Earlier this month, Meredith blogged about the Chancery Court’s decisions in two earnout cases, ACON Igloo Holdings, LLC v. Dometic Corporation, (Del. Ch.; 9/26), and In re Saama Technologies Litigation (Del. Ch., 9/26). This Taft memo says that these two decisions highlight the risks associated with earnouts, and identifies these key insights to be drawn from the decisions:
First, the decisions illustrate the importance of clearly allocating operational control during the earnout period. Earnouts frequently require continued involvement by seller-side management, whose financial incentives may not align with those of the buyer or acquired business. Saama demonstrates the potential consequences when executives exercise that authority to pursue personal financial interests at the company’s expense.
ACON Igloo confirms that a buyer may enforce negotiated ordinary-course limitations even when doing so prevents the seller from achieving an earnout. Transaction documents should therefore expressly address management authority, pricing and discount discretion, operating restrictions, and the circumstances in which buyer approval is required.
Second, earnout disputes are not just contract cases. Saama shows that the same conduct can expose continuing management to personal fiduciary-duty liability. Contractual authority to pursue a target does not shield an executive who knowingly sacrifices the company’s interests to maximize contingent pay. Buyers and sellers should build post-closing governance that addresses these conflicts, including oversight procedures, approval requirements, and careful treatment of management incentives.
Third, both decisions underscore the importance of contemporaneous evidence in post-closing disputes. In each case, the Court closely examined internal communications, financial projections, pricing decisions, and management’s stated reasons for pursuing or rejecting particular business strategies. Those records were central to determining whether the conduct reflected legitimate business judgment, compliance with contractual limitations, or an improper attempt to influence the earnout.
For litigators, the decisions underscore importance of obtaining evidence concerning management’s motivations and the economic consequences of challenged decisions. Transactional counsel should carefully establish clear decision-making procedures and document the business rationale for material operating decisions during the earnout period.
In September, I blogged about the Delaware Chancery Court’s decision in the ATG Capital Opportunities case, in which the Court held that the board of Empery Digital improperly rejected an activist’s slate based on disclosure requirements that Vice Chancellor Will concluded weren’t contained in the company’s advance notice bylaw. This Cooley blog discusses the Chancery Court’s decision, and identifies the following things to keep in mind when dealing with advance notice bylaws:
– Draft bylaws with precision.Delaware courts will enforce clear advance notice bylaws, but they will not supply missing disclosure obligations. Stockholders are not expected to deduce disclosure requirements or “guess” what a board might interpret bylaws to require. Boards should consult with counsel to ensure that advance notice bylaws are clear, appropriately comprehensive and reasonably constructed so as not to inequitably interfere with the stockholder franchise.
– Use advance notice bylaws to inform stockholders, not to displace them. Advance notice bylaws help boards evaluate nominations and communicate with stockholders. They do not authorize incumbents to exclude nominees because they disagree with an activist’s strategy, incentives or expected business plan. Ultimately, advance notice bylaws cannot be misused to thwart stockholder choice or entrench existing directors.
– Make rejection decisions disciplined and record-based. Rejecting a nomination notice is a consequential step. It involves legal, reputational and strategic considerations. Boards should work closely with counsel to identify material deficiencies tethered to the bylaws’ plain language, document the specific grounds in the deficiency letter and avoid shifting theories later. In providing a rejection or deficiency letter to an activist, boards do well to provide a letter that is based in fact, even handed and prepared in good faith. As the court emphasized, “Advance notice bylaws are not moving targets.”
Barclays’ latest review of quarterly activism developments covering the third quarter and 2026 year-to-date was released earlier this month. Activity was down somewhat, and the U.S. was driving that trend. Here are some key findings:
– 179 campaigns were launched in 2026 YTD, down 7% year-over-year (192), but largely in line with the four-year average– 43 campaigns in Q3 represented a 42% drop from 74 in Q2, reflecting a more normal “seasonal slowdown” compared to what was an unusually busy Q3 2025 (62).
– The U.S. remained the primary market for activism with 91 campaigns (51% share of global activity), above its four-year YTD average of 86.
– A record level of concentration in the top five sectors targeted by activists (82%), led by Industrials (30%) and Technology (20%).
– The overall number of activists continued to track lower in 2026, down 14% year-over-year to 99– Elliott launched the most campaigns YTD with 16 across seven countries; three of its Q3 launches were among the largest in 2026.
– 58% of Q3 demands were M&A-related; the surge of M&A demands lifted the YTD mark to 44% of all demands, now in line with the four-year average after a slow start to the year.
– Activists won 87 board seats YTD, 10% below the four-year average, with wins concentrated among Elliott, Starboard and Engine, which accounted for one-third of the total.
