Aumni and Fenwick recently released their latest “Venture Beacon,” a quarterly report on the state of the venture capital market. This one covers the fourth quarter of 2024, and this excerpt highlights some of the survey’s key findings:
– The second half of 2024 saw improvements in capital raised and pre-money valuations, particularly at the top end of the market, suggesting potential positive momentum into 2025.
– Down rounds decreased in prevalence for late-stage companies, and extension rounds returned to levels seen in 2019 and 2020, indicating a relative improvement in market health.
– Despite the increase in up rounds and pari passu financings for late-stage companies, there was a notable increase in the prevalence of pay-to-play provisions in Series B and later rounds, continuing an upward trend since 2022, highlighting a strategic shift towards restructuring preference stacks and
prompting investors to support later stage companies in achieving stability and growth.
– Startup cohorts from 2021 and 2022 were less likely to secure follow-on capital within two years compared to those from 2019 and 2020, highlighting ongoing challenges in deal velocity and graduation rates.
– While there are encouraging signs of growth, extended fundraising timelines and lower stage-to-stage graduation rates suggest that stakeholders should remain vigilant to both opportunities and potential challenges in 2025.
As anyone who has been involved in an effort to sell a troubled company can tell you, it’s an extremely stressful process, particularly for members of the board who know that every decision they make is likely to be second-guessed by creditors and shareholders and closely scrutinized by a court. This brief Goodwin memo highlights some of the things that boards should keep in mind as they manage the sale process for a distressed company. This excerpt discusses fiduciary duty issues and the need for transparency, disclosure and conflicts management:
– Understand Fiduciary Duties and Maximize Enterprise Value. Directors of insolvent companies or those operating in the “zone of insolvency” remain subject to the same fundamental fiduciary duties as directors of solvent corporations: care, loyalty, and good faith. However, directors of an insolvent company must also consider creditors’ interests because creditors become the residual beneficiaries and may gain standing to bring fiduciary breach claims.
The primary focus should be maximizing the value of the enterprise for the benefit of all stakeholders. This often requires balancing competing interests while maintaining a clear focus on overall value preservation and enhancement.
– Prioritize Disclosure, Transparency, and Conflict Management. Full disclosure of potential conflicts is essential. Boards should consider appointing experienced, independent directors to ensure that conflicts do not compromise the process and leave board decisions open to second-guessing in the future. In some cases, it may be necessary to establish and empower a special committee of independent directors for this purpose.
Document all deliberations thoroughly. Courts frequently review board minutes and supporting materials when evaluating whether directors fulfilled their fiduciary obligations. A well-documented record demonstrating thoughtful consideration of alternatives can provide crucial protection against future challenges
Other topics addressed in the memo include the need to consider all alternatives and test the market, the importance of realistically stress-testing liquidity and its impact on deal timing, and the requirement for the board to focus on valuation and compliance with contractual and other obligations when it comes to distributions of the sale proceeds.
The debate over Senate Bill 21 continues to rage on, while the legislation itself, which would amend the DGCL to provide a broad safe harbor for controlling stockholder transactions, is moving through the Delaware General Assembly at near warp speed. I’ve tried to stay on top of the back-and-forth over the legislation, but it’s getting harder to separate the signal from the noise as both partisans and opponents flood the zone with their messages about the apocalyptic impact the bill’s passage or rejection will have on Delaware’s status as the nation’s preferred jurisdiction of incorporation. With that qualification, here are what I think are some of the more significant recent developments relating to SB 21:
– Opt-in Proposal. A group of law professors submitted a letter to the General Assembly urging that SB 21’s safe harbor be converted into an opt-in provision that would require companies to amend their certificate of incorporation in order for it to apply. Here’s an excerpt from the letter:
By embracing an opt-in framework, Delaware can reaffirm its commitment to a corporate governance system that is enabling, adaptable, and responsive. This approach satisfies every legitimate concern of controlled companies with minimal risk to Delaware’s celebrated expert judicial system and rich body of precedent. Adding an opt-in would not only preserve Delaware’s status as the premier corporate law jurisdiction, but it would double down on the key principles that have made the state successful: choice, flexibility, and the wisdom of market driven evolution.
