Last week, Reuters reported that the SEC’s Division of Enforcement is investigating potential conflicts of interest for private equity firms and other money managers related to continuation vehicles as well as “how managers are valuing the assets, and whether investor disclosures are sufficient and consistent.” CVs have been particularly popular recently, with PE firms having a hard time finding buyers willing to pay purchase prices that match their expected valuations.
Traditional private equity funds have a finite life cycle, usually about a decade. CVs allow managers to find new investors and transfer assets from older funds into a new vehicle, extending the holding period while giving existing investors the option to cash out.
As a result, the vehicles give managers a way to return cash to investors without being forced to sell assets at a deep discount in weak markets or to a competitor — or realize potential losses. CVs predominantly deal in equity assets, although the share of credit assets is growing.
Starting last year, the SEC expanded their intra-division coordination on the private credit market.
While SEC examiners have been scrutinizing private fund issues, including continuation vehicles, for some time, the escalation to the enforcement division and the cross-division collaboration underscore growing concerns among watchdogs over potential problems in private markets.
This Yahoo! Finance article says “only about 11% of continuation fund deals in 2025 were set against a competing, arm’s-length bid,” even though there can be major conflicts when the sponsor is the seller and continuing manager.
Gibson Dunn & Crutcher partner Kate Timmerman said, “The structure of CV deals is unlikely to change. Sponsors are considering how to best manage the core conflict of a continuation vehicle in light of the ongoing SEC attention.”
“Now more than ever, sponsors need to demonstrate defensibility and be able to demonstrate a fair, well-documented, arm’s-length-like CV process,” she said.
The May-June issue of the Deal Lawyers newsletter was just sent to the printer and is also available online to members of DealLawyers.com who subscribe to the electronic format. This issue includes the following articles:
– Dual-Track Processes: How to Turbocharge Your Exit
– Earn-Outs and Other Forms of Contingent Consideration: Recent Delaware Decisions and Drafting Takeaways
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at info@ccrcorp.com or call us at 800-737-1271.
In Energy Founders Fund v. Daskevich, (Tex. Bus.; 5/26), the Texas Business Court rejected a minority investor’s claim that drag-along rights contained in Energy Founders Funds’ (EFF) LLC agreement were not triggered by the controller’s sale of its interests to a third party.
The drag-along provision did not apply to transactions with an affiliate of EFF, and the plaintiff claimed that the substantial contractual control rights that EFF would acquire with respect to the buyer following the sale made the buyer an “Affiliate” of EFF. The agreement used the following common formulation to define the term “Affiliate”:
“Affiliate” means, when used with reference to a specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the Person specified. For purposes of the foregoing, “control,” “controlled by” and “under common control with” with respect to any Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person . . . whether through the ownership of voting securities, partnership interests or other equity interests, or by contract or otherwise.
Analyzing this language, Judge Brian Stanger pointed to three factors that led to the conclusion that the buyer should not be regarded as an Affiliate prior to the closing. First, he observed that the definition speaks in the present tense. In order to be an Affiliate, the entity must “control”, be “controlled by” or be “under common control with” the specified person. In order to for such control to exist under the agreement, Judge Stanger concluded that the party must presently have “possession” of the power to direct management and policies. In the Judge’s view, the term “possession” means “current, existing authority, not a future or contingent entitlement to it.”
The second factor Judge Stanger identified was that the definition focused on actual operational governance, and that the relevant inquiry was “therefore straightforward: before closing, who could actually run [the buyer],” and that under the terms of the contract, it was clear that any rights EFF had with respect to the buyer’s business did not arise until after the closing.
Finally, the Judge noted that the plaintiff placed significant weight on the language indicating that the control necessary to be regarded as an Affiliate could exist “by contract or otherwise.” While he agreed that this kind of catch-all language was intended to prevent parties from concealing affiliate relationships “behind clever labels or corporate subterfuge,” it did not override the need for the specified person to current have control. Such a conclusion would have the result of reading the term “possession” out of the definition entirely.
Accordingly, Judge Stanger granted the defendant’s motion for summary judgment and dismissed the plaintiff’s claims.
