The accuracy and completeness of many representations and covenants in an acquisition agreement are often qualified by phrases like “in all material respects” or “except where the failure to be accurate or complete would have a material adverse effect” on the target. In certain situations, the agreement calls for a “materiality scrape” to be applied. In effect, a materiality scrape removes the materiality qualifiers attached to a rep for specific situations – usually closing conditions or indemnity rights – arising under the agreement.
A recent Mayer Brown memo on the Delaware Superior Court’s decision in JanCo FS 2 v. ISS Facility Services, (Del. Super. 8/25), points out that the Court applied a contractual materiality scrape to an absence of changes rep in a way that many lawyers may not have expected, which resulted in a negative outcome for the seller. This excerpt explains the Court’s approach:
The buyer alleged that the seller breached the absence of changes representation, which provided in relevant part:
Since June 30, 2021, Sellers have operated only in the Ordinary Course of Business and have not: [(1)] suffered any damage, destruction, or Loss to any asset or suffered any other change, development, or event (individually or in the aggregate) that has had, or could be reasonably expected to have, a Material Adverse Effect on the Target Accounts; [or] [(2)] suffered or experienced any other event or circumstance which has resulted in a Material Adverse Effect on it [sic] or which is reasonably expected to result in such a Material Adverse Effect.
In analyzing the absence of changes representation, the Court cited Delaware Chancery Court precedent for the proposition that a defined term incorporates the entire definition and stated that the “proper order of operations” is to (1) replace the defined term “Material Adverse Effect” with the text of the entire definition of Material Adverse Effect and then (2) employ the materiality scrape to remove the materiality qualifiers from the text of the definition of Material Adverse Effect.
What happened when the Court applied this “order of operations” to the rep in question? Check this excerpt out:
Since June 30, 2021, Sellers have operated only in the Ordinary Course of Business and have not: [(1)] suffered any damage, destruction, or Loss to any asset or suffered any other change, development, or event (individually or in the aggregate) that has had, or could be reasonably expected to have, a Material Adverse Effect any effect, condition, circumstance or change that individually or when taken together with other conditions, effects or circumstances in the aggregate has had a material an adverse effect on the Target Accounts.
Yikes! The Court performed the same operation on the second clause of the rep, which addressed the absence of adverse changes in the target’s purchased assets (including intangible assets), liabilities, condition (financial or otherwise), properties or results of operations or to the ability of any party to consummate timely the transactions contemplated by the agreement.
Naturally, the seller complained that Court’s application of the materiality scrape made the representation overly broad, but the Court pointed out that the basket and cap provisions of the agreement both limited the seller’s indemnification exposure and served as evidence that the parties’ didn’t intend for the buyer to have to prove a material adverse effect in order to obtain indemnification.
The article goes on to recommend some practice pointers in light of the Court’s decision, including a new approach to drafting materiality scrapes that pays “particular attention to the specific drafting of the materiality qualifiers (including within defined terms used in the representations), and tailor[s] the materiality scrape so that it applies to only those representations, and only in the manner, that the parties intend.”
Last Thursday, in US Chamber of Commerce v. FTC, (E.D. Tex.; 2/26), the US District Court for the Eastern District of Texas vacated the final rules implementing the FTC & DOJ’s overhaul of the HSR reporting regime which went into effect last year. Here’s an excerpt from Gibson Dunn’s memo summarizing the Court’s decision:
In Chamber of Commerce v. FTC, a coalition of business groups led by the U.S. Chamber of Commerce challenged the FTC’s 2024 Rule. On February 12, 2026, Judge Jeremy D. Kernodle on the U.S. District Court for the Eastern District of Texas granted summary judgment to the plaintiffs, holding that the 2024 Rule exceeded the FTC’s statutory authority because “the agency has not shown that the Rule’s claimed benefits will ‘reasonably outweigh’ its significant and widespread costs.”