Well, that didn’t take long! When I blogged about the Delaware Chancery Court’s Cloudflare decision yesterday, I said that I expected law firms to weigh in on the case. Wachtell appears to be the first out of the gate, and yesterday it published its take on the decision. This excerpt discusses the Court’s willingness to bifurcate the proceedings to address issues concerning the applicability of the safe harbor prior to a full-blown entire fairness proceeding:
Consistent with its rejection of the plaintiffs’ gross negligence claim, the Court emphasized that its assessment of the special committee’s good faith remained preliminary, without the benefit of live testimony from the directors. Recognizing that the Section 144 safe harbors were designed to avoid the costs and burdens of entire fairness review, the Court concluded there was “good reason to think that the defendants should not be put through the burden of trying an entire fairness case” until it could be determined on a full record whether the safe harbor applied.
The Court thus offered the defendants the choice of bifurcating the proceedings and conducting an initial trial focused on whether the special committee approved the transaction in good faith and thereby qualified for safe harbor protection. That innovative ruling is a welcome signal that the Court may seek to resolve safe harbor questions before imposing the burdens of a plenary fairness trial with all the expense, complexities, and uncertainty of an after-the-fact inquiry into whether a transaction was entirely fair as to both fair dealing and fair price—even where the preliminary record suggests the possibility of the plaintiffs establishing a lack of good faith at trial.
The memo characterizes Vice Chancellor Laster’s decision as “a faithful interpretation of the amended Section 144 and its promise of greater predictability for transaction planners,” and stresses that “even where a preliminary record suggests that a special committee’s process was imperfect, the safe harbors of Section 144 may be invoked at later stages of litigation before incurring the uncertainty and expense of a plenary trial on the entire fairness of the transaction.”
On Friday, in In re Cloudflare Stockholders Litigation, (Del. Ch.; 10/26), the Chancery Court granted the stockholder plaintiffs’ motion to preliminarily enjoin Cloudflare’s proposed dual class recapitalization. The plaintiffs allege that the proposed recapitalization involved breaches of fiduciary duty by both the company’s board and its controlling stockholder. The decision is the most significant to date interpreting the statutory safe harbors for insider transactions established last year by SB 21.
What’s most interesting about Vice Chancellor Laster’s 142-page opinion is that although he appears to have largely accepted the defendants’ reading of the safe harbors in Section 144 of the DGCL, the Vice Chancellor nevertheless concluded that there was a reasonable probability that the special committee may not have acted in good faith:
The evidence makes it reasonably probable that the plaintiffs can show that the committee failed to act in good faith. How? By acting to placate the founders and give them what they wanted, rather than striving to obtain a transaction that served the best interests of the company and its stockholders as a whole.
Contemporaneous meeting notes suggest that the committee’s advisors knew from the start that the recapitalization would happen and set out to craft a narrative to support that result, including gives from the founders that would look like gets for the committee. There was also a critical point where one of the committee members had an unauthorized conversation with one of the founders in which he told the founder that he expected the committee to give the founder what he wanted.
When the committee’s next proposal differed from what the founder expected, he exploded. He berated the committee members in a text tirade, made threats, and appealed to boardroom allies not on the committee. Two of his allies inserted themselves into the committee’s process. The terms ended up where the founder wanted, and there is good reason to think that the founders’ concessions were less significant than portrayed.
While this isn’t the first Chancery Court decision interpreting the SB 21 safe harbors, it’s clearly the important and I expect that many law firms will weigh in on its implications in the near future. When they do, we’ll post those memos in our “Controlling Shareholders” Practice Area.
Last week, the D&O Diary Blog featured data from a Cornerstone Research report on settlements of M&A lawsuits filed in the Delaware Chancery Court. As the announcement notes, the report covers data from settlements from 2012 to 2025. Cornerstone found that settlements rose in 2025, while dollar values fell.
The number of settlements in litigation related to mergers and acquisitions (M&A) in the Delaware Chancery Court reached 25 last year, its highest level since 2012. However, aggregate settlement amounts declined to $326.6 million, down significantly from the 2023 inflation-adjusted peak of $734.8 million, according to a new Cornerstone Research report released today.
In addition to the dip in aggregate settlement amounts, the median settlement in 2025 fell to $10 million, the lowest recorded over the period analyzed. The median settlement amount as a percentage of transaction value also declined, continuing a multi-year downward trend.
All 2025 settlement amounts were below $50 million, and 80% were below $20 million. In comparison, only 42% of settlements between 2020 and 2024 were below $20 million.