Yesterday, Corp Fin posted new Securities Act Sections CFI 142.01, which addresses the contents of a registration statement of securities underlying rights that are to be listed on an exchange. Here’s the text of the CFI:
Question: A company seeks to list rights on a national securities exchange in connection with a business combination transaction without the underlying securities also being listed. As required by the exchange, the company must have an effective registration statement, prior to the rights being listed, that registers the issuance of the underlying securities upon exercise of the rights. Must the registration statement contain information regarding the specific transaction and the business to be acquired?
Answer: Yes. The registration statement must contain information about the contemplated business combination transaction and the business to be acquired. [June 23, 2026]
I don’t have a lot of experience in this area, but I think some practitioners have argued that if an issuer is only listing rights and not the underlying stock, it could file a “generic” registration statement to satisfy exchange listing requirements and defer detailed disclosures about the potential business combination until the rights were exercised. To my knowledge, the Staff has never signed off on that approach, and this new CFI appears to effectively foreclose it.
In a market where it seems like anyone who sprinkles the magical AI fairy dust on their start-up immediately attracts a swarm of VC interest, it isn’t surprising that founders of promising AI start-ups have a lot of leverage with potential VC investors. This Goodwin memo says they aren’t afraid of using it when it comes to negotiating the economic and governance terms of these investments.
The memo notes that while there’s nothing new here, founders are seeking favorable terms in earlier rounds than in the past, and they’re also not content to settle for concessions on just one or two points. This excerpt discusses some of the governance terms that founders are negotiating for:
The core objective for founders in venture financing is to maintain operational control — over the CEO role, board composition, and overall voting. The governance mechanisms they use to maintain that control vary by deal, but the most commonly negotiated provisions include:
– Board composition and voting rights: founder-majority or founder-designated board configurations that give founders effective control over the board’s decisions, whether through a majority of seats or super-voting rights attached to founder-held seats. These protections don’t require continued service, so they survive a founder’s transition out of an operating role.
– Super-voting structures: typically, 10 votes per share on founder-held common stock, allowing founders to exert structural vetoes through voting power alongside any explicit protective provisions.
– Common stock protective provisions: founder veto rights — exercised as a stockholder rather than as a board member, which reduces fiduciary duty concerns — over M&A, future financings, material changes in company direction, executive hiring and firing, and other key governance controls. These provisions are often negotiated to be narrower in scope than what investors would typically receive as standard preferred stock protections, but their mere existence as common stock veto rights is atypical when viewed in historical context.
– Limits on investor protective provisions: the converse of the common stock protective provisions, investor protections are often scaled back or limited by explicit economic thresholds — for example, limiting the veto on an exit transaction to situations in which a transaction would return less than a defined multiple of invested capital, effectively removing the investor check on exits that generate meaningful returns.
Economic terms sought by founders include terms providing them with structured secondary liquidity opportunities, participation in investor secondaries, and multiple-round structures with valuation step-ups for a subsequent tranche baked into the initial deal documents.
In Premca Extra Income Fund v. Angle, (1st. Cir.; 6/26), the First Circuit Court of Appeals refused to dismiss securities fraud claims arising out of Amazon’s aborted acquisition of iRobot. What makes the case interesting is that the statements alleged to be false and misleading that the Court refused to dismiss involved statements of opinion concerning the likelihood of the deal obtaining necessary regulatory approvals.
Following the abandoned merger, the plaintiffs filed a class action lawsuit against iRobot, its CEO, and its CFO challenging various disclosures made in connection with the transaction. The district court dismissed the plaintiffs’ lawsuit for failing to state a claim. On appeal, the First Circuit upheld the district court’s decision with respect to all challenged disclosures except for those relating to statements concerning the likelihood of regulatory approval contained in an amended proxy statement filing.
Under the SCOTUS’s Omnicare decision, in order for a plaintiff to successfully allege that a statement of opinion is actionable under the securities laws, it must establish that the statement in question omits material facts about the issuer’s inquiry into, or knowledge about, the statement of opinion. In this case, the opinion disclosure challenged by the plaintiffs involved statements in amended proxy materials that the defendants “expect[ed] that all applicable regulatory approvals [would] be obtained” and that “the merger [would] not violate the antitrust or foreign investment laws.”
