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.
A recent Chancery Court decision, Pacira Biosciences, Inc. et al. v. Fortis Advisors LLC (Del. Ch.; 1/25), addressed a very specific life sciences earnout issue — whether the contract tied the earnout payment to a national CMS (Centers for Medicare and Medicaid) reimbursement rate or a locality-adjusted reimbursement rate. The Court held that the agreement was ambiguous on this point and looked to extrinsic evidence, finding that it “overwhelmingly” supported that the parties intended for national reimbursement rates to be used. They were the only rates referenced throughout the merger negotiations, and post-closing milestone correspondence also referred to national rates — until a consultant tried to argue for an alternative interpretation after the milestones hadn’t been met based on the national rates.
When I first read this decision, I thought this issue — the meaning of the term “CMS Reimbursement” — was too unique for broader takeaways. But, of course, the use of varied, highly customized earnout milestones is common in life sciences deals, and this Cleary alert does identify a number of broad, helpful takeaways. One is the need for close collaboration between the legal and science steams when drafting milestones in life sciences earnouts:
This case highlights how important it is for parties to a transaction to develop a clear understanding of the key drivers of earnout milestones (here, the different reimbursement codes and the differences between national and local rates). It also highlights the challenges in drafting unambiguous earnout milestone language, particularly given the incentives that litigants (and their consultants) have to identify potential ambiguities and new interpretations after the fact. Like several other recent cases, the case again calls attention to the importance of close collaboration between legal and science teams in drafting milestones in order to avoid costly litigation and potentially unpredictable outcomes.
The alert also has some takeaways related to extrinsic evidence that are even more broadly applicable:
Importance of Maintaining a Clear Record: As earnout litigation becomes increasingly common, it is of the utmost importance that parties build a clear record regarding negotiations of these provisions. While Delaware courts generally do not look outside the four corners of an agreement, they will do so in cases of ambiguity to understand the parties’ intent. In light of this risk, it is critical that parties to a transaction are appropriately informed about the technical details of earnout milestones and are sensitive to the fact that their contemporaneous communications and records of their negotiations may be determinative in a court’s interpretation of the parties’ obligations.
Agreements that Limit the Relevance of Extrinsic Evidence, While Useful, May Not Limit the Use of All Extrinsic Evidence: Myoscience and Pacira’s merger agreement contained a clause providing that prior drafts, course of performance, and course of dealing could not be used to interpret the merger agreement. The Court respected this provision and made clear that its decision did not rely on prior drafts or the parties’ course of performance (including the fact that the MyoScience security holders had accepted a separate undisputed milestone payment based on the national reimbursement rate). However, this provision did not preclude the Court from considering other extrinsic evidence of the parties’ intent, such as the negotiation history and the seller’s own after-the-fact communications, which showed that the interpretation the seller advocated in the litigation was developed retrospectively by its consultants.
Yesterday, the Corp Fin Staff released updated CDIs on the filing of Schedules 13D and 13G. First, Question 103.11 was revised to state that a shareholder’s ability to file on Schedule 13G in lieu of the Schedule 13D otherwise required will be informed by the meaning of “control” as defined in Exchange Act Rule 12b-2. As you can see from the redline (thanks again, Corp Fin!), language about the shareholder’s discussions with management has been deleted.
New CDI 103.12 now separately describes that “discussion” factor – with significant changes from the previous language. Here it is in full:
Question: Shareholders filing a Schedule 13G in reliance on Rule 13d-1(b) or Rule 13d-1(c) must certify that the subject securities were not acquired and are not held “for the purpose of or with the effect of changing or influencing the control of the issuer.” Under what circumstances would a shareholder’s engagement with an issuer’s management on a particular topic cause the shareholder to hold the subject securities with a disqualifying “purpose or effect of changing or influencing control of the issuer” and, pursuant to Rule 13d-1(e), lose its eligibility to report on Schedule 13G?
Answer: The determination of whether a shareholder acquired or is holding the subject securities with a purpose or effect of “changing or influencing” control of the issuer is based on all the relevant facts and circumstances and will be informed by the meaning of “control” as defined in Exchange Act Rule 12b-2.
The subject matter of the shareholder’s engagement with the issuer’s management may be dispositive in making this determination. For example, Schedule 13G would be unavailable if a shareholder engages with the issuer’s management to specifically call for the sale of the issuer or a significant amount of the issuer’s assets, the restructuring of the issuer, or the election of director nominees other than the issuer’s nominees.