Under the HSR Act, the FTC may request only pre‑merger information “necessary and appropriate” to assess whether a transaction may violate the antitrust laws—a standard the Court interpreted as requiring a reasonable cost‑benefit analysis. The FTC failed to meet that requirement. Although the FTC acknowledged that the 2024 Rule would nearly triple filing time—from 37 to 105 hours—the Court found the FTC could not substantiate the benefits it claimed the changes would produce. For example, the FTC was unable to identify a single illegal merger in the 46‑year history of the prior form that the new form would have prevented. The Court rejected the FTC’s argument that the 2024 Rule would conserve agency resources, noting that any efficiency gains would accrue only in the roughly 8% of transactions the FTC investigates, while all filers would bear the increased compliance burden.
Judge Kernodle also ruled that the 2024 Rule is arbitrary and capricious because the FTC failed to consider whether the 2024 Rule’s benefits “bear a rational relationship” to its costs and the FTC “did not adequately explain its rejection of less costly and burdensome alternatives,” such as targeted voluntary submissions or more focused Second Requests.
The Court vacated and set aside the 2024 Rule but stayed its decision through February 19, 2026. During this period, the FTC may choose to appeal or allow the prior HSR reporting rule to take effect.
The memo says that the rule will likely remain in effect during the appeal process, but if the FTC doesn’t appeal by February 20th, the premerger notification requirements will revert to the prior HSR reporting rule on that date. We’re posting memos in our “Antitrust” Practice Area.
In Monica, et al. v. Delta Data Software, Inc.(Del. Super.; 2/26), the Delaware Superior Court denied a motion to dismiss claims that a buyer breached the covenant of good faith and fair dealing by undermining the collection of a customer payment to avoid an earnout. The case arose out of the purchase of Phoenix Systems by the defendant, Delta Data Software. Plaintiffs were entitled to an earnout payment conditioned on annual recurring revenue (ARR) for any contract that met certain conditions, including that an initial payment was made under the contract prior to March 31. Following the closing, one plaintiff served as Delta Data’s VP of Business Development and negotiated a contract with a new customer, requiring an initial payment by March 29. However, in what plaintiffs allege was an affirmative act for the purpose of avoiding the earnout, Delta instructed the new customer not to pay the invoice. The new customer contract would have met the conditions to be included in the earnout, but for the payment being received after March 31. The threshold ARR was not met.
The court found that the plaintiffs pleaded that there was a contractual gap for the implied covenant to fill (related to payment collections) and sufficient facts to allege a breach.
The SPCA provides an Earnout Payment conditioned on, among other things, when initial customer payments are made. For those payments to be made, Defendant had to collect, or at least accept, them. Defendant agrees that the SPCA “is silent” on the issue of how it was required to act when collecting payments and emphasizes that the SPCA contains no “efforts” clause in that regard. There is thus a “gap” regarding the range of actions Defendant either must or is prohibited from taking when it comes to collection of payments.
Beyond pleading a gap, Plaintiffs plead an implied obligation that Defendant breached. The complaint pleads that Defendant took affirmative acts to prevent the Customer from making payment on the MSLA for the purpose of undermining Plaintiffs’ right to an Earnout Payment. Specifically, Plaintiffs plead, after Delta Data had already invoiced the Customer for payment due on March 29, 2025, Defendant “t[old] the customer that it would void the invoice and that the Customer did not need to pay.” The complaint alleges that Defendant took this action for the purpose of “manipulat[ing] 2024 ARR,” thus undermining Plaintiffs’ right to an Earnout Payment. Plaintiffs also plead that Defendant terminated Monica “to ensure that he could not participate in the performance of Delta Data’s contract with the Customer and the collection of the Customer’s first payment.”
The parties agreed to an Earnout Payment contingent on Delta Data receiving certain customer payments prior to March 31, 2025. When Plaintiffs entered that agreement, it was reasonable for them to expect at least that Delta Data would not take affirmative acts to avoid receiving customer payments by that date. By pleading that Delta Data took such acts for the purpose of undermining the Earnout Payment, Plaintiffs allege a breach of the implied covenant.
The court also refused to dismiss the breach of contract claims — despite plaintiffs’ acknowledgement that the earnout was not met — under the prevention doctrine since plaintiffs allege that defendant’s own conduct prevented the earnout payment threshold from being met.
Yesterday, the SEC’s Division of Corporation Finance issued a handful of new CDIs relating to Form S-4, Going Private Transactions and Tender Offers. Below are summaries and links to the full CDIs.
