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.
The way that Delaware courts have approached controlling stockholder transactions in recent years has given impetus to the DExit movement. Our readers are well aware of how the Delaware legislature has responded to this challenge, and we’ve also blogged about Nevada’s recent statutory changes designed to enhance controlling stockholders’ protection from liability – but what about Texas? How does The Lone Star State evaluate the obligations owed by controlling stockholders and what standard applies to judicial review of transactions with them? This excerpt from a recent Cooley blog provides some insight into these questions:
In the context of a controller transaction, Texas courts apply somewhat of an intermediate approach, focusing on the duty of loyalty in analyzing the propriety of director conduct. To prove a breach of a duty of loyalty, it must be shown that the director was interested in the transaction. Once it is shown that a transaction involves an interested director, the burden is then shifted to the directors to prove the fairness of their actions to the corporation – a heightened review regime more akin to entire fairness than the BJR.
A challenged transaction found to be unfair may nonetheless be upheld if ratified by a majority of disinterested directors or the majority of stockholders. With the recent TBOC amendments codifying the BJR, this heightened legal regime would not apply to a controller transaction in the case of a public company or company that opted into the BJR codification regime and complied with Texas law.
The blog points out that recent amendments to the TBOC also give the board of a public company the right to petition the Texas Business Court to determine the independence and disinterest of directors comprising special committees formed to review transactions with controlling stockholders, directors or officers.
Of all the challenges involved in a successful M&A transaction, post-deal integration is probably the hardest to get right – and effectively integrating key employees into the combined enterprise is often the hardest part of the integration process. This Foley blog provides some thoughts on how to get the “human factor” right. This excerpt discusses how to identify and manage talent:
Every business has mission-critical employees. Identifying and offering incentives to these employees can improve engagement in a transaction process and prevent an exodus of the most important talent. These types of incentives can take many forms, including retention bonuses, post-closing equity compensation, pre-negotiated employment and severance agreements, leadership opportunities, or clear paths for growth within the post-closing entity, and they can be offered to employees on both sides of the transaction. If certain employees will not be retained in the transaction, then handling their transition out of the business thoughtfully will also have a positive impact on overall morale.
The blog also emphasizes the importance of cultural due diligence during the M&A process in order to ensure that the cultures of the two parties align and recommends the use of individuals or teams of “cultural stewards” to identify issues that arise during the post-closing integration phase and keep employees aligned on shared values and goals.
Purchase price adjustment disputes often involve intricate interpretive issues in which the meaning of terms that the parties thought they had agreed upon during the negotiation process becomes hotly disputed. Not infrequently, the parties call upon the Chancery Court to sort things out. Vice Chancellor Will’s decision in Northern Data AG v. Riot Platforms, (Del. Ch.; 6/25) is the latest example of that.
The case arose following an accounting expert’s resolution of various purchase price adjustment issues in the buyer’s favor. The seller sought to have the Court overturn the expert’s decisions, contending that with respect to two items, the accounting expert applied a GAAP standard, instead of also considering the seller’s historical accounting practices reflected on the closing statement it submitted in accordance with the agreement. The seller challenged other determinations on the basis that they exceeded the expert’s authority because they should have been governed by the indemnification provisions of the agreement instead of addressed through the purchase price adjustment mechanism.
Vice Chancellor Will rejected the seller’s argument concerning the expert’s application of a GAAP standard to the purchase price adjustment. This excerpt from Gibson Dunn’s memo on the decision summarizes her reasoning:
The Court found that the SPA created a hierarchy whereby the Accounting Expert was obligated to apply GAAP as the primary standard. If GAAP allowed for multiple approaches, the Accounting Expert was required to determine the GAAP-compliant approach most consistent with the Illustrative Closing Statement. However, if GAAP allowed for only one approach and the Illustrative Closing Statement was noncompliant with the permitted methodology, the Accounting Expert had to apply the approach that complied with GAAP for PPA purposes.
The Court agreed with the Accounting Expert that GAAP only allowed for a single approach with respect to the accounting items at issue, which approach was not compatible with the Illustrative Closing Statement. The Court upheld the Accounting Expert’s determination, as the SPA provided that his resolution would be final and binding absent manifest error, and he had not committed such error in his assessment under GAAP.
Vice Chancellor Will agreed with the seller that the accounting expert exceeded his authority in attempting to resolve the validity of an account receivable and an account payable reflected in the seller’s net working capital through the purchase price adjustment process. Here’s how the memo summarizes that aspect of her decision:
In both cases, there were factual questions about whether the receivable and payable had already been paid, and the Court addressed how the validity of such items interacted with Seller’s representations regarding the target’s accounts receivable and indebtedness. The Court emphasized that the PPA true-up process had a “limited” role that was intended only to account for changes in the target’s business between signing and closing.
