Enactment of the SB 21 safe harbor for transactions with a controlling stockholder was accompanied by much wailing and gnashing of teeth from plaintiffs’ lawyers. However, a recent lawsuit challenging Skechers’ 2025 controller-backed LBO suggests that anyone who bought into arguments that SB 21 slammed the door on litigation challenging controller transactions may have seriously underestimated the resourcefulness of the plaintiffs’ bar.
This excerpt from a recent “D&O Diary” blog by Sarah Abrams discusses how the plaintiffs in that case have attempted to plead around the SB 21 safe harbor:
The recent Delaware Supreme Court decisions upholding SB 21 and in Moelis could reshape the legal framework applicable to disputes involving controller-led transactions, like the deal outlined in the Skechers Complaint. Transactions involving controlling stockholders that satisfy specified procedural protections, such as approval by a fully empowered and independent special committee and a majority-of-the-minority vote, may now qualify for business judgment review rather than the more exacting entire fairness standard.
Against that backdrop, the allegations in the Skechers Complaint, if substantiated, appear aimed at placing the transaction outside of this emerging safe harbor framework. The plaintiff alleges that the process was dominated by the company’s controlling stockholders, that the special committee was either ineffective or insufficiently independent, and that the transaction lacked meaningful procedural safeguards. If proven, these allegations could preclude application of the more deferential standard of review and instead subject the transaction to traditional entire fairness scrutiny, under which defendants would bear the burden of demonstrating both fair dealing and fair price.
The Skechers Complaint further alleges that the controlling stockholders structured the transaction to provide themselves with differential consideration and ongoing governance rights, including through rollover equity and post-closing influence. The plaintiff appears to advance these allegations in an effort to align the claims with the types of controller conduct that Delaware courts have historically scrutinized under the entire fairness framework. If substantiated, such allegations could reinforce arguments that the transaction was not conditioned on protections sufficient to replicate an arm’s-length process.
The blog goes on to make the point that while the Delaware legislature and its courts have tried to map a clear pathway for controller transactions to receive the protections of the business judgment rule, the ability to achieve that result remains highly dependent on the integrity of the transaction process. In other words, in order to reach the safe harbor, fiduciaries may still need to navigate a fairly narrow channel.
Whatever you may think of the merits of RWI and other transaction insurance products, you can’t accuse the industry of being lacking when it comes to innovation. The emergence of Regulatory Termination Fee, or RTF, insurance is a great example of that. This product is designed to shift the risk of paying a reverse termination fee based on the failure to obtain regulatory approvals away from a buyer and onto the underwriters of an RTF policy.
While an RTF policy’s benefits to a buyer are significant, this White & Case memo notes that its use may significantly change the buyer’s incentives when it comes to the regulatory approval process:
If a buyer’s obligation to pay an RTF is eliminated from the equation or substantially reduced because the obligation is shifted to an insurer, the buyer’s incentive to obtain required regulatory approvals may be meaningfully reduced. This is particularly true because in most transactions (particularly those in which the buyer is a private equity firm or other financial buyer), in circumstances where the buyer is obligated to pay the seller or the target an RTF, the recovery of that RTF by the seller or target is usually the sole and exclusive remedy for the buyer’s breach of the transaction agreement.
Accordingly, if a buyer can obtain RTF insurance for the cost of the premium, and its only exposure in the event all required regulatory approvals cannot be obtained is the amount of the retention or deductible under the insurance policy, the buyer may be more likely to conclude that the economic and other costs of any required regulatory remedy or other action exceed the transaction’s economic and other benefits to the buyer.
While a retention or deductible under an RTF insurance policy will leave a portion of the RTF exposure with the buyer, this portion will usually be relatively small as a percentage of the amount of the RTF, and a competitive RTF insurance market will likely work in favor of buyers in this regard.
Although the memo notes that specific performance provisions may help keep the buyer’s feet to the fire, it says that because regulatory efforts clauses are often open to broad interpretation, it may be difficult to obtain an order that would allow a seller to obtain specific enforcement of such a clause.
A recent FTI Consulting report says that cyber-attacks occur frequently following the closing of an M&A transaction, and that most companies aren’t adequately prepared to prevent those attacks. Here are some of the report’s rather alarming takeaways:
Impact on Deal Value and Post-Transaction Targets: More than two-thirds of those who experienced a cyber incident during or after a transaction claim it had a negative impact on the transaction in some capacity. Nearly half claimed the deal value was reduced as a result of the cyber incident, and another 20% stated that the transaction was paused or delayed. A majority (58%) believe the incident impaired the company’s ability to reach financial targets after the transaction.