Securities Act Rules FormsRevised 225.03 (redline) permits using a business combination Form S-4 to register for resale the securities previously offered and sold to officers, directors, and affiliates of the target company in connection with the business combination transaction pursuant to an exemption (e.g., in connection with written consents or lock-up agreements per recently updated Securities Act Sections Questions 139.29, 130.30, and 239.13).
Going Private Transactions, Exchange Act Rule 13e-3 and Schedule 13E-3New Question 112.03 provides that the Rule 13e-3(g)(2) exception to Rule 13e-3’s requirements for going privates is available if the class of equity securities is not listed on a national securities exchange at the time the transaction is announced but the registration and approval for listing (or authorization to be quoted in an inter-dealer quotation system) are express conditions to closing, disclosed as such and all other conditions of the exception are satisfied. Revised Question 212.01 (redline) has been revised accordingly.
New Question 112.04 provides that Rule 13e-3 would generally not apply to transactions where there is an express non-waivable condition in the tender offer that the issuer would not purchase an amount of subject equity securities that would have a reasonable likelihood or purpose of producing any of the effects described in Rule 13e-3(a)(3)(ii) (e.g., causing the class of subject equity securities to become eligible for termination of Section 12 registration under Rules 12g-4 or 12h-6 or causing the suspension of Section 15(d) reporting obligations under Rule 12h-3.)
Tender Offer Rules and SchedulesNew Question 101.22 provides that a parent company’s tender offer for Section 12 registered equity securities issued by its affiliate is subject to Section 14(d) and Regulation 14D and exempt from Rule 13e-4 by virtue of Rule 13e-4(h)(4). Section 14(d)(8)(B)’s exception for tender offers by “the issuer of such security” is not available for any affiliates of the issuer other than a 100%-owned subsidiary of the issuer.
New Question 163.02 provides the staff will not object to an issuer’s failure to comply with the 10 business day requirement of Rule 14e-2 if the issuer was unaware of the existence of a third-party mini-tender offer and the issuer publishes, sends, or gives to security holders the required statement as soon as possible after it becomes aware.
In September, we shared the SEC’s notice and request for comment for a proposed change to Nasdaq’s rules applicable to initial listings for de-SPAC transactions to align the treatment of OTC trading SPACs with similarly situated exchange-listed SPACs. In early December, the SEC posted a notice of amendment and an order granting the accelerated approval of the proposed change, as modified. Specifically, Nasdaq’s amendment to the proposal:
– Specified that the changes only apply to a de-SPAC transaction involving a SPAC that was previously listed on an exchange and provides its public shareholders the opportunity to redeem or tender their shares in connection with the deSPAC transaction in exchange for a pro rata share of the IPO proceeds and concurrent sale by the company of equity securities;
– Addressed a commenter’s suggestion for a technical revision regarding the proposed rule language for the timing of the effectiveness of a registration statement as it relates to the listing of a company in connection with a de-SPAC transaction; and
– Made minor technical changes to improve the structure, clarity and readability.
Last spring, the Treasury Department launched a pilot program for a fast-track CFIUS process. Now it’s looking to progress the program by seeking public input. In an announcement last week, Treasury says:
Through this RFI, stakeholders will have the opportunity to provide input into the development of the Known Investor Program as well as share feedback on additional areas where CFIUS may increase efficiencies and enhance its processes related to case reviews, non-notified transactions, mitigation, and monitoring and enforcement. Treasury is seeking a broad range of perspectives on these topics to inform its work. The comment period is open for any stakeholder with an interest in CFIUS and will close on March 18, 2026.
This Simpson Thacher alert explains the program, which is in many ways similar to the TSA’s Known Traveler program. For example, applicants will be asked to provide certain information at the time of application and only certain entities are anticipated to be eligible.
These include investors that have submitted at least three transactions to the Committee for review within the prior three years and anticipate submitting an additional transaction in the upcoming year. Furthermore, entities with prior CFIUS compliance issues, entities designated under certain U.S. government programs (e.g., the Entity List and Military End User List), and other entities with various connections to Adversary Countries, defined to include China (inclusive of Hong Kong and Macau) and certain other sanctioned jurisdictions, shall not be eligible for the Program.
