Private credit has become a dominant force in private equity-backed M&A, and this Herbert Smith Freehills Kramer memo (p. 4) discusses how documentation for private credit financings continues to evolve. Here’s what the memo has to say about the current state of financial covenants in private credit financings:
Financial covenant frameworks remain a key point of differentiation in U.S. private acquisition finance. In traditional middle-market unitranche deals, lenders rely on a quarterly-tested leverage-based maintenance covenant as an early-warning tool.
Competitive dynamics in prior years drove a shift toward “covenant-loose” structures (distinct from “covenant-lite” in the broadly syndicated loan market), where leverage covenants were set with wider headroom, limited to a single test, omitted entirely or replaced with a springing revolver-only covenant triggered when drawn above a specified threshold. However, 2026 has shown early signs of a correction, with new originations incorporating more robust covenant packages as lender discipline reasserts itself.
The memo notes that private credit documentation increasingly incorporates syndicated loan concepts, including EBITDA-based baskets and more permissive debt, investment, and restricted payment capacity as EBITDA grows. It also says that provisions allowing PIK payments in lieu of cash have moderated in 2026 as lenders’ negotiating leverage has increased. Finally, the memo says that as PE sponsors have increased their focus on liability management, lenders have refined credit documentation to address in greater detail “value movement within capital structures and conditions under which new money can be introduced.”
Fox Rothschild recently blogged about the Delaware Superior Court’s decision in Prosser v. PharmaLogic Holdings Corp, (Del. Super.; 7/26), which involved several common contract issues that arise in earnout disputes.
The case arose out of the sale of a nuclear pharmacy business by its founders under the terms of a securities purchase agreement. That agreement called for a $30 million upfront payment plus a potential earnout under which the sellers would receive a $6.6 million earnout payment if EBITDA during the earnout period reached at least $7 million. The agreement also imposed operational restrictions on the buyer, requiring it to act in good faith and prohibiting actions intended to impede or reduce EBITDA.
The buyer ultimately reported $6.8 million in EBITDA during the earnout period, narrowly missing the $7 million milestone. The sellers sued, alleging that the buyer intentionally depressed EBITDA through a variety of accounting, recordkeeping, compensation, and operational changes to the business. The sellers also alleged that the buyer failed to provide adequate support for its EBITDA calculation and impaired their ability to evaluate performance by changing certain financial reporting practices.
The Court allowed most of the sellers’ breach-of-contract claims to proceed. It rejected the buyer’s argument that because the sellers were challenging its EBITDA calculations, the agreement required the dispute to be adjudicated by an independent auditor. The Court concluded that the sellers were not just challenging the EBITDA calculations, but were also alleging that the buyer deliberately manipulated operations and accounting practices to avoid paying the earnout.
Since these claims involved issues beyond simple accounting disputes, the Court concluded that they were outside the scope of the auditor’s authority under the agreement. The Court also rejected the buyer’s contention that the seller’s claims were time barred, concluding that further discovery was necessary to determine when the sellers were on notice of the buyer’s alleged wrongdoing.
This excerpt from the blog highlights some of the key takeaways from the case for parties considering including an earnout in their deals:
– Spell out who decides earnout disputes—and which issues go to that decision-maker. If the parties want an auditor to resolve disputes over document access, recordkeeping, operational decisions, or intent-based allegations, the agreement should say so expressly.
– Sellers should negotiate concrete protections for how the business will be run during the earnout period. A general good-faith obligation helps, but specific operating, accounting, and recordkeeping guardrails can reduce uncertainty and lower the odds of later litigation.
– Buyers should think carefully before making operational changes during the earnout period. Even ordinary business decisions can create litigation risk if their timing or effect suggests an effort to reduce an earnout payment.
This recent article from The Guardian presses the panic button on the private equity industry. It contends that recent failures of prominent PE-backed companies, the changing interest rate environment, rising prices for acquisitions & the inability of firms to dispose of their portfolio companies at attractive prices means that the PE business model is facing an “existential crisis.” This excerpt addresses some of the issues associated with longer holding periods & rising valuations:
Private equity firms promise investors higher returns than the stock market, in exchange for holding on to their money for a longer time period, generally 10 years, a business model that’s been the same for decades.
“What has changed is that the price of buying a target company has gone through the roof,” as the number of private equity funds increased, explains Rosemary Batt, a Cornell University management and labor professor who studies the industry’s impacts on workers and companies. Healthcare companies that once sold at 11 times EBITDA, a measure of enterprise value, are now priced at 18 times or more, for example.
That makes exiting the investment for a profit even more difficult on investors – and on customers and employees.