There was an overall drop in claimed damages and settlement values, but these results were at least somewhat driven by an increased number of SPAC lawsuits, “which tend to involve lower claimed damages.” Not surprisingly, claimed damages and settlement amounts significantly correlate, but cases with larger claims tend to settle for a smaller percentage of those claimed damages.
Over on The Harvard Governance Blog, a recent post from Paul Weiss speculates on how shareholder engagement might evolve if the SEC’s proposal to rescind Rule 14a-8 is adopted. Here are some of the blog’s predictions:
Shareholders may increasingly turn to a company’s governing documents to submit shareholder proposals. Many companies’ bylaws already permit shareholders to submit business for consideration at an annual meeting independent of Rule 14a-8, subject to advance notice and other procedural and disclosure requirements. These provisions have rarely been invoked because Rule 14a-8 offered a simpler and less costly path to include a shareholder proposal in the proxy materials.
With the rescission of Rule 14a-8, more shareholders may look to propose business under a company’s bylaws. Accordingly, companies may consider reviewing their advance notice provisions to ensure that appropriate procedural and disclosure requirements are in place to address a potential increase in shareholder proposals.
Shareholders may seek more direct engagement with the board. Shareholder proponents may seek to elevate their concerns to directors through direct communications to the board. Some proponents may also pursue books-and-records requests to scrutinize the scope and quality of board oversight. Consequently, companies may need to assess which communications and issues warrant board attention and ensure that board records appropriately reflect oversight of matters material to the company.
Shareholder proponents could, on occasion, seek to leverage hedge fund activist campaigns to advance their objectives. In the absence of Rule 14a-8, some proponents may attempt to capitalize on the heightened attention surrounding activist campaigns to draw focus to governance and other concerns that have historically been advanced through shareholder proposals. Although such strategies are likely to remain the exception rather than the rule, they may provide an alternative avenue for proponents seeking visibility and engagement.
Interestingly, the authors are skeptical that rescission of Rule 14a-8 will lead to widespread litigation over shareholder proposals, primarily due to the cost and compressed timelines involved. In addition, while they anticipate a rise in “vote no” campaigns, the authors are also skeptical that these will frequently move the needle.
The defendants pointed to other language in the bylaw requiring disclosure of a “participant” in the solicitation. Citing federal case law interpreting the term participant under the federal proxy rules, Vice Chancellor Will observed that these decisions rejected attempts to classify individuals as “participants” unless they either financed the proxy contest or directly participated in the solicitation. Applying this precedent and common law interpretive principles, the Vice Chancellor concluded that the investor was not a participant in the activist’s proxy solicitation.
Vice Chancellor Will’s conclusion that the investor was not a participant in the solicitation proved fatal to another argument put forward by the defendants that the nominations could be rejected. The defendants pointed to a bylaw provision requiring disclosure of any information required to be disclosed in a proxy statement under Schedule 14A. While Item 5(b) of Schedule 14A requires disclosure of the participants in the solicitation, the Court’s conclusion that the investor wasn’t a participant precluded this argument.
The Delaware Supreme Court also affirmed VC Will’s conclusion that the defendants waived legal theories they had not advanced until late in the expedited proceedings. More from John on the Chancery Court’s decision:
The defendants attempted to “pivot” and contended that Rule 14a-9, which prohibits false and misleading statements or omissions in proxy materials required the activist to disclose this information in order to comply with Schedule 14A. Vice Chancellor Will rejected this argument, noting that the letter rejecting the activist’s nominees didn’t cite Rule 14a-9, and that it would not be permitted to subsequently raise that as abasis for rejection:
“When a board rejects a nomination, it must give the nominating stockholder sufficient notice of the contractual basis for rejection. Having grounded its rejection in the asserted failure to disclose [the other investor] as a participant, the defendants cannot wait until trial to abandon that basis and advance a different theory of contractual noncompliance. Advance notice bylaws are not moving targets.”
Last week, the Department of the Treasury announced the first civil penalty under its Outbound Investment Security Program. A company was fined $200,000 for failing to notify the Treasury of an investment of $92,478 in a Chinese tech company by a foreign entity it controls.
The OISP, which took effect on January 2, 2025, prohibits, or requires notification to Treasury of, certain “covered transactions” by US persons, and by non-US entities they control, in “covered foreign persons.” These are generally entities in, or connected to, China (including Hong Kong and Macau) that are engaged in specified activities in the AI, semiconductor and microelectronics, and quantum computing sectors.
As Treasury’s release emphasizes, a US person must notify Treasury within 30 days of the closing of any transaction by its controlled foreign entity that would be notifiable if engaged in by a US person, and must take all reasonable steps to prevent a controlled foreign entity’s transaction that would be prohibited. In particular, the OISP requires US persons to notify Treasury whenever they engage in covered investments that are not otherwise prohibited and where the covered foreign person develops an AI system that is intended to be used for the control of robotics systems, or which was trained using a quantity of computing power greater than 1023 computational operations.
