In case you missed it, last week the SEC proposed changes that, if adopted, would significantly decrease the regulatory burden of Exchange Act reporting for most public companies by extending current SRC and EGC accommodations to 80% of filers and make it much easier for public companies to raise capital in registered offerings. For this crowd, be aware that there are some ‘Easter Eggs’ in there for companies that went public through a de-SPAC. As this Davis Polk alert notes:
A company that goes public through a deSPAC transaction would no longer be considered an “ineligible issuer” under Securities Act Rule 405, which means it would be eligible to use Form S-3 like a traditional IPO company provided it meets the other eligibility criteria under the form. It would also benefit from other flexibility, including the ability to use free writing prospectuses like traditional IPO companies and be eligible for SELI and ELI status just like traditional IPO companies, unlike the current framework where WKSI status is not available until at least three years after closing of the deSPAC transaction.
That said, there will remain some significant challenges for de-SPAC public companies if the proposal is adopted since it doesn’t tackle these two issues:
Notably, the proposals do not seek to amend either Rule 144(i) or Rule 145. Rule 144(i) currently imposes a rolling 12-month current public information requirement for persons seeking to rely on Rule 144’s safe harbor in reselling securities issued by a deSPACed company, and that requirement never falls away no matter how long the company has been an SEC registrant. Rule 145 currently deems statutory underwriter status on certain parties involved in a deSPAC transaction. So, deSPACed companies would continue to be treated differently in these two respects.
But here’s hoping those are on the SEC’s agenda as well!
This recent FTI Consulting article highlights the increasing role that geopolitics and national security considerations play in the dealmaking process and how they are shaping deal strategy. The article highlights several areas of geopolitical risk that should be on dealmakers’ radar when doing deals in EU member jurisdictions, including the implications of receiving foreign subsidies, increasingly stringent foreign direct investment regulation, and industrial policy pressure.
This excerpt offers tips on how buyers should integrate these policy considerations into their strategy and decision making to position themselves to withstand this regulatory scrutiny:
– Redesign your processes by embedding antitrust early in the strategy development, whether planning for an M&A or launching a new product, while assessing geopolitical risk alongside financial and strategic due diligence.
– Build geopolitical intelligence into your regulatory strategy by understanding and anticipating how the broader geopolitical environment may affect the perception of competition authorities and policymakers.
– Engage proactively, not reactively position your transaction and constructively help the relevant authorities to support informed decision-making and mitigate the risk of negative politicisation of deals.
– Plan for different scenarios early in the process, incorporating legal and geopolitical dimensions before formal filings and anticipating concerns that could become formal objections.
– Have a dynamic strategy, that allows for adaptions due to changes in the political environment or legal discussions which could affect the perception of the transaction and the regulatory approvals.
In Guilbeau v. Footprint International Holdco, Inc.,(Del. Ch.; 4/26), the Chancery Court addressed, among other things, the fiduciary duties of a director appointed by a particular shareholder or group. The case arose out of a challenge by Class A preferred stockholders to a proposed cram-down financing plan. In connection with his assessment of the plaintiffs’ implied covenant claims, Vice Chancellor Laster was called upon to address the fiduciary duties of the directors appointed by the Class A holders. This excerpt sets forth his analysis of the duties of constituency directors:
Delaware law does not generally recognize constituency directors. Delaware law rests on the bedrock principle that directors of a Delaware corporation owe fiduciary duties to act carefully, loyally, and in good faith to promote the value of the corporation for the benefit of its stockholders.
“In a world with many types of stock— preferred stock, tracking stock, common stock with special rights, common stock with diminished rights (such as non-voting common stock), plain vanilla common stock, etc.—and many types of stockholders—record and beneficial holders, long-term holders, short-term traders, activists, momentum investors, noise traders, etc.—the question naturally arises: which stockholders?” “The answer is the stockholders in the aggregate in their capacity as residual claimants, which means the undifferentiated equity as a collective, without regard to any special rights.”