The goal of the PPA was to keep all measures other than such changes consistent, “to prevent parties from extracting value for which they did not bargain.” The Court determined that the validity of the two payments, however, turned on events that occurred prior to the relevant period and did not reflect changes in the target’s business during such period.
Instead, the Vice Chancellor concluded that although accounting matters may be implicated in determining the validity of the payments, the timing of the events in question meant that they implicated the accuracy of the seller’s reps & warranties. Accordingly, those claims should be pursued under the stock purchase agreement’s indemnification terms and not through the purchase price adjustment process.
In Jhaveri v. K1 Investment Management LLC, (Del. Ch.; 6/25), the Delaware Chancery Court declined to dismiss tortious interference claims brought by a former target stockholder against affiliates of the buyer and breach of contract claims against the target’s equityholder representative. These claims arose out of alleged misconduct associated with the representative’s decision not to pursue a lawsuit against the buyer for actions resulting in its failure to achieve an earnout milestone set forth the agreement.
The plaintiff brought breach of fiduciary duty and fraud claims against the buyer and various other defendants, but Vice Chancellor Will dismissed these claims on the grounds that they were covered by a broad release executed by the plaintiff in connection with the merger. However, she refused to dismiss claims that the equityholder representative Raj Goyle, who was the target’s former CEO, breached his obligations under the merger agreement.
Those breach of contract claims were premised on allegations that the representative was aware of active “interference” by certain affiliates of the buyer and its controlling stockholder in the achievement of the earnout but withheld written notice of their improper actions based on assurances of what the Vice Chancellor referred to as a “lucrative soft landing” from those affiliates.
Because the plaintiff’s breach of contract claim survived the motion to dismiss, Vice Chancellor Will turned to tortious interference claims brought against the buyer and the various affiliates. She noted that to prove a tortious interference claim, the plaintiff: “must show “(1) a contract, (2) about which [the] defendant[s] knew, and (3) an intentional act that is a significant factor in causing the breach of such contract, (4) without justification, (5) which causes injury.” At the outset, she dismissed the plaintiff’s claim against the buyer, because under Delaware law, a party to a contract can not tortiously interfere with that contract.
She then turned to the claims against the various affiliates. The Vice Chancellor acknowledged that tortious interference claims against a buyer’s affiliates must overcome the “affiliates exception,” which creates “a limited ‘privilege among affiliates to discuss and recommend action’ given their ‘shared economic interests.’” However, she said that this privilege only came into play when the affiliated party engaged in “lawful action in the good faith pursuit of its profit making activities.” In this case, she concluded that the plaintiff had adequately pled that the defendants’ conduct put them outside of the privilege:
He alleges that the K1 Defendants undertook “extraordinary steps to hide payments to Goyle”—including making “material misstatements” to Jhaveri and other [target] stockholders and taking other “bad faith acts”—to persuade Goyle not to challenge the earnout. Based on these facts, Jhaveri adequately pleads a “malicious or other bad faith purpose” allowing his tortious interference claim to proceed against [buyer’s] affiliates—provided that the elements of the claim are met.
Vice Chancellor Will also held that the plaintiff had adequately pled each of the other elements of a tortious interference claim against the buyer and controlling stockholders’ affiliates, and declined to dismiss those claims.
Yesterday, the SEC’s Division of Economic and Risk Analysis (DERA) announced the publication of a white paper intended to provide the public with information about changes in M&A activity over time. DERA used data on deals completed from 1990 to 2024 involving U.S.-based public and private acquirers and targets and at least a 50% stake purchased. The white paper analyzes:
– The U.S. M&A market over the past 35 years
– For recent (2020-2024) transactions, characteristics of a typical M&A deal and companies involved in it
– Geographic breakdowns based on acquirer and target locations within the U.S.
ICYMI, last week, Bloomberg reported that Goldman is back in the SPAC market. After being the second-largest underwriter of SPAC IPOs in 2021, the firm made the decision in 2022 not to work with SPACs anymore — through a self-imposed ban on underwriting SPAC IPOs or working on de-SPAC transactions — apparently deeming it too risky across the board.
It’s returning to assessing SPAC transactions on a case-by-case basis, although it may also limit the sponsors the firm decides to work with. All in all, this seems like a good sign for the SPAC market. But I also worry this means Goldman doesn’t expect the “IPO slump” to end anytime soon.