Transactions will also continue to be reviewed on a case-by-case basis, but there are still anticipated benefits:
[W]e expect foreign investors, asset managers, private equity firms, and institutional investors to see tangible benefits for those admitted to the Program. Primarily, we expect that the Program could reduce timing uncertainty on transactions that require CFIUS approval by decreasing the likelihood that the Committee may require a second-phase investigation.
Perhaps more importantly, we expect that participation in the Program may benefit non-U.S. investors participating in a competitive M&A process, by allowing the investor to signal to a seller considering several offers that the investor has already been vetted and deemed lower-risk by the Committee. This may close some of the gap in the regulatory posture between the investor and competing U.S. bidders not subject to CFIUS filing requirements, or improve the regulatory posture as compared to similarly situated foreign investors that are not admitted to the Program.
FTC Chairman Andrew Ferguson recently said the Commission is considering whether “acquihiring” is just a clever deal structure to inappropriately skirt HSR notification and pre-merger review. We noted back in September that “acquihires” are getting more popular in tech with Microsoft, Amazon, Alphabet, and Meta all having used them. This WilmerHale alert says:
Remarks from top FTC officials signal that enforcers seemingly have both procedural and substantive concerns with acquihires: first, whether such agreements are used to evade reporting obligations under the HSR Act—for instance by structuring acquihires as hiring or nonexclusive licensing agreements (for intellectual property) rather than traditional acquisitions of assets, voting securities or noncorporate interests that confer control, as contemplated by HSR —and second, as to substance, whether acquihires are an anticompetitive means to buy nascent competitors that may otherwise compete against the incumbent purchaser. Ultimately, both whether an acquihire is reportable or whether it raises substantive competitive concerns will depend on deal-specific facts.
It says companies need to consider the antitrust risks of these acquihires and work with counsel to:
– Structure any acquihire or similar transactions to account for antitrust risk, and consider documenting a decision not to report under HSR a deal that would meet the notification thresholds if it were deemed an asset acquisition.
– Prepare for potential engagement with antitrust authorities for any acquihire deals (consummated or unconsummated) that antitrust enforcers might scrutinize. This is particularly important for any newly signed or recently completed substantial transactions where an antitrust authority might investigate whether an acquihire should have been reported under HSR or a non-US notification scheme or had the effect of killing or marginalizing an incipient rival. In some circumstances, companies may be well advised to prepare for advocacy if necessary.
– Closely monitor enforcement and policy updates. Given FTC Chairman Ferguson’s recent statements that FTC guidance on acquihires may be forthcoming, companies should consider whether they are interested in making a submission during any notice and comment period that may precede formal agency guidance.
– Take compliance steps to ensure that HSR and non-US notifications are not missed for any transactions, regardless of their structure. Companies should consider whether an antitrust authority might deem a transaction structure a mechanism to avoid notification.
AI is certainly a hot topic in M&A, with native AI companies and those with adjacent technologies featuring ever more prominently in the deal landscape. This excerpt from a recent Herbert Smith Freehills Kramer blog moves beyond the topic of industry specific transactions and discusses some of the risks and opportunities associated with AI from a buyer’s perspective:
For some prospective buyers, AI may be a transaction driver. Strategics may be looking for target businesses that will help them adapt to the changing tech environment, while sponsors may target companies operating in industries ripe for disruption by AI, offering opportunities for cost reductions and profitability upside. Conversely, others may be more hesitant to buy legacy businesses which are not sufficiently future-proof to withstand potential disruption.
Meanwhile, assets such as data centres, power providers and others with significant ‘compute’ power are experiencing tailwinds from booming investment in AI.
But AI is now a sector-agnostic consideration; whether a target is in manufacturing or retail, its exposure to AI-driven disruption – or its failure to adopt it – will directly impact its long-term viability.
The difficulty however is the speed with which AI is evolving, making it hard to predict how far it will go and which businesses and industries will be winners and losers. Buyers must think about:
– Cost uncertainty, including the current levels of subsidies given to customers.
– Sustainability.
– Obsolescence risk, as the AI model currently used in the target’s business may become obsolete or be overtaken by new, improved models.
– Adoption costs, including the cost of adopting and implementing new technology and driving change in business.
– The dataset – an AI tool is only as good as the data it is trained on, and a target’s value may lie in the data it owns rather than the AI software itself.