Treasury’s announcement notes that the COINS Act will expand OISP jurisdiction to additional countries and technology sectors.
Here’s something Liz shared last week on TheCorporateCounsel.net:
Yesterday, the SEC posted this Section 21(a) report, detailing an investigation by the Enforcement Division, with support from Corp Fin, into whether the actions of certain members of Climate Action 100+ (“CA100”) in connection with the election of dissident directors at the May 2021 annual meeting of the Exxon Mobil Corporation may have violated the Exchange Act. As you might recall, this was the meeting where Engine No. 1 ran a proxy contest and won three seats, which led many companies to start taking “ESG” initiatives much more seriously.
Here’s an excerpt from the 23-page report:
The Commission has determined not to pursue an enforcement action based on the conduct and activities known to the Commission at this time, but has serious concerns about the conduct of CA100 members and other participants in these activities as described herein. The Commission in its discretion has determined to issue this report of investigation (“Report”) pursuant to Section 21(a) of the Exchange Act to inform those asset managers and investors who would join, or would consider joining, an organization such as CA100 to take appropriate steps to ensure compliance with the Exchange Act.
Specifically, this Report recognizes that the agreement, arrangement, understanding, or concerted action underlying the formation of a “group” may be implied and that coordinated engagement practices ̶ ̶ even when undertaken through an intermediary ̶ ̶ may implicate the beneficial ownership reporting framework. While shareholders may deny the existence of a group, such denials are not conclusive as to whether a group has formed.
Beneficial owners who do not wish to be part of a group therefore should proactively ensure policies aimed at avoiding group formation are adequately enforced. Irrespective of group formation, beneficial owners that report on Schedule 13G need to be mindful of whether their actions may be viewed as having been undertaken with the purpose or effect of changing or influencing control of a specific issuer. Membership in an organization whose stated purpose is to change or influence control of a specific issuer by promoting the election of dissident directors or otherwise could be a factor in the loss of eligibility to report on Schedule 13G instead of Schedule 13D.
Even though the Commission isn’t pursuing an enforcement action and the report is focused on activities that occurred in connection with a proxy contest, it’s fair to read the report as a warning to investors – especially asset managers that tend to own more than 5% of the shares of their portfolio companies and could face severe consequences and restrictions if they are not considered “passive investors.” Accordingly, the report reinforces some of the other pressure that is already being applied to asset managers, proxy advisors and the overall voting and engagement landscape. Here’s another excerpt:
This Report does not address any findings or conclusions, based on the activities described herein, regarding potential breaches of fiduciary duty by investment advisers. In addition, nothing in this Report should be understood as suggesting that the potential formation of a “group” or the loss of Schedule 13G eligibility is an issue unique to the asset managers identified in this Report. The considerations described herein apply equally to all members of CA100 that beneficially own securities in a covered class, as well as participants in any similar intermediary-driven organization.
As you might recall, the White House had issued an executive order late last year which – among other things – directed the SEC to:
Analyze whether, and under what circumstances, a proxy advisor serves as a vehicle for investment advisers to coordinate and augment their voting decisions with respect to a company’s securities and, through such coordination and augmentation, form a group for purposes of sections 13(d)(3) and 13(g)(3) of the Securities Exchange Act of 1934
And in a speech that Commissioner Uyeda delivered a mere week or so ahead of the Executive Order, he questioned whether the practice of proxy advisor “robo-voting” – where funds and asset managers use proxy advisors for voting decisions and engage in “robo-voting” based on those recommendations – could constitute a group for purposes of Section 13(d)(3) or Section 13(g)(3) of the Securities Exchange Act.”
Alongside that earlier context, this report shows that the SEC is still paying close attention to the boundaries of “passive” activities, even as the Corp Fin Staff issued a clarifying CFI last month about permissible investor engagement activities. In a LinkedIn post announcing the Section 21(a) report, the SEC stated:
As we head into the 2027 proxy season, the Commission’s 21(a) report reminds asset managers and investors of their responsibilities with respect to shareholder engagement, especially in the context of organized efforts that follow a playbook similar to that of Climate Action 100+.
Shareholders have the right to express their views on a particular topic and explain their voting decisions. Congress has mandated that shareholders, acting individually or as a group, owning more than five percent of a public company must disclose their plans and other information if they seek to change or influence control of the company.
John had already shared a prediction that investors may still be somewhat measured with their engagements and communications in the coming proxy season. Now, they may also be taking another look at any coalition memberships that still exist…