direct bearing on how the Earnout Amount should be determined,” and indeed “proffer[ed] [Fortis’s] explanation as to why Stillfront’s Earnout Determination Statement was flawed,” the Supreme Court wrote.
After discussing recent cases with similar ADR provisions that went the other way, the alert gives some drafting tips for practitioners:
Most critically, the parties should specify whether the ADR expert will act as an arbitrator or as an expert.Parties should consider whether to identify specific issues, or types of issues, as to which the expert will act as an arbitrator, others as to which it will act as an expert, and others as to which it will not act and the court will decide. The issues specified might be those that typically require consideration of both expert and legal issues to resolve (such as whether financial statements were prepared consistent with past practice, whether an earnout statement contained sufficient detail, or whether a milestone was met); or those that are most likely to occur or to be significant in the particular factual context. Parties may want to consider a default provision that states that an arbitration, or instead an expert determination, will be utilized where it is otherwise uncertain which would apply.
Provisions calling for the decision-maker to resolve “all” disputes, or “any” dispute, or to “interpret” the parties’ agreement, often are viewed as indicating an arbitration process. Provisions calling for limited authority of the decision-maker, no specific procedures for the process, a short or informal process, no discovery or hearing, no authority to award relief, and/or a determination that is not final and binding on the parties, are often viewed as indicating an expert determination process.
A provision calling for resolution of disputes over “calculation” of an earnout (or other post-closing adjustment) may be interpreted as conferring broad authority to resolve disputes that do not involve actual calculations but relate to what the earnout amount will be. Parties should consider specifying that the decision-maker will have authority to determine only financial- or accounting-related metrics, principles and calculations, and not broader legal issues that may relate to the earnout amount owed (such as determining whether a milestone was met, or a party complied with operational, good faith, or efforts covenants).
The insurance policies at issue followed form to a “bump‑up” provision found in the definition of “Loss” in the primary policy which states that, in the event of a claim alleging inadequate price or consideration for an acquisition of all or substantially all of an entity, “Loss” shall not include any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased (defense costs and non‑indemnifiable loss excepted). The Delaware Supreme Court construed this provision applying a two-pronged analysis: (1) did the claim allege inadequate consideration; and (2) does the settlement represent an effective increase in the consideration.
The Delaware Supreme Court affirmed judgment for Harman, concluding that the insurance companies failed the second prong of the analysis even though they satisfied the first. The court held that the underlying Section 14(a) claim alleged inadequate consideration, but the record did not show that any portion of the $28 million settlement “represented” an effective increase in the merger consideration. Accordingly, the bump‑up provision did not apply, and coverage for the settlement was affirmed.
John shared a Hunton memo at the time of the Delaware Superior Court decision that noted that the decision is particularly significant for policyholders incorporated in Delaware. The Delaware Supreme Court has said that Delaware law should apply to disputes involving D&O policies sold to Delaware-chartered companies, and other courts have come out differently. In June, John blogged about a 4th Circuit decision holding that the bump-up exclusion precludes coverage for the underlying settlement. Companies facing potential bump-up exclusion challenges may be incentivized to litigate coverage claims in Delaware courts.
Liz shared the weekend’s tariff ups and downs on TheCorporateCounsel.net on Monday and discussed some of the disclosure considerations (particularly time-sensitive for companies still finalizing 10-Ks). Tariff uncertainty may also be a particularly time-sensitive issue for M&A practitioners trying to figure out not only what the SCOTUS decision — but also the Administration’s announcement of Section 122 tariffs of 15% — means for their deals.
For detailed legal coverage of the weekend’s developments, check out this Eversheds Sutherland alert. It warns (citing the dissent) that the resulting refund process could be a “mess” and that all the trade deals are now in an uncertain state as a result of the decision. What the possible refund “mess” might look like is still unclear (although we’ve now seen at least one complaint filed for refunds). Here’s more from the alert:
The CIT will now be responsible for determining the scope of appropriate relief and the procedures for its administration. There is little doubt that the CIT will authorize or recognize the general rights to a refund – given the underlying illegality of the tariff collected. Indeed, in requesting a stay of the original decisions against the imposition of IEEPA tariffs, the Trump Administration conceded that refunds would be paid with interest if the IEEPA tariffs were ruled to be illegal. Specifically, in a filing with the US Court of Appeals for the Federal Circuit on May 29, 2025, the Department of Justice stated that “[i]f tariffs imposed on plaintiffs during these appeals are ultimately held unlawful, then the government will issue refunds to plaintiffs, including any post judgment interest that accrues.” Until the Administration or CIT provide additional guidance, it is unclear how such tariff refunds will made and what steps importers will be required to take to request any refunds. The process could involve the use of existing administrative Customs tools (post-summary corrections and protests), filing lawsuits with the CIT, or a new specified avenue. Importers therefore should gather documentation to support any such refund requests and should, in the interim, take all appropriate steps to perfect their refund requests under existing rules and procedures.