The higher prices for buyouts are “putting even more pressure on PE firms to squeeze the juice out of their portfolio companies”, Batt said, at a time when there’s almost no regulation governing how they do that.
“They can engage in financial engineering or just slash and burn on the operating side,” Batt said. “And it takes years for anyone to really see it.”
As they hold the company, these investors generally channel free cashflow to “creditors and equityholders, often constraining capital expenditures, worker training, and safety investments”, the University of Chicago’s Business Law Review warns. Tightening macroeconomic conditions can result in forced restructurings “that are costly and value‑destroying for the going concern”.
Not everyone thinks the sky is falling, however. The article quotes Will Dunham, the President & CEO of the American Investment Council, who contends that the PE industry’s pockets are deep enough to weather a crisis:
“Private equity-backed businesses face the same higher interest rates and economic pressures as other companies, but they also have committed investment partners that can provide additional capital and keep investing through difficult periods,”
Slaughter & May recently published a report on takeover trends in deals involving UK public companies. The firm says that “bear hugs” have returned in a big way in 2026. This excerpt provides the firm’s analysis of why bear hugs are on the rise:
Valuation gaps. Differences in valuation expectations between bidders and target boards remain pervasive in UK public M&A, with target boards focused on standalone value and the potential for future upside amidst persistent perceptions of undervaluation. As a result, where private engagement on terms fails to secure a recommendation, bidders are increasingly putting their proposals directly to shareholders. This enables a bidder to test shareholder appetite broadly and publicly (which could not be achieved by wall crossing a select few) and encourage them to influence the target board.
Target engagement. Bear hugs can be a helpful tactic for bidders struggling to gain traction with a target board, as any resulting shareholder pressure will create momentum and make it harder for a target board to resist engagement. It can also be useful where the bidder has already been identified publicly, and the clock is ticking on its 28-day “put up or shut up” (PUSU) deadline to announce either a firm intention to make an offer or that it does not intend to make an offer.
Public narrative. A bear hug allows a bidder to frame its proposed premium, strategic rationale and the deliverability of the transaction, and can shift the burden of rebuttal onto the target. This can be particularly effective where the bear hug reveals the bidder for the first time, allowing the bidder to set the tone – at least initially – before the target has publicly established its own narrative.
The report goes on to observe that a bidder that executes bear hug well can put itself into position to frame the valuation debate, demonstrate the credibility of its proposal, build momentum towards diligence access and, ultimately, persuade the target to recommend its offer. However, it also notes that the strategy has risks, which the report also outlines. The report also provides examples of recent UK transactions involving bear hugs and highlights some actions that targets may take in response.
Drawing from the circumstances of the closely followed bidding war between Novo Nordisk and Pfizer to acquire Metsera, this White & Case article discusses how boards should assess competing proposals that are alike in amount and composition, but differ in structure, timing and probability of consummation due to regulatory risk. The alert summarizes the facts of the Metsera saga as follows:
In the fourth quarter of 2025, Novo Nordisk A/S (“Novo”) intervened as an interloper in the acquisition of Metsera, Inc. (“Metsera”), a clinical-stage developer of obesity and metabolic therapies that had entered into a merger agreement to be acquired by Pfizer Inc. (“Pfizer”). Novo offered a higher headline price than Pfizer, together with a structure designed to neutralize the greater antitrust risk its offer carried. The structure was less novel than it first appeared. Novo ultimately abandoned the proposal after the staff of the Federal Trade Commission (the “FTC”) signaled that it was inclined to recommend a challenge and Pfizer commenced actions in two courts seeking to block the transaction. Pfizer raised its offer in successive steps until it matched Novo’s final proposal in both amount and composition. Once the headline figures converged, Metsera’s board concluded that Novo’s structure carried unacceptable legal and regulatory risk relative to the deal certainty Pfizer offered.
Here are a few key takeaways from the memo:
– Antitrust risk is a substantive component of deal value, and where competing bids converge on headline price, it tends to become the decisive variable. Nor is the resulting valuation discount confined to antitrust: the same arithmetic applies to any approval on which closing depends, whether the relevant regulator supervises insurance, banking, communications or energy.
– Although the final Pfizer and Novo prices were identical, the bids were not equal in value. The Novo proposal was worth what it promised only if the upfront structure survived legal challenge and the back-end merger cleared antitrust review, and the antitrust objections put both in doubt. A board weighing that uncertainty could reasonably conclude that Pfizer’s nearly certain package was worth more after adjusting for risk.