The Court concluded that iRobot’s failure to disclose the regulatory challenges that the deal was facing in the EU – including the EU’s rare decision to elevate its investigation of the transaction to “Phase II” – as well as Amazon’s unwillingness to comply with certain information requests, made these disclosures potentially misleading:
iRobot’s rosy prediction of regulatory success, which had not appeared in any public filing since the original proxy statement in September 2022, could reasonably be understood as reassurance to investors as it came on the heels of the EC’s Phase II announcement. But iRobot did not include information about Amazon’s refusal to provide information on the search engine, which was critical to the EC’s publicly expressed concerns. Including that information could be found to have “significantly altered the total mix of information” available to investors by undermining iRobot’s message of reassurance.
The Court also concluded that the plaintiffs had adequately alleged scienter with respect to these disclosures. In doing so, it pointed to allegations that iRobot was a declining company that depended on completion of the merger to secure its financial future, and that this supported an inference that the defendants were paying close attention to regulatory details and were unlikely to “merely neglect to provide the troubling information about the merger while expressing optimism about it.”
Yesterday, in Grower v. Trux, Inc. (Del. Ch.; 6/26), the Delaware Chancery Court addressed a minority stockholder’s challenges to Viking’s acquisition of a majority of the outstanding stock of Trux on the basis that the selling stockholders breached a right of first refusal and co-sale agreement. The plaintiff stockholder’s claims were dismissed with prejudice in 2023, but one of the selling stockholders had intervened seeking a declaratory judgment that the purchase was void under the terms of the ROFR, and, though he stipulated to the dismissal, he filed cross-claims for breach of contract.
The company’s amended certificate of incorporation provided that a “sale, transfer or other disposition, in a single transaction or series of related transactions, by the stockholders of the [Company] of a majority of the outstanding shares of capital stock of the [Company] (determined on an as-converted basis)” was a “Deemed Liquidation Event.” This is relevant because Viking was a minority stockholder when the amended certificate was approved, and the ROFR made certain exceptions and gave Viking certain rights in connection with a Deemed Liquidation Event.
The decision responds to the summary judgment motions filed by both Trux and Viking to the intervening selling stockholder’s cross-claims. Trux and Viking pointed to the ROFR’s exceptions for a Deemed Liquidation Event and argued that the ROFR was not breached. And even if it was, they argued that the selling stockholder released his claims in the purchase agreement. Vice Chancellor Fiorvanti found the defendants’ arguments persuasive:
Richard’s Cross-Claims rise or fall on the applicability of Section 2.4. Under Section 2.4(a), a Proposed Transfer that is “not made in compliance with the requirements of [the ROFR] Agreement shall be null and void ab initio.” According to Richard, his transfers of stock to Viking and those of the Selling Stockholders are void. As a consequence, he argues that the Seller’s Release in his Stock Purchase Agreement is unenforceable, and all equitable defenses are inapplicable. Richard goes so far as to contend that he could invoke his own breach of the ROFR Agreement—several years after the Transaction—as a basis to void his sale to Viking along with those of the other Selling Stockholders.
Richard’s Cross-Claims fail as a matter of law. First, the Transaction was a series of sales of Transfer Stock pursuant to a Deemed Liquidation Event. Under Section 3.2 of the ROFR Agreement, “the provisions of Section 2 shall not apply to the sale of any Transfer Stock . . . pursuant to a Deemed Liquidation Event.” Because Richard’s voidness theory relies on the application of Section 2.4(a), Section 3.2 forecloses his claim. Second, even if Section 3.2 did not foreclose Richard’s theory, the Defendants did not breach Section 2.5 or Section 2.1(b). Third, and finally, Richard released his claims when he executed the Stock Purchase Agreement.
VC Fiorvanti also agreed with the defendants that the selling stockholder released his claims when he executed the stock purchase agreement since it included a release of any and all claims “based on acts, events or omissions occurring on or prior to this Agreement” and “relating to the Seller’s ownership of the Shares.” Since the purchase wasn’t void, neither was his release of claims, and his claims regarding the ROFR “fall squarely within this category of released, ownership-related claims.”
Earlier this month, the Council of the EU adopted a new framework for screening foreign direct investments. The press release notes that these rules replace the existing FDI screening framework that’s been in place since 2020. It explains:
The revised regulation requires all member states to establish screening mechanisms covering a common minimum scope of sensitive sectors, technologies and infrastructure (such as dual-use items and military equipment, critical raw materials, artificial intelligence, energy, transport and digital infrastructure), including foreign investments made through EU-based subsidiaries, while maintaining sole national responsibility for screening decisions.