– Download relevant data from CBP’s Automated Commercial Environment portal for entries made under IEEPA tariff codes. Relevant information includes entry numbers, dates, and the specific amounts of IEEPA duties paid;
– File an action in the CIT covering all entries where IEEPA duties have been paid; and
– File protective protests with CBP within the 180-day protest period for entries that have been finalized or “liquidated.”
As far as the impact on pending deals, the “good” news is that everyone has recent experience navigating this tariff uncertainty, but let’s recap some considerations. With the Trump Administration immediately announcing an alternative tariff regime and existing trade deals off the table, we don’t know whether the new Section 122 tariffs will be extended past their 150-day maximum, if another avenue will be pursued, or if other deals will be negotiated. That means renewed challenges for: financial forecasts and valuations; trade and supply chain due diligence;allocation of risks associated with any new tariffs in purchase agreements; and tariff-related exclusions to RWI policies — plus the increased risk of post-closing disputesthat comes with uncertainty and complexity. For refunds, the Greenberg Traurig update says parties may want to specify which party is entitled to refunds attributable to pre-closing period tariffs, rather than rely on standard post-closing tax covenant provisions, and address which party has the obligation to collect, the level of efforts that must be applied, how long to pursue and whether the collection costs may be set off.
After the US District Court for the Eastern District of Texas vacated the final rules implementing the FTC & DOJ’s overhaul of the HSR reporting regime that went into effect last year, the FTC filed — and the district court swiftly denied — an emergency motion for stay. But the FTC also filed an emergency motion for stay pending appeal, which the Fifth Circuit granted late last week. This Fenwick alert says that the case schedule has briefing on the underlying motion complete by February 26. It also shares these key takeaways and recommendations:
– Parties with transactions requiring HSR notifications should, for now, continue to prepare those filings under the new rules and use the new form.
– The rules at issue only affect the amount and kind of information that must be included in a party’s filing. They have no impact on which transactions are subject to HSR requirements.
– If the HSR requirements revert to the rules in effect prior to February 10, 2025, deal parties may face significantly less time and expense in preparing their filings, with corresponding benefits to overall deal timelines.
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:
– So, You Think You Can (Deal) Jump?
– Delaware Chancery Litigation Over Continuation Vehicle Transaction Highlights Considerations for GP-Led Secondaries
– Just Announced: The 2026 Proxy Disclosure & 23rd Annual Executive Compensation Conferences
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.
According to the most recent edition of EY’s Private Equity Pulse, PE sponsors are optimistic about the environment for many long-delayed exits of portfolio investments in 2026:
Exit momentum also began to reassert itself in 2025, allowing long-deferred liquidity plans to move forward. This was underpinned by the more constructive macro backdrop, improving financing availability and a recovery in buyer confidence, especially amongst corporate acquirors.
Trade sales, which had been broadly flat through 2023 and much of 2024, inflected sharply higher last year. These were the result of significant pent-up strategic demand and greater conviction at the board level to deploy capital.
In aggregate, PE firms announced US$481b of sales to strategics, representing an increase of 26% by volume and more than 75% by value. Activity was particularly pronounced in sectors where scale, technology and operational capabilities were viewed as critical competitive differentiators. Going forward, GPs expect continued strength in the channel, rating it the most important likely exit route for next year.
EY says that secondaries continued to play a big role in exit activities in 2025, and with more than $1.6 trillion in dry powder available for deployment, sponsor-to-sponsor deals are expected to continue to feature prominently in this year’s exits. While the IPO route has been challenging in recent years, EY points to improving momentum during the second half of 2025 as a potential harbinger of good news for 2026.