The opt-in idea appears to have originated with Profs. Eric Talley, Jeff Gordon and Stephen Bainbridge, and this recent blog from Prof. Bainbridge summarizes the letter’s arguments. While the letter has been signed on to by 26 law profs, at least one heavy hitter, Berkeley’s Steven Solomon, is skeptical of the proposal, arguing in a LinkedIn post that “the proposal does not address the merits of the actual provisions or why it is indeed optimal. Rather, it is more of a thought experiment that would create a problematic regime of two classes of companies.”
– Process Criticism. Regardless of your position on SB 21, the process by which the legislation reached the General Assembly represents a pretty significant departure from the norm, and the optics of it are pretty bad. CNBC laid out some of the details on how the bill came to be, and its coverage highlighted the role that concerns about Meta’s proposed DExit played in the way the process unfolded. While most critics have focused on the Tornetta litigation & Elon Musk as a driving force behind the legislation, CNBC revealed that Meta was directly involved as well. CNBC’s revelation that Zuck was lurking behind the scenes reminded of Don Corleone’s famous line in The Godfather – “I didn’t know until this day that it was Barzini all along.”
– D&O Insurance Implications. Over on his blog, Francis Pileggi summarized commentary from panelists at a recent conference who addressed the implications of SB 21 for D&O insurers. The blog highlights several comments from the panelists, including the prediction that “the outcome of SB 21 will be the biggest topic in the D&O world for 2025.”
– Economic Impact of SB 21. The Delaware Business Times published an opinion piece by a Wharton economist who contends that SB 21’s impact on fiduciary duty litigation will cost Delaware plenty. He foresees a “reduction in revenue from fiduciary duty litigation of between $71 and $142 million with a “base case” estimate of $107.5 million.” At the low end, his assumption is based on a 33% reduction in fiduciary duty lawsuits, while his base case assumes a 50% reduction in those claims and high-end case assumes a 66% reduction. Those kinds of numbers make it easy to see why the plaintiffs’ bar is up in arms about SB 21, but if his projections are anywhere close to being correct, SB 21 is going to take a big bite out of defense firms as well.
Meanwhile, the legislation itself sailed through the Delaware Senate and was originally scheduled for a vote in the House last Thursday. That didn’t happen, but it still looks like this legislation will likely be on the Governor’s desk by the end of the month.
While Delaware’s SB 21 was the most hotly debated topic at Tulane’s Corporate Law Institute earlier this month, there were also lots of great discussions surrounding shareholder activism and engagement. Tiffany Posil, Chief of the Office of M&A in the Division of Corporation Finance, joined the panel “Hot Topics in M&A Practice” and shared some helpful comments on common questions that have come up since the mid-February release of updated CDIs on the filing of Schedules 13D and 13G.
Here’s a summary of her comments on three common questions. (Keep in mind that all Staff comments are subject to the standard disclaimer that the views are the person’s own in their official capacity and not necessarily reflective of the views of the Commission, the Commissioners, or members of the Staff, and our summaries are based on our real-time notes.)
– Is publishing a voting policy or guideline viewed as influencing control with no other actions taken? No; these policies are not targeting a particular company and apply to all the filer’s portfolio companies. Even where they have bright line conditions (for example, to say that the investor will always vote “against” if the company doesn’t take a particular action), they are not considered an attempt to influence control at a particular company, and the CDI permits 13G filers to express views and how those views impact its voting decisions.
– What if investors then meet with an issuer to discuss those guidelines? The CDI allows for a meeting and discussion regarding policies, but 13G status is at risk the more the discussion becomes specific or insistent or turns into a negotiation (like demanding actions in exchange for votes). She also noted that company-initiated meetings are less likely to call filer status into question, but that doesn’t mean that an investor has a “blank check” to say whatever it wants in a company-initiated engagement and remain a 13G filer.
– What is the intent behind the use of “implies” and “implicitly conditions its support”? These words were used to make sure the CDI didn’t “imply” that 13G filers can continue to use Schedule 13G as long as they don’t say magic words like “We’re going to vote against a director,” where all other actions suggest that that’s what they’re going to do. (Note the parallel to Regulation FD where companies can trip up Regulation FD when they convey information “the meaning of which is apparent though implied.”)
Finally, she stressed that the examples provided in the CDI are illustrative only and not the only instances where engagement could be considered influencing control and the guidance was not intended to chill or impede communications.
We’ve all seen the staggering statistic that one-third of all VC dollars invested in 2024 went to AI startups. AI is also a huge driving force behind M&A activity these days as companies look to use M&A to increase their AI capabilities. That means M&A practitioners have been forced to deal with the unique risks of acquiring an AI-focused company and how to address these risks in agreements.