Directors thus owe fiduciary duties to the entity and the entire body of stockholders generally rather than to individual stockholders or stockholder subgroups.
The Vice Chancellor went on to say that Delaware decisions have consistently rejected the argument that a director can or should serve the interests of the group that appointed that person, and that directors who act to benefit the investors who appointed them instead of acting in the best interests of the corporation and all of its stockholders breach their duty of loyalty.
For more details about this decision, check out Francis Pileggi’s recent blog.
As SpaceX’s high-profile IPO moves toward the launch pad, I think it’s fair to say that interest in space-related investments has reached levels not seen since my fellow Boomers and I were begging our moms to buy Tang for us at the grocery store. But before private equity investors get ahead of themselves, they should check out this Debevoise blog on the diverging regulatory approaches to space-related investments in the EU & the US.
Debevoise says that the EU’s proposed Space Act is intended to “establish a unified legal framework among Member States and to promote interoperability of critical space infrastructure,” while the US is taking an “On your mark, get set, GO!” regulatory approach to space-related investments, subject to the usual national security concerns regarding foreign ownership. Here’s an excerpt from the memo’s discussion about the implication of these diverging regulatory approaches for PE investors:
These developments have several implications for private equity investors considering an acquisition in the space sector. First, investors should assess at the outset which regulatory frameworks are likely to apply to the target’s business and geographic footprint. The proposed Space Act reaches not only EU-based operators but also third-country providers offering space-based data or services in the European Union. In the United States, companies face heightened scrutiny of foreign ownership, data access and national security safeguards, even as implementation remains uncertain and technology may outpace regulatory clarity. Investors should diligence not only where a target operates today, but also which jurisdictions may become relevant as the business scales.
Second, investors should evaluate whether the target has the technical and organizational capacity to manage evolving and potentially conflicting requirements across jurisdictions. The proposed Space Act, in particular, may impose near-term costs through spacecraft redesign, contract renegotiation and new reporting processes, while dual U.S.-EU exposure may create additional challenges where regulatory equivalency remains uncertain. There is also the possibility of having to adapt to regulatory countermeasures one jurisdiction might take against the other. FCC Chairman Brendan Carr, for example, has warned that the United States could consider reciprocal measures if the European Union adopts policies favoring European satellite providers over U.S. competitors.
The blog goes on to say that in an environment like this, compliance risk should be viewed as a dynamic issue that will need to be addressed not just as of the closing, but throughout the operational life of the investment. Regulatory changes may the increase cost and execution risk associated with the investment over time and could also trigger contractual disputes over cost allocation or claims that regulation is disproportionate or discriminatory.
This Fenwick memo says that the IRS has reinstated its “significant issue” private letter ruling program, which was suspended in 2024. Here’s the IRS’s Rev. Proc. reinstating the program and here’s an excerpt from Fenwick’s memo on the decision:
The program will allow taxpayers to seek letter rulings on significant, specific issues relevant to either tax-free spin-off under § 355 of the tax code. Under this program, the IRS may, for example, issue a letter ruling addressing significant issues presented by the application of § 355(e), even though the ruling does not address overall qualification of the transaction as a tax-free spin-off under § 355.
In addition to tax-free spin-offs under § 355, significant issue rulings are also available for transactions (or parts of transactions) governed by §§ 332, 351, 368, or 1036.
This decision is helpful to transaction planners because with the suspension of the program, companies considering a spin-off or other transaction with significant tax issues had to request a ruling from the IRS on the entire transaction. Under the significant issue ruling program, companies can ask the IRS to address only a particular issue, instead of asking the IRS to bless the entire deal – and that can save time & resources.