Minimized Role for CISOs in Decision Making: A plurality of CISOs do not have a seat at the table during transaction due diligence, with one in three indicating they do not believe they have the ability to kill a transaction if the risk to the organization is too high during or after a transaction.
Disconnect between Growth Goals & Cybersecurity Risk: Pressure to close deals quickly comes at the expense of carefully weighing cybersecurity defenses (or lack thereof) during the due diligence process, exacerbating the somewhat inherent tension between growth and risk mitigation.
Cyber Integration Post Transaction is a Significant Challenge: Most organizations struggle to align and integrate their cybersecurity protocols and procedures post-deal, with 84% of survey respondents citing challenges in harmonizing IT systems and policies.
Companies are Targeted and Potentially Exposed at a Critical Moment: One in four respondents admit that their organization experienced a cyber incident within 24 months after closing a transaction, revealing lasting, real-world consequences for those who do not coordinate their cybersecurity and deal teams.
FTI says that one striking observation is the extent to which companies drop their guard post-closing. The report notes that during a transaction, 50% of executives say they take a fully proactive approach to cybersecurity risks. Post-closing, however, only 23% of executives saying they manage cybersecurity risks proactively.
Investors in portfolio companies that are attractive IPO candidates often pursue a “dual track” exit strategy that involves preparing for initial public offering while also soliciting potential buyers for the company. Done properly, this dual track process can help investors maximize the valuation of their investment by allowing them to choose the path that looks most attractive as conditions evolve.
If you’re working with a company that’s thinking about a dual track exit strategy, be sure to check out this Cooley blog, which discusses some of the things that companies and their advisors should consider before going down this path. This excerpt discusses how to determine which track is most likely to result in the highest valuation:
The valuation of a business by public markets versus a financial or strategic buyer can vary significantly. IPOs are affected by stock market sentiment, volatility and comparisons (whether valid or not) with the recent trading performance of peers. When equity markets are strong, the IPO track can act as a “stalking horse” in eliciting M&A buyers. Valuation in an M&A process, on the other hand, is often driven by considerations such as realizing synergies, pursuing short- versus long-term business plans, obtaining critical assets (often intellectual property), and benchmarking off of industry consolidation trends and recent comparable transactions.
The factors that shape the ultimate choice include:
Valuation dynamics: Does the M&A market fairly value long-term potential? Is an acquirer offering a premium that reflects its strategic rationale?
Execution risk: Are there concerns around market conditions or investor appetite? Is an M&A transaction actually actionable?
Strategic vision: Does the company prefer independence or believe it can achieve greater impact as part of a larger organization?
What makes a dual-track truly effective is leverage. The question is whether a credible IPO story can be maintained in parallel to creating heat in the auction and how speed through diligence, deal terms and consideration can be leveraged in the most effective manner.
Something to remember: Testing the waters remains essential. With a private sale, it will never be possible to know with certainty how the stock market would have valued a business for comparison. However, pre-IPO companies can and should take the opportunity to assess market receptivity by taking advantage of confidential meetings with investors – dubbed “testing-the-waters” meetings in the US – that carefully comply with applicable regulations. These meetings provide valuable intelligence about where public market investors are likely to price your company and thereby indirectly inform how aggressively you should be pushing M&A buyers on valuation.
Other considerations addressed by the blog include the need for stakeholder buy-in, the company’s viability as an IPO candidate, whether investors desire a complete exit, the time frames involved in a dual track process, and the ability of the team to execute two processes at once.
Faegre Drinker’s Oderah Nwaeze and Angela Lam recently put together this handy overview of Delaware’s fiduciary duty of disclosure. The article reviews what the duty of disclosure requires, the settings in which disclosure claims are typically brought, and offers some guidance to boards on how to satisfy their duty of disclosure. This excerpt discusses one area where disclosure claims frequently arise – management projections:
– Delaware law does not require disclosure of all financial projections, especially if they are speculative, unreliable, or not relied upon by the financial advisor.
– But financial projections made in the ordinary course of business and used by financial advisors are typically considered reliable and should be disclosed if relied upon.
– The failure to disclose financial projections may be considered a material omission depending on the specifics.
– And selective disclosure of only some projections can be misleading, causing courts to find that the partial disclosure was inadequate if omitted information would be material to a reasonable stockholder.
Other sources of disclosure claims identified by the authors include financial advisor compensation and conflicts, descriptions of the merger sale process, and director nominations and removal.