– Novo’s non-voting preferred structure allowed roughly three-quarters of the proposed consideration (valuing a contingent value right, or CVR, at its maximum), and half of Metsera’s equity, to change hands before any antitrust review. The HSR rules, which disregard any transaction or device employed to avoid a filing obligation and test reportability against the substance of the transaction as a whole, undermined the certainty the structure was designed to offer. A filing obligation may therefore exist notwithstanding the structure’s form.
– The regulatory-likelihood prong of the contractual “superior proposal” standard calls for a genuine probabilistic assessment, and for care in the sequencing and framing of the board’s findings rather than a nominal acknowledgment that clearance is uncertain.
The memo provides a detailed illustration of that probabilistic assessment. It also has a thorough discussion about how Delaware courts might have analyzed the agreement with Novo, had Metsera gone in that direction, and shares some practical tips for navigating competing bids that are primarily distinguished by regulatory risk. There’s a lot here, and it’s a practical read that’s worth your time.
When I blogged about the Chancery Court decision in Dodiya v. Franklin, et al. (Del. Ch., 8/26) – the first decision analyzing whether a transaction process met the new Section 144 safe harbors – I focused on the finding that Section 203 does not require that a stockholder vote be “informed,” rather than Vice Chancellor Will’s analysis of Section 144. That was because VC Will described the facts “as an extreme scenario where a board acted with reckless indifference to its own safeguards against a known leak.” But despite some unusual facts that go beyond the “ordinary imperfections of a sale process,” there are still some important Section 144-related takeaways from the decision, as this Goodwin alert details.
The case arose from a take-private acquisition led by Sababa Holdings Free LLC (Sababa), an entity owned and managed by Martin Franklin. Martin Franklin’s son, Michael Franklin, had joined the Whole Earth board in August 2022 and became interim CEO [. . .] Michael Franklin secretly sent his father’s investment firm “a 54-page goodwill impairment test” report containing material nonpublic information [. . .] a draft Form 10-K, the status of credit agreement negotiations, and a draft earnings and guidance release. Sababa subsequently purchased millions of shares of Whole Earth stock and accumulated a 19.8% stake before proposing to acquire the company.
After Sababa submitted its initial proposal, the board recognized Michael Franklin’s conflict and asked him to “sign an undertaking” prohibiting him from participating in the sale process, accessing process-related confidential information, or sharing information with his father or Sababa affiliates. He refused and was placed on paid leave [. . .] “the full [b]oard [knew he] had previously provided non-public information to his father’s company.”
Michael Franklin remained a director after resigning as CEO. On October 24, 2023, he received materials from “meetings held during his suspension,” including “nonpublic financial results,” special committee materials, “and an update on the […] investigation into his own misconduct.” A week later, he attended a board meeting for updates on that investigation, company financial results, and the special committee’s consideration of Sababa’s proposal.
No mechanism was in place “to prevent or detect further” leaks. The proxy statement nevertheless told stockholders that Michael Franklin had not participated in process-related activities, meetings, or communications and had received no process information from Whole Earth.
Vice Chancellor found these facts to be problematic for Section 144(a)(1) and (a)(2).
The court explained that a majority vote by disinterested directors is “necessary” but “not sufficient” by itself for Section 144(a)(1)’s safe harbor. The statute also requires that the board or committee authorizes the transaction “in good faith and without gross negligence.” This requirement, however, includes not just the mere act of director voting but also “the collective conduct of the board or committee that authorized the transaction.” Specifically, this requirement applies to how the board “informed itself, deliberated, negotiated, and reached its decision.” The participation of an interested director “does not [automatically] defeat the safe harbor,” but it “may bear on whether” the authorizing body acted “in good faith and without gross negligence.”
Drawing on Delaware fiduciary law, the court explained that good faith and gross negligence are distinct conditions [. . .] Because Section 144(a)(1) uses the conjunctive “and,” both conditions must be satisfied for the safe harbor to apply. Thus, a board may be grossly negligent even if it believes it is serving the corporation, while a careful process may still be undertaken in bad faith if directors “consciously advanc[e] interests other than those of the corporation.”
The Section 144(a)(1) safe harbor was unavailable at the dismissal stage because the court found it was “reasonably conceivable that the board acted with reckless indifference ‘to the risk that confidential information would reach the buyer,’ thereby compromising ‘the integrity of the sale process.’ Section 144(a)(1)’s safe harbor was therefore unavailable at the dismissal stage.”
As to Section 144(a)(2):
The court separately held that Section 144(a)(2)’s stockholder-vote safe harbor was unavailable. Although the merger received overwhelming approval, the proxy’s assurance that Michael Franklin had been “walled off from the process” was inconsistent with the pleaded facts and incorporated board materials. Because a reasonable stockholder would consider his continued access important given the father-son conflict and the prior leak, the “vote was not informed for purposes of [the] motion to dismiss.”