‘S-Corp’ is a popular entity classification among small business owners for good reason, but with the benefits come specific requirements and harsh penalties for noncompliance — and buyers may not want to inherit issues from prior ownership. So, this Torys alert says:
Because of the potential downsides of failing to be a “good” S-Corp, prior to closing an acquisition, it has become popular practice to reorganize the target in a pre-closing reorganization to protect the buyer from any mistakes the target’s owners may have made from a tax perspective. These acquisitions are likely familiar to the skilled dealmaker, as these transactions are growing in popularity. Just as familiar, if not more, is that when a deal like this comes across the desk and the tax folks have been looped in, the first question is usually something along the lines of, “Have the parties considered a pre‑closing F‑reorganization?” Which immediately begs the question: “What is an F‑reorganization, and why are the tax folks always asking about this?”
To which the memo answers:
A pre‑closing F‑Reorg allows buyers to effectively achieve the same result as a 338(h)(10) election while also reducing the risk to the buyer that the target’s S‑Corp status was inadvertently terminated or never effective in the first place [. . .] The purpose of an F-Reorg is to allow a corporation to reincorporate, change its name, or move its place of organization without triggering gain or loss recognition. In the end, the resulting corporation is considered the same as the original corporation, which allows it to maintain the tax attributes of the old corporation and possibly carry back NOLs or net capital losses.
It goes on to describe the roughly five steps to an F-reorganization, which, while seemingly simple, has some regulatory requirements and traps for the unwary, including the following (shortened from the memo):
– Stock of Newco can initially be issued only to existing owners of Oldco stock.
– Identity of stock ownership must remain the same.
– Newco cannot hold any property or have any tax attributes before the potential F-Reorg.
– Oldco must liquidate completely for tax purpose (but not for corporate purposes).
– Newco must be the only acquiring corporation.
– Oldco must be the only acquired corporation.
– Timing is key.
Timing, the memo says, is one of the most common mistakes. Specifically:
Newco must be formed before the acquisition—ideally at least two days prior. After Oldco transfers its equity to Newco, the QSub election for Newco should be filed no later than one day before the acquisition. If the parties also intend for the QSub to elect to be treated as an LLC, that election likewise must be completed one day prior to closing.
– The trend toward “jumbo” deals
– Earnouts in the current environment
– Purchase price adjustment trends
– Developments in reps & warranties
– Escrow & holdback trends
– Trends to keep an eye on
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at mervine@ccrcorp.com or John at john@thecorporatecounsel.net. We’re wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
On May 5, the SEC proposed amendments that would allow public companies to elect to file semiannual reports on new Form 10-S, rather than filing quarterly reports on Form 10-Q. For companies that may be interested in taking advantage of optional semiannual reporting or acquire companies that take advantage of semiannual reporting (should the proposed rules be finalized), there are many considerations to work through — including some M&A-related considerations. For example, this Akin alert says:
The SEC’s proposed amendments would likely make public mergers & acquisitions (M&A) more diligence-intensive, bespoke and sensitive to timing. Prospective buyers may be less willing or able to rely on recent filed financials and instead depend more heavily on internal company data and expanded diligence processes. Valuation could become harder to anchor, which could drive more frequent use of pricing protections such as collars, earnouts and contingent value rights. Merger agreements may include greater emphasis on interim operating covenants, KPI reporting and tighter representations, with expanded schedules, rather than periodic disclosure.
Deal timing could likely become less predictable given fewer natural windows tied to earnings releases. At the same time, financing and investor processes could become more complex due to misalignment with lender expectations and market practices. Overall, the SEC’s proposed changes may inadvertently push public M&A toward a more private equity–style model of risk allocation, which, in turn, could constrain a public company board’s ability to maximize shareholder value by forcing it to accept greater conditionality, pricing adjustments and execution risk that dilute deal certainty and headline value.
This Jones Day alert from October, when the proposed rules were only anticipated, also listed these potential M&A impacts:
Targets and acquirors will need to consider implications if the acquiror completes voluntary quarterly auditor reviews but the target does not.
Financing cooperation covenants may need to be adjusted to require specified financial statements during the period between signing and closing. Similarly, access to information covenants and notice of certain events covenants may change.