Last week, in Paramount Global v. Rhode Island Office of the Treasurer, (Del.; 3/26), a divided Delaware Supreme Court affirmed a prior Chancery Court ruling holding that, under appropriate circumstances, a stockholder could establish a credible basis for suspected wrongdoing based on post-demand evidence and anonymous sources. This excerpt from Gibson Dunn’s memo on the case summarizes the Court’s decision:
Post-Demand Evidence: The Delaware Supreme Court held “under exceptional circumstances, the Court of Chancery may, in the exercise of its sound discretion, consider post-demand evidence that is material to the court’s credible-basis inquiry and not prejudicial to the corporation.” The Court reasoned that there is nothing in Section 220’s text that prohibits the consideration of post-demand evidence. However, the Court endorsed the general rule “that when a stockholder seeks relief under § 220, it will be limited to evidence identified in the demand and the information available to the stockholder when the demand was made.”
Hearsay in Confidentially Sourced News Reports: The Court affirmed that hearsay from anonymous sources in news articles, if found to be sufficiently reliable, can support a credible basis. The Court expressed unease with the Vice Chancellor’s suggestion that “[n]ews articles from reputable publications that rely on anonymous sources will generally be sufficiently reliable for a court to consider when assessing whether a stockholder has a credible basis to suspect wrongdoing,” but was satisfied that the Vice Chancellor did not rely exclusively on the news outlets’ reputations in reaching his conclusion. The Court noted that an inquiry into the reliability of hearsay evidence is “fact-specific” and concluded that the Vice Chancellor’s reliability determination fell “within the permissible range of choices available in this case.”
Chief Justice Seitz and Justice Valihura dissented from the Court’s decision to permit consideration of post-demand evidence. The dissenters noted that “confining stockholders to evidence in existence at the time of the demand discourages stockholders from filing Section 220 litigation lacking a concrete basis at the time of the demand” and incentivizes them “to bring books and records disputes only after the dispute has matured into a concrete dispute or transaction.”
There’s an interesting new letter opinion from Magistrate in Chancery Hume that addresses when optimistic statements by a buyer about its future plans for the target’s business that fail to materialize cross the line and become actionable fraud. Shareholder Representative Services v. Sphera Solutions, (Del. Ch.; 3/26), arose out of the 2024 sale of SupplyShift, a provider of supply chain sustainability and responsible sourcing solutions, to Sphera Solutions.
In the negotiations leading up to the transaction, Sphera Solutions made a number of statements concerning its future plans for the target company. The plaintiff contended that these optimistic statements played a central role in the target’s decision to sell the company and its willingness to agree to an earnout. Magistrate Hume’s opinion identifies four specific statements cited by the plaintiff in support of its fraud and breach of contract claims:
(1) Sphera’s CEO stated that Sphera would market SupplyShift product offerings to “all [its] 7,000 . . . customers.”
(2) Sphera’s Head of Corporate Development stated that Sphera would both substantially increase SupplyShift’s marketing budget and focus on cross selling efforts of SupplyShift products to Sphera customers.
(3) Sphera’s Head of Corporate Development represented that Sphera already had a “substantial integration plan” that would it implement immediately post closing.
(4) Sphera’s Head of Corporate Development articulated to SupplyShift’s CEO that successfully cross-selling Sphera’s lowest price offering to only 7.5% of Sphera’s extant customer base would increase ARR to more than $10 million. Moreover, successfully cross-selling SupplyShift’s average price offering to only 3% of Sphera’s customers would increase ARR by more than $13 million. The ARR benchmark for a full earn-out payment was only $8.5 million.
Sphera responded to the plaintiff’s claims by contending that certain of the cited statements were “mere puffery” and did not rise to the level of fraud. It pointed to the Chancery Court’s statements in Trifecta Multimedia Hldgs. Inc. v. WCG Clinical Servs., (Del. Ch.; 6/24), to the effect that a party’s “optimistic statements praising its own ‘skills, experience, and resources’ are ‘mere puffery and cannot form the basis for a fraud claim” and that “vague statements of corporate optimism” are similarly insufficient to support such a claim.
Citing the Chancery Court’s decision in Trenwick America Litigation Trust v. Ernst & Young, (Del. Ch.; 8/06), Magistrate Hume said that a forward-looking statement goes beyond mere puffery where it is both “sufficiently specific” and “fraudulently conceived,” and that a plaintiff’s fraud claims will survive the pleading stage if “the plaintiff sets forth particularized facts about (1) the circumstances of the promise, (2) inferences that the promise was and (3) defendant’s incentive to mislead.”