Notably, failure to meet the safe harbor conditions did not mean that the board was liable for breach of fiduciary duty. Although it was reasonably conceivable that the board was grossly negligent, the company’s exculpation provision shielded them from liability for breaches of the duty of care. The court dismissed claims against all but two directors. Only plaintiff’s duty of loyalty claims against two directors — the former CEO who shared confidential information and a director who negotiated a secret $1.4 million consulting arrangement with the buyer — survived the motion to dismiss.
Designated directors have always been in a tough spot. Though their relationship to the appointing stockholder can vary – with some holding key leadership roles at the stockholder while others are independent – they are still serving on the board at the behest of that one stockholder. Yet they owe fiduciary duties to the corporation and all its stockholders “in the aggregate.” As we’ve seen from some recent Chancery Court decisions (like Guilbeau v. Footprint), the interests of one stockholder or class may not align with the interests of the collective, and the directors can be held liable for breaching their fiduciary duties if they act for the benefit of one or a subset of the stockholders to the others’ detriment. Stockholders can also find themselves in the litigation hot seat for aiding and abetting those breaches.
For example, in Zync, Inc. v. Porsche Investments Management(Del. Ch.; 8/26), the Chancery Court denied a motion to dismiss allegations of breaches of fiduciary duties by a designee and aiding and abetting by the appointing stockholder. The company alleged that the director refused to act without the investor’s approval and, in doing so, delayed and actually prevented the company from entering into necessary financing arrangements, causing the company to shut down its business. Vice Chancellor Laster found that the allegations were sufficient to sustain claims that the director pursued the stockholders’ objectives over the company’s and that the stockholder aided and abetted the director’s breaches, intentionally interfered with the company’s prospective economic advantage and breached the implied covenant of good faith and fair dealing. He was also not persuaded that the claims should be dismissed as exculpated because Delaware law does not allow eliminating liability for intentional and bad-faith acts.
In light of this and other recent Delaware rulings, this Mayer Brown alert shares guidance for both designated directors and stockholders on managing liability risks, taking into account amended Section 144 of the DGCL. They’re worth reading in full, but here are the key takeaways related to amended Section 144 for director designees and appointing stockholders:
What Designated Directors Need to Know. Conflicted Transactions: When the board considers a transaction involving the appointing stockholder, designated directors may be deemed to be conflicted and subject to claims for breach of the duty of loyalty. In such situations, designated directors should consider mitigating their risk in the following ways:
– Safe Harbors: Conflicted designated directors should seek to ensure the transaction is structured to qualify for a safe harbor under new DGCL §144. A director is deemed to be conflicted under §144 if the board is asked to approve a transaction between the corporation and an entity in which the director has a “financial interest” or is a director, stockholder, partner, manager, member, or officer. In such cases, the approving directors generally may obtain safe harbor protection if the transaction is (1) approved by the affirmative vote of a majority of the disinterested directors of the board or committee of the board, (2) approved by the informed, uncoerced, and affirmative vote of the majority of the disinterested stockholders or (3) fair to the corporation and its stockholders. Subject to certain exceptions, the safe harbor protection under §144 exempts the director from equitable relief and damages relating to the director’s involvement in giving rise to the transaction, the director’s receipt of any benefit, the director’s participation in meetings regarding the transaction and the director’s involvement in the initiation, negotiation, and approval of the transaction.
– Abstention: While the §144 safe harbor provides broad protection, a conflicted director should also consider abstaining from the decision-making process. Generally, an abstaining director cannot be liable for the wrongful approval of a conflicted transaction, unless the director was involved in negotiating the transaction or promoting its approval.
What Appointing Stockholders Need to Know. Designation Rights as Evidence of Control: A designation right may render a stockholder a “controlling stockholder” under §144. Among the circumstances specified in §144 that can cause a stockholder to be deemed a controlling stockholder is the possession of contractual or other rights to cause the election of director nominees who constitute either (1) a majority of the members of the board or (2) directors entitled to cast a majority in voting power of all directors on the board. If deemed to be a controlling stockholder, conflicted transactions with the appointing stockholder may be subject to entire fairness review, unless the safe harbor and exculpation protections offered under §144 apply.
Late last month, the FTC announced the approval of a consent order requiring, as a condition to Ascension Health’s acquisition of AmSurg, that Ascension divest seven AmSurg ambulatory surgery centers after the FTC alleged that the acquisition would limit competition for certain services in certain metro areas. This consent order comes after the FTC created a Healthcare Task Force in March, and this Cooley alert says it “demonstrates the agency’s continued scrutiny of vertical and horizontal healthcare consolidation at the local, service level – even where the overall transaction value and combined entity size might not otherwise trigger significant antitrust concern nationally.”