The regulation also improves cooperation between member states and the European Commission, increases transparency and consistency across national screening systems, and streamlines procedures for investors and public authorities. In addition, it introduces new tools to facilitate information exchange and prevent circumvention of the rules.
The regulation will be published in the official journal and enter into force 20 days after publication. The new rules will start applying 18 months after the entry into force of the regulation.
This Gibson Dunn alert shares some color on what this means for U.S. investors in Europe:
The reform lands amid a changing stance vis-à-vis U.S. investors and mounting European sensitivity around foreign influence over the digital infrastructure underpinning core governmental functions. A case in point: On May 25, 2026, the Dutch government prohibited U.S.-based Kyndryl’s acquisition of Solvinity, the cloud provider hosting the Netherlands’ digital identity platform for accessing government services – the Netherlands’ first FDI prohibition of a U.S. acquirer. The message is unambiguous: U.S. investments in Europe enjoy no safe harbor, and that message is now being reinforced in the new EU FDI Screening Regulation.
One theme that runs throughout the reform: The new Regulation provides a floor, not a ceiling – it harmonizes a minimum standard but allows Member States to go further. Therefore, significant divergence between national FDI regimes in Europe is expected to persist.
The alert describes the “good,” the “bad,” and the “not-so-pretty” aspects of the new framework, which it characterizes as a “mixed bag” for investors who value predictability. It also says:
As most of the new regime hinges on national implementation over the next 18 months, the practical contours, including the application of risk factors and the call-in power, will emerge only after this. Investors active in the covered sectors in the EU should map their filing footprint and closely monitor national implementation over the coming months.
Back in March, we shared that the Premerger Notification Office was accepting the old HSR Form again — after a US District Court vacated the new rules and the FTC’s motion for a stay pending appeal was denied by the Fifth Circuit. This Baker Botts alert shares that, in May, the FTC and DOJ filed an unopposed motion to hold the appeal challenging the new rules in abeyance through the end of the year. In support of their motion, the FTC and DOJ cited their request for public comment and noted that they are evaluating potential changes to HSR requirements in light of the comment file with the goal of publishing a notice of proposed rulemaking by year’s end. They also indicated that the Agencies would continue to accept HSR filings using the old form.
The alert highlights these practical implications for parties making HSR filings:
Pre-February 2025 HSR rules remain in effect. Filers should continue using the less burdensome pre-February 2025 form and associated documentary requirements unless further changes are implemented.
The Agencies are pursuing continued consideration of revisions rather than abandonment of reform. The motion indicates that the Agencies are continuing to evaluate potential revisions to the HSR reporting framework while the appeal remains pending.
Further rulemaking may occur. The Agencies continue to view the prior HSR framework as insufficient for modern merger review and are likely to pursue expanded disclosure requirements.
The Agencies are emphasizing reduced burdens on non-problematic transactions. Recent statements reflect an effort to balance more effective merger screening with reduced compliance burdens for transactions unlikely to raise competitive concerns.
Areas of continued regulatory focus include: nontraditional transaction structures (including acquihires, reverse acquihires, convertible securities, and certain non-exclusive intellectual property licensing arrangements); and the scope of investment and real estate exemptions.
The Agencies are also continuing to evaluate disclosure obligations relating to: sovereign wealth funds, CFIUS, and defense-sector disclosures; supplemental filing obligations for materially restructured transactions or late-stage remedies; and the use of AI tools in identifying and selecting documents for HSR submissions and in responding to Second Requests.
The CAQ’s SEC Regulations Committee meets periodically with the SEC Staff to discuss emerging financial reporting issues relating to SEC rules and regulations. Last month, on TheCorporateCounsel.net, Dave shared that the Regulations Committee had published highlights from its Spring 2026 meeting with the Staff. As Dave noted, these highlights always offer useful insights into the Staff’s thoughts on a wide range of financial reporting issues. The meeting addressed these two topics of interest to this audience (among others):
– Corporation Finance Interpretations 130.05 and filer status determination upon consummation of a de-SPAC transaction; and
– Filing interim financial information for private operating company when a reverse merger between two operating companies occurs after fiscal quarter end, but before Form 10-Q is due.