With regard to the presentation of pro forma financial information or acquired business financial statements, corresponding changes to Rule 3-12 of Regulation S-X may need to be made to maintain symmetry between the Securities Act of 1933 and the Securities Exchange Act of 1934 regarding the age of financial statements.
The due diligence process may change. Acquisitive companies, or companies considering pursuing a strategic transaction, will need to determine whether to have quarterly financial statements prepared that have been reviewed by the auditors and that can be presented to potentially interested parties.
There may be additional financing or due diligence challenges for potential acquirors that are considering an unsolicited offer. Companies will need to identify and develop an action plan for addressing these challenges.
With respect to Rule 3-12 of Regulation S-X, the proposal does contemplate this update. Under the proposal, the SEC contemplates consolidating the requirements of Rule 3-12 into Rule 3-01 and eliminating Rule 3-12.
In late April, following a consultation last year, the European Commission released new merger control guidelines that would supersede the Horizontal and Non-Horizontal Merger Guidelines from 2004 and 2008, respectively. This Wachtell alert calls the proposed guidelines “the most significant proposed reform to EU merger control policy of the past two decades,” noting that they “aim to modernize how the EC assesses mergers,” while the statutory test (whether a merger may significantly impede effective competition) remains unchanged. Here’s more from the alert:
Under the new Guidelines, a merger’s benefits “will play a key role” in the EC’s competitive assessment. The EC proposes to give “adequate weight” to a merger’s impact on scale, innovation, investment and resilience, all “procompetitive factors that can benefit from a degree of consolidation.” In particular, the Guidelines embrace industrial scale as procompetitive where it allows companies to “reach the necessary size to compete in global markets,” especially in innovation-heavy sectors.
The Guidelines also seek to balance concerns that mergers may harm competition by eliminating innovation rivalry or weakening investment incentives with the recognition that mergers can lead to “dynamic efficiencies” that increase the combined firm’s abilities or incentives to invest and innovate.
For example, the guidelines include:
– A proposed “innovation shield,” a “safe harbor for certain deals involving small innovators where the merging parties do not exceed certain market share thresholds or the acquirer is not considered a ‘gatekeeper’ in the relevant industry;”
– That the EC will “consider other non-price effects, such as a merger’s impact on supply‑chain resilience, sustainability, and consumers’ privacy, in its competitive assessment of a potential merger’s harms and benefits;” and
– An updated framework for the analysis of market power that takes a more “holistic” approach, including looking “beyond a static assessment of market power to other factors, such as the competitive potential of the merging parties’ R&D activities, level of R&D investment, and innovation track record” in innovation-heavy sectors.
The alert suggests that the proposed changes might result in the approval of more “scale-enhancing mergers” but also might “increase the risk of divergent outcomes between Europe and the United States.”
Last week, Vice Chancellor Laster of theDelaware Court of Chancery published a piece in the HLS Forum on Corporate Governance on controlling stockholders — specifically, whether the decisions in Match, Sears Hometown, and Tornettawere a significant departure from the historical approach of Delaware courts to judicial oversight of controlling stockholders. The article is in response to an academic paper, Control and its Discontents, by Professors Jill E. Fisch and Steven Davidoff Solomon, arguing that they were. VC Laster disagrees and argues that:
– Entire fairness was never limited to freeze-outs and asset sales;
– Controlling stockholders have long owed fiduciary duties when voting; and
– Non-majority control was always functional.
You may be wondering if this is all purely academic at this point, following SB-21. And I think the answer to that is, “no.” In fact, VC Laster details the situations in which case law predating the 2025 DGCL amendments continues to be relevant:
That does not mean the debate over control is over. The safe harbor amendments establish remedial immunity for corporate fiduciaries who comply with their terms. Prior law remains relevant for aiding-and-abetting claims and for transactions that fall outside the safe harbors. The amendments also do not change the law governing LLCs, limited partnerships, or general partnerships. And the safe harbor amendments do not apply to other jurisdictions.