This Torys memo says that AI-specific representations and warranties are increasingly being used for this purpose — especially when AI is a critical element of the target’s business. The memo includes a non-exhaustive list of AI-related considerations for reps and warranties, which relate to the scope of AI, AI training and data use, ownership and license, use and functionality, governance and oversight, use of third-party AI or open-source code, compliance with law/industry standards and incidents/litigation. Here are a few examples:
– [W]hether AI should be a defined term and, if so, the potential scope of the definition. Definitions of AI should generally be drafted considering the ordinary meaning of “artificial intelligence”, which includes AI beyond genAI and the factual matrix surrounding the transaction.
– Depending on the circumstances, whether the target’s personnel have sufficient internal expertise to perform the various applicable oversight, use, maintenance, and similar functions within the organization may also be a consideration.
– In certain circumstances, buyers may seek to confirm AI models have sufficient logs and that results are sufficiently explainable and auditable.
– Where there is a lack of consensus as to the relevant industry standard, or where such standards are underdeveloped, parties may be better served by drafting properly scoped sector-specific representations to address compliance.
– The parties should consider whether there are any (i) instances of the target’s use of AI causing harm to individuals or demonstrating an undesired bias; (ii) complaints regarding the target’s use of AI; or (iii) threatened or pending litigation relating to the target’s use of AI.
This Cooley M&A blog takes a look at 2024 activism trends. One of the oft-cited 2024 trends is the targeting — and subsequent replacement — of CEOs. As the blog explains, “activists had greater success in driving executive shakeups, logging 27 CEO resignations following the launch of a campaign (an all-time high, representing a 69% increase over the four-year average and a 170% increase since 2020).”
2024 may seem like a lifetime ago, but proxy contests are up and these trends are still relevant and top of mind for boards and activism defense counsel — as was very evident from the engaging panel “Shareholder Activism and the Polarization of ESG and DEI” at Tulane’s Corporate Law Institute earlier this month. The Tulane panleists noted that criticism of a company’s strategy and operations has always been an indirect criticism of management, but that activists focus on leadership when the board isn’t taking the hard steps to make change when it’s needed. At the same time, one panelist noted that the 2024 data may not solely reflect activist influence since some of the boards may have already been contemplating or preparing for change in management.
CEOs and other members of management looking at this data may be wondering what they can do to get ahead of activist concerns that could lead to a costly and time-consuming engagement. The blog makes a few suggestions for management teams in that regard. Below I’ve highlighted the suggestions focused on ensuring the company’s current strategy is in its shareholders’ long-term best interest and effectively communicating that to investors:
– Taking proactive measures to improve cost and operational efficiency, including streamlining workflows, outsourcing non-core functions and embracing automation where possible.
– Publicly laying out the company’s long-term vision and strategy for addressing secular changes in the company’s market, including potentially through holding an investor day (although note that detailed long-term targets can often be used against you in a later activist campaign).
– Proactively monitoring and engaging with the investor base, including laying conceptual groundwork for material strategic transactions outside existing strategy and maintaining a detailed contact log with top shareholders.
– Taking investor feedback into account and taking credit for proactive changes in investor materials and communications. – Monitoring performance relative to peers, including on a total shareholder return basis over one-, three- and five-year periods.
This Goodwin alert asserts that the first merger challenge under the new Republican-led FTC is most notable for what it doesn’t say. Specifically, the March 6 complaint filed in federal court challenging the proposed acquisition of Surmodics by GTCR BC Holdings is silent on private equity roll-up and add-on practices. It relies on a traditional theory of harm. That’s contrasted with the two Democratic Commissioners’ concurring statement, which characterizes the transaction as an example of a “problematic playbook… [of] a private equity” company.
The alert says the fact that this first challenge focuses “on the horizontal combination of two direct head-to-head competitors with high combined market shares in an allegedly concentrated market, rather than the fact that the deal involves a private equity add-on [. . .] suggests that the anti-private equity perspective is now a minority view within the FTC, and that the Republican-led FTC will apply conventional competitive harm analysis based on established antitrust principles.”
Public companies would be well advised, on a lovely, clear day (in the Delaware sense), to update their advance notice bylaws. In the normal course these bylaws receive little attention, but in the event of an activist campaign they are critical to the board’s ability to discharge its fiduciary duties.