In addition to the subject matter of the engagement, the context in which the engagement occurs is also highly relevant in determining whether the shareholder is holding the subject securities with a disqualifying purpose or effect of “influencing” control of the issuer. Generally, a shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more, would not be disqualified from reporting on a Schedule 13G. A shareholder who goes beyond such a discussion, however, and exerts pressure on management to implement specific measures or changes to a policy may be “influencing” control over the issuer. For example, Schedule 13G may be unavailable to a shareholder who:
– recommends that the issuer remove its staggered board, switch to a majority voting standard in uncontested director elections, eliminate its poison pill plan, change its executive compensation practices, or undertake specific actions on a social, environmental, or political policy and, as a means of pressuring the issuer to adopt the recommendation, explicitly or implicitly conditions its support of one or more of the issuer’s director nominees at the next director election on the issuer’s adoption of its recommendation; or
– discusses with management its voting policy on a particular topic and how the issuer fails to meet the shareholder’s expectations on such topic, and, to apply pressure on management, states or implies during any such discussions that it will not support one or more of the issuer’s director nominees at the next director election unless management makes changes to align with the shareholder’s expectations. [Feb. 11, 2025]
Pay attention to those bullet points. They may force institutional investors and asset managers to choose between engaging on voting policy topics & consequences vs. maintaining Schedule 13G eligibility. Acting SEC Chair Mark Uyeda has remarked in the past that asset managers’ engagement endeavors – when they include the implicit threat of voting against a director standing for re-election – may have the purpose or effect of changing or influencing control.
In fact, since Liz shared this post, the new guidance has already had an impact. Yesterday, BlackRock has temporarily paused engagement meetings while considering what this means. Check out our “Schedules 13D & 13G” Practice Area where we’re posting related law firm memos.
Yesterday, Senate Bill 21 was introduced in the Delaware Senate Judiciary Committee. Boies Schiller partner Renee Zaytsev describes the bill’s new protections for boards and controlling shareholders on LinkedIn as follows:
1. For corporate transactions with controllers, other than going private transactions, providing a safe harbor if the transaction is 𝘦𝘪𝘵𝘩𝘦𝘳 (a) approved or recommended by a committee consisting of a majority of disinterested directors 𝘰𝘳 (b) approved or ratified by a majority of disinterested stockholders. (Current case law—embodied in 𝘔𝘍𝘞 and 𝘔𝘢𝘵𝘤𝘩—requires approval of 𝘣𝘰𝘵𝘩 an independent committee 𝘢𝘯𝘥 the majority of minority stockholders, plus some twists, for the safe harbor to apply).
2. For going private transactions with controllers, specifying that the safe harbor applies if only a majority of the committee is disinterested. (Current case law, as set forth in 𝘔𝘢𝘵𝘤𝘩, requires the entire committee to be disinterested).
3. Re-defining “controlling stockholder” such that minority stockholders must have “the power functionally equivalent to that of a” majority stockholder “by virtue of ownership or control of at least one-third in voting power . . . and power to exercise managerial authority over the business and affairs of the corporation.” (Current case law has a flexible test that looks at actual control, whether generally or specific to a particular transaction, without setting any formal shareholding threshold).
There’s a lot more! Check out the list in Tulane Law Prof Ann Lipton’s latest blog. Notably, it also redefines “independence/disinterest to incorporate federal stock exchange standards” with the board determination presumptively controlling unless a plaintiff shareholder pleads “substantial and particularized facts” showing the director’s material interest in the transaction or material relationship with a person with a material interest.
The bill seems clearly designed to address recent criticisms of how the Delaware Courts approach controlling stockholder transactions. (UCLA Law Prof Stephen Bainbridge noted that SB 21 is largely consistent with proposals in his recent article and points to other papers that seem to have influenced the proposed bill.) But, through some proposed changes to Section 220 on books and records demands and a Senate Resolution requesting that the Council of the Corporation Law Section recommend legislative action on attorney’s fee awards, it seems the General Assembly also seeks to reduce the number of shareholder suits filed — or even investigated — in Delaware through other means as well.
The bill is notable in both substance and process, and there’s speculation out there that the proposed changes might be approved as soon as this spring — not in the usual August timeframe.
Memos already started rolling in today, and we’re posting them in our “State Law” Practice Area. Check that out for more info!
The private equity industry poured money into the campaign coffers of Donald Trump and other Republican candidates during the last election cycle, but recent events may have them wondering whether they’ll get the policies they paid for. For example, a recent PitchBook article notes that the President’s fondness for tariffs could throw a monkey-wrench into PE funds’ ability to ramp up exits from investment positions that have been held for quite a long time. This excerpt highlights the auto industry as a case in point:
PE firms have historically held their investments for three to five years before exiting, but the average hold time has crept up in recent years. In some sectors threatened by tariffs, a significant chunk of PE investments are nearing the end of the standard holding period.
In the auto industry, for example, PE firms are sitting on 279 companies they have held for at least five years—that’s about 44% of all PE investments in this space, according to PitchBook data. The garment, electronics, food products and beverage sectors see a parallel trend: More than half of PE-backed companies have been held for five years or longer.
If additional tariffs eventually kick in, the exit timeline for some of these investments could be stretched even further.
Of course, tariffs aren’t likely to be the biggest source of angst to the private equity industry. That honor probably goes to the Trump administration’s desire to pull the rug out on the carried interest tax deduction. That’s already got PE & VC trade groups rushing to man the barricades, so we’ll see whether he has better luck with eliminating the deduction than he did during Trump 1.0.