Cooley says the consent order also shines some light on how the FTC is applying its approach to healthcare enforcement in practice. The memo shares these key takeaways for dealmakers in the healthcare space:
– Local market power remains key antitrust risk. The FTC’s challenge focused on competition concerns in five specific metro areas and three outpatient surgery services, underscoring that even relatively small local overlaps can draw scrutiny regardless of overall deal size. Healthcare providers should continue to expect market-by-market and service-by-service antitrust review.
– FTC oversight can extend well beyond Hart-Scott-Rodino (HSR) requirements. Under the settlement, Ascension must provide 30 days’ notice before acquiring any outpatient surgery center in the affected markets for the next 10 years, including transactions below HSR thresholds. This highlights the FTC’s willingness to impose long-term monitoring obligations following healthcare enforcement actions.
– The FTC continues to actively pursue its enforcement agenda and prioritize healthcare enforcement. The Ascension/AmSurg divestitures, coupled with the FTC’s recent federal court victory blocking Henkel’s acquisition of Liquid Nails, demonstrate that the agency is following through on its enforcement priorities, not just announcing them.
Lewis Brisbois’s Francis Pileggi and Aimee Czachorowski recently authored a Bloomberg Law article highlighting some of the significant practical advantages that Delaware offers its corporations compared with its leading competitors. The article focuses on business filings, and while it notes that Texas has recently announced a “Texas Express” service for expedited filings, this excerpt explains that what The Lone Star State offers still doesn’t compare to Delaware’s expedited services:
While this announcement is an improvement for Texas entities, the Delaware Division of Corporations provides a superior level of speed, responsiveness, efficiency, and cost.
For example, it doesn’t appear that Texas offers the one-hour service that Delaware offers. In Delaware, one can confirm the formation of an entity or receive confirmation of a filing within a matter of hours. The Delaware Division of Corporations will process the request within the requested time (such as one hour) and a filer can request a confirmation email.
Delaware also offers more options for expedited filings, with the most expedited services offered by Delaware being unavailable in Texas. For the two services — same-day and next-day — which are also offered in Texas, Delaware still proves to be less expensive, and easier to actually file.
The Delaware Division of Corporations provides several options to allow entities to request expedited service both for corporate filings or for uniform commercial code filings for a fee in addition to the normal filing fee.
While Delaware offers one-hour service, which can be requested for $1,000, it appears that the same level of expedited service is unavailable in Texas. Delaware also provides two-hour service for an additional fee of $500; Texas doesn’t offer two-hour service. Texas also announced that it will charge an additional fee for same day-service and next-day service, which Delaware already provides.
While these “back office” issues don’t get much attention from the media or others engaged in the DExit debate, for transactional lawyers and the companies they represent, the Delaware Secretary of State’s office to provide expedited services for a wide array of filings is incredibly important, and states that are serious about getting into the game need to be able to offer filing services that are on a par with those offered by Delaware.
SRS/Acquiom recently published a snapshot of earnout trends for 2025 transactions. Here are some of the highlights:
– Earnout use continues to increase as valuation gaps persist and buyer behavior evolves. While historical norms have been closer to 15%, earnouts appear in 24% of 2025 deals (excluding life sciences), more than 75% of 2025 biotechnology/pharmaceutical transactions, and have increased in prevalence among other private-target M&A sectors, including technology, energy, and manufacturing.
– Historically, deals involving private equity buyers or technology targets have been less likely to include earnouts. In 2025, however, both categories saw modest increases. Earnout use in VC-backed exits has varied over time and generally remains at or above the rate for all non-life sciences deals. In recent years, VC-backed technology exits have included fewer earnouts, consistent with market demand for earlystage AI and blockchain companies.
– Lower middle-market deals with upfront payments of $50 million or less—especially those of $25 million or less—are more likely to include earnouts tied to a larger share of total transaction value. LMM deals see lower earnout achievement rates as well, with a median of 43 cents on the dollar for those LMM deals with any level of earnout achievement. Larger deals, with upfront payments exceeding $50 million and any level of success on the earnout, saw a materially higher 67 cents on the dollar paid.
SRS/Acquiom found that most earnouts achieve at least some level of success, with sellers typically receiving about 50 cents on the dollar in deals where earnouts are paid. However, that’s strongly influenced by deal size and target industry, and overall, sellers receive approximately one in five potential earnout dollars across all transactions with potential earnouts.