Regulatory scrutiny is another key factor – around the world, regulators are not just looking at current market size/turnover but also the future potential market size. They have had an increasing focus on so-called “killer acquisitions”, where large companies acquire smaller targets in highly innovative sectors to prevent competing products from reaching the market or eliminating an early-stage competitor. AI is one of their key areas of focus in this area. Regulators are also increasingly concerned about data monopoly – where acquisitions are driven primarily by access to data.
The blog also discusses how AI tools are being used in the M&A process, and highlights their current and potential use cases in preliminary negotiations, due diligence, documentation and the closing process.
Deloitte recently published its 2026 M&A Trends Survey. Among other things, the survey suggests that the rise of private credit is likely to continue but notes that concerns about default risks are growing, as is the attractiveness of cash financing. Here are some of the key takeaways from the survey’s discussion of deal financing:
– In 2025, the rise of private credit continued. So did a falloff in commercial lending.
– While private credit and nonbank lenders remained at the top of survey respondents’ preferred financing mechanisms in 2025, concerns about default risk are also rising. A record 61 middle-market borrowers received CCC ratings from the Kroll Bond Rating Agency, indicating that those borrowers were “facing severe operational or liquidity challenges.”
– Among survey respondents, the use of private credit decreased by six percentage points from 2024 and tied with another financing option: all-equity deals, which reflects the continued bull equity market that characterized most of 2025.
– In addition, respondents to our 2025 survey indicated that cash is finally beginning to come off the sidelines to a noticeable degree. Cash as a financing option increased seven points, from 33% in 2024 to 40% in 2025. These financing trends support the notion of a broader potential rebound for M&A in the new year.
The survey also says that dealmakers continue to channel their inner Willy Loman and are once again optimistic about the year, although expectations for the amount of growth in M&A transactions are somewhat tempered. It also discusses the consequences of mixed macroeconomic signals for dealmakers, the potential for growth in small & mid-cap transactions, and the need for dealmakers to remain flexible in their approach as a result of market uncertainty.
Morrison & Foerster recently published its report on M&A in 2025 and Trends for 2026. One of the topics addressed in the report were the implications of the tax provisions of the One Big Beautiful Bill (OB3) for M&A deal structure and valuations. Here’s an excerpt:
– Basis Recovery: OB3 restored 100% bonus depreciation for qualifying property, allowing businesses to immediately expense such capital expenditures. In addition to affecting potential target company values, this could make asset purchase structures more attractive to buyers.
– R&D Expensing: OB3 restored immediate expensing for domestic R&D costs, though taxpayers must still capitalize R&D costs incurred outside the U.S.
– Interest Deductions: OB3 generally increased business interest deductions by restoring a more generous EBITDA-based calculation for computing the business interest limitation (while tightening the rules in other respects).
– Qualified Small Business Stock: OB3 expanded tax incentives for investing in “small business” stock by (i) increasing the minimum gain exclusion to $15 million from $10 million, so that the exclusion generally is the greater of $15 million or 10 times basis, (ii) adding a phase-in starting after three years to the strict five-year holding period, and (iii) increasing the gross asset threshold to $75 million from $50 million.
– Renewable Energy Updates: OB3 substantially narrowed access to renewable energy tax incentives, making it substantially more difficult for certain projects to claim these credits.
– International Changes: OB3 revised certain controlled foreign corporation (“CFC”) provisions as well as other international tax rules, including the “Net CFC Tested Income” (previously referred to as “GILTI”), the base erosion and anti-abuse tax (“BEAT”), and foreign-derived intangible income (“FDII”) regimes. The formulas for calculating Net CFC Tested Income and FDII have been simplified, and the rates have been increased. Also relevant for M&A transactions, U.S. shareholders that dispose of CFC stock are now allocated their share of Subpart F and Net CFC Tested Income inclusions on a pro rata basis, whereas prior law allocated the inclusions exclusively to the shareholder on the last day of the tax year.
Other tax law changes highlighted in the report include the issuance of final regulations on the stock buyback excise tax that significantly narrowed its scope, the Treasury Department’s withdrawal of proposed regs that would have created more demanding standards for spin-offs, and the issuance of new guidance on how the corporate Alternative Minimum Tax applies to M&A transactions.