Since recent cases have addressed the enforceability of advance notice bylaws, Milbank prepared a model that the blog says is focused on gathering information on the activist’s plans and proposals, the degree of alignment between the activist and the company’s other stockholders and the qualifications and independence of the activist’s nominees, all of which are intended to ensure that the company’s other stockholders receive accurate and timely disclosure and the board has the necessary information to discharge its fiduciary duties in connection with settlement discussions and its recommendation for or against the activist’s nominee. The blog highlights a number of “key features” of the model, some of which are excerpted below:
Clarity. The Alignment ANB is drafted in a clear and direct manner, without setting up potential foot faults and boobytraps for activists seeking to nominate directors. The information sought, while comprehensive, is only what is necessary to provide boards and stockholders with a proper foundation for their decision-making. The bylaw heeds the Delaware Supreme Court warning in Kellner v. AIM Immunotech, Inc. that “[a]n unintelligible bylaw is invalid under ‘any circumstances.’”
Voting Borrowed Shares. While lending shares of the corporation to cover short sales may provide income for large fund complexes, it is unlikely that these fund complexes (or other long-term holders) wish to promote empty voting in a contested corporate election. Permitting the voting of borrowed shares by an activist – amplifying the activist’s voting power when there is no meaningful economic stake in the shares being voted – misaligns voting power with the economic consequences of the vote and does not promote good long-term decision making. The Alignment ANB accordingly requires the nominating stockholder and allied participants in the solicitation to waive their right to vote shares in excess of their collective net long position – in other words, to waive the right to vote shares that were borrowed or otherwise subject to an offsetting sale or delivery obligation.
Independence of Nominees. In some cases, activists will nominate their own employees as directors, in a clear bid to drive their platform (which platform, as noted above, should be made transparent to voting stockholders). In other situations, activists will nominate “independent” directors, with the apparent intention of bringing independent expertise to the problems faced by the corporation. At times, however, the term “independent” is applied rather liberally, making it less clear whether the nominee was put forth in order to drive the activist’s platform, or to serve as an independent technocrat. The Alignment ANB seeks to make the connections between nominees and the activist clearer, requiring disclosure of whether the nominee and activist have had discussions to align on a shared agenda for the corporation (and if so, the result of such discussions), on financial, social and family ties, and finally, on whether the nominee is expected to share confidential board information with the activist going forward. The degree of independence of any given nominee will matter acutely to voting stockholders, particularly if they are not fully on board with the activist’s platform or if their financial interests do not clearly align with the activist’s.
If you were among those hoping that the Trump administration’s antitrust regulators might revisit the controversial 2023 Merger Guidelines, this WilmerHale memo says you’re going to be disappointed. Here’s the intro:
Since their release, the federal antitrust agencies’ 2023 Merger Guidelines (2023 Guidelines) have faced significant criticism from many. There was speculation that the Federal Trade Commission (FTC) and Department of Justice (DOJ) under the new Trump Administration would revoke or significantly revise the 2023 Guidelines. On February 18, however, FTC and DOJ Antitrust Division leadership confirmed that the joint FTC/DOJ 2023 Merger Guidelines will remain in effect as the agencies’ framework for the merger review process.
The timing of these announcements was notable. They came just as the FTC was receiving a rush of Hart-Scott-Rodino (HSR) notifications, many of which seemingly were expedited to avoid the new HSR form that went into effect on February 10, 2025. The new HSR form is another major change during the Biden Administration that apparently will survive the turnover at the agencies.
However, the memo also notes that while the Guidelines remain in place, it remains to be seen how the FTC and DOJ will undertake merger enforcement and the extent to which their enforcement program will differ from that of those agencies during the Biden administration.
I’ve previously sung the praises of Rick Climan & Keith Flaum’s M&A training cartoons, and they’ve recently come out with a new program that’s definitely worth checking out. This time, Rick & Keith are joined by their Hogan Lovells colleague Jane Ross to address fraud-related provisions in acquisition agreements. Topics addressed in this 15-minute video include:
– The legal definition of “fraud”
– Intra-contractual fraud and whether the parties can eliminate their liability for deliberate intra-contractual fraud
– Extra-contractual fraud and non-reliance clauses
Rick, Keith and Jane do a terrific job distilling some pretty complex concepts and I think both new and more experienced lawyers will find their presentation to be entertaining and informative. The video ends with a promise that modifying the definition of fraud and negotiating fraud indemnities will be addressed in a subsequent session, so stay tuned!