In a recent article on the use of Gen AI tools in M&A, McKinsey channeled its inner Kent Brockman to sing the praises of our new AI overlords. Here’s the article’s intro:
That didn’t take long. In 2024, the opportunities to apply gen AI to M&A deals were just emerging, and dealmakers were focused on learning about potential use cases. But since then, the number of gen-AI-enabled tools and capabilities on the market has exploded. In a survey we conducted last year, the respondents who say they are using gen AI in their M&A activities report an average cost reduction of roughly 20 percent. Forty percent of respondents report that gen AI enabled 30 to 50 percent faster deal cycles. Of all respondents, 42 percent say they believe gen AI has the potential to transform or to bring highly differentiating capabilities to the deal process.
Although excitement about gen AI is high and users report compelling results, our survey also finds that only 30 percent of respondents engage with gen AI at moderate to high levels. Even among avid users, the large majority of respondents currently rely on commercially available gen AI chatbots, not customized, proprietary tools. Respondents across industries and company sizes identify a lack of expertise as their main challenge to AI adoption.
The article acknowledges that it may be tempting, given how fast these tools are advancing, for M&A teams to sit on the sidelines for now, but the authors suggest that they jump in with both feet:
[T]eams can benefit by recognizing what tools are already on the market and how companies are currently using them to identify M&A targets, accelerate diligence, and augment integration planning and execution. By engaging with the current tools and understanding how they are evolving, M&A teams can develop the necessary documentation, inputs, and systems they will need when the next wave of innovation arrives.
Gen AI is moving fast, and forward-thinking M&A practitioners are already embracing it. The next era of M&A will be defined by teams that don’t wait on the sidelines but learn to surf the gen AI wave as it gains speed.
The accuracy and completeness of many representations and covenants in an acquisition agreement are often qualified by phrases like “in all material respects” or “except where the failure to be accurate or complete would have a material adverse effect” on the target. In certain situations, the agreement calls for a “materiality scrape” to be applied. In effect, a materiality scrape removes the materiality qualifiers attached to a rep for specific situations – usually closing conditions or indemnity rights – arising under the agreement.
A recent Mayer Brown memo on the Delaware Superior Court’s decision in JanCo FS 2 v. ISS Facility Services, (Del. Super. 8/25), points out that the Court applied a contractual materiality scrape to an absence of changes rep in a way that many lawyers may not have expected, which resulted in a negative outcome for the seller. This excerpt explains the Court’s approach:
The buyer alleged that the seller breached the absence of changes representation, which provided in relevant part:
Since June 30, 2021, Sellers have operated only in the Ordinary Course of Business and have not: [(1)] suffered any damage, destruction, or Loss to any asset or suffered any other change, development, or event (individually or in the aggregate) that has had, or could be reasonably expected to have, a Material Adverse Effect on the Target Accounts; [or] [(2)] suffered or experienced any other event or circumstance which has resulted in a Material Adverse Effect on it [sic] or which is reasonably expected to result in such a Material Adverse Effect.
In analyzing the absence of changes representation, the Court cited Delaware Chancery Court precedent for the proposition that a defined term incorporates the entire definition and stated that the “proper order of operations” is to (1) replace the defined term “Material Adverse Effect” with the text of the entire definition of Material Adverse Effect and then (2) employ the materiality scrape to remove the materiality qualifiers from the text of the definition of Material Adverse Effect.
What happened when the Court applied this “order of operations” to the rep in question? Check this excerpt out:
Since June 30, 2021, Sellers have operated only in the Ordinary Course of Business and have not: [(1)] suffered any damage, destruction, or Loss to any asset or suffered any other change, development, or event (individually or in the aggregate) that has had, or could be reasonably expected to have, a Material Adverse Effect any effect, condition, circumstance or change that individually or when taken together with other conditions, effects or circumstances in the aggregate has had a material an adverse effect on the Target Accounts.
Yikes! The Court performed the same operation on the second clause of the rep, which addressed the absence of adverse changes in the target’s purchased assets (including intangible assets), liabilities, condition (financial or otherwise), properties or results of operations or to the ability of any party to consummate timely the transactions contemplated by the agreement.
Naturally, the seller complained that Court’s application of the materiality scrape made the representation overly broad, but the Court pointed out that the basket and cap provisions of the agreement both limited the seller’s indemnification exposure and served as evidence that the parties’ didn’t intend for the buyer to have to prove a material adverse effect in order to obtain indemnification.
The article goes on to recommend some practice pointers in light of the Court’s decision, including a new approach to drafting materiality scrapes that pays “particular attention to the specific drafting of the materiality qualifiers (including within defined terms used in the representations), and tailor[s] the materiality scrape so that it applies to only those representations, and only in the manner, that the parties intend.”