Earlier this month, in Fortis Advisors LLC v. Krafton, Inc. (Del. Ch.; 3/26), the Chancery Court decided to extend an earnout period after finding that acquiror, Krafton, breached an equity purchase agreement by improperly seizing operational control of the target, Unknown Worlds Entertainment, after terminating key employees without valid “cause,” allegedly to avoid earnout payments. This Troutman Pepper alert gives some background:
[G]aming conglomerate Krafton, Inc. acquired Unknown Worlds Entertainment […] in October 2021 for $500 million upfront plus up to $250 million in contingent earnout payments tied to revenue performance through a defined testing period ending December 31, 2025. The equity purchase agreement (EPA) guaranteed that three “key employees,” co-founders […] would retain operational control of the studio during the earnout period and could only be terminated “for cause.” The EPA defined “cause” narrowly […] By spring 2025, as Subnautica 2 neared its planned early access launch, Krafton’s internal financial projections showed that a successful release would generate between $191.8 million and $242.2 million in earnout payments.
Krafton’s CEO, who had personally led the acquisition, became concerned that the payout would damage his reputation and consulted an AI chatbot for strategies to avoid the obligation. Krafton formed an internal task force, internally called Project X, to either negotiate a reduction of the earnout or execute a corporate takeover of the studio.
Krafton terminated all three key employees, citing a single reason: their “intention to proceed with a premature release of Subnautica 2.” Krafton then locked the studio out of its Steam publishing platform, blocked the game’s release, and replaced the key employees with