Applying this standard, Magistrate Hume held that several of Sphera’s statements were simply puffery, including its representation that it would market SupplyShift’s products to all 7,000 of its customers. However, he held that Sphera’s statements about increasing its marketing budget and focus on cross-selling efforts were a different matter:
But Sphera’s promise to substantially increase its marketing budget and dedicate resources to cross-selling departs mere puffery’s safe harbor into more treacherous waters. While this statement taken by itself could be puffery, SRS’s pleading meets the standard this Court set forth in Trenwick.
According to the language of the complaint, when Sphera’s Head of Corporate Development made this statement, Sphera had already finalized its budget for the following year that failed to devote adequate resources to support its promise to SupplyShift. Moreover, Sphera had every incentive to mislead SRS. The complaint alleges that Sphera induced SupplyShift to enter the arrangement where a significant portion of the purchase price was deferred to the true-up and earn-out stages based on Sphera’s representation.
While the merger agreement for the transaction did include an integration clause, Magistrate Hume concluded that this clause did not include clear non-reliance reliance language, and that as a result, the plaintiff’s fraud claims were not precluded. Accordingly, he declined to dismiss those claims at the pleading stage.
Morris Nichols recently posted the 2026 edition of its “Mergers & Acquisitions: A Delaware Checklist,” which may be downloaded for free at the firm’s website. The 192-page Checklist summarizes essential Delaware decisions addressing fiduciary duties, poison pills, deal protections and other merger agreement provisions, structural issues, appraisal rights and preferred stock and negotiated acquisitions.
EY Parthenon recently issued its monthly report on M&A activity for February 2026. One of the trends noted in the report is the increase in PE sponsor-backed take private deals. Here’s an excerpt:
PE acquisitions increased 9% in February from the prior month, including a continued focus on select public-to-private transactions. Recent take-private activity highlights how financial sponsors are pursuing public companies that exhibit strong underlying assets while facing structural constraints in executing long-term strategic plans within public markets.
By transitioning these businesses to private ownership, PE sponsors can pursue accelerated operational improvements and cost efficiency while selectively repositioning operating platforms toward higher-growth adjacencies or more efficient commercial models. This pattern reflects a renewed conviction in PE’s ability to capture multiyear value-creation opportunities through focused governance and faster decision-making cycles.
Overall deal activity in February showed deal value rising by 139% and volume declining by 15%. EY says this reflects a continuing emphasis on larger transactions. Transactions of $100 million and above are up 224% in value and down 9% in volume on a year-over-year basis, while $1 billion and above deals surged 319% in value and rose 38% in volume.
Alvarez & Marsal recently published the latest edition of its US Activist Alert, which highlights three market trends driving M&A-related activism. These trends are increasing M&A activity driven in part by rising foreign direct investment, an emphasis on portfolio optimization, and an enhanced focus on margin improvement and cost discipline.
The article highlights Elliott Management’s recent campaigns at Honeywell and Pepsico as examples of activists’ focus on portfolio optimization, and sets forth the following considerations for boards and management’s at companies that may be vulnerable to this type of activist campaign theme:
Clear and compelling total equity story: Companies must articulate how each business unit, segment, or product line contributes to strategic coherence and capital efficiency. Not all segments warrant standalone status, and in many cases, assets are stronger together. Management teams and boards that effectively articulate this to the market can build investor conviction in the company’s portfolio and longterm value creation narrative.
Continuous business simplification: Investors are evaluating whether structural complexity, at the segment or even SKU level, obscures value or dilutes management focus. While activists may at times “overshoot” by ignoring or failing to recognize real synergies, companies should proactively assess and explain the rationale for their structures to stay ahead of external pressure.
Disciplined product and segment rationalization: Defenses rooted in legacy synergies or historical strategic fit face heightened skepticism. Arguments for retaining certain assets or segments must be grounded in demonstrable strategic or operational advantages. Otherwise, such arguments may be interpreted as resistance to necessary portfolio discipline rather than evidence of structural advantage.
A&M goes on to say that activists are willing to challenge complexity in a companies’ portfolio of businesses without waiting for underperformance. Instead, they highlight “blurred strategic priorities” and capital misallocation. In this environment, companies need to simplify their business portfolios where appropriate in order to avoid having their strategic narrative coopted by an activist bent on “portfolio optimization” or – as we geriatrics used to call it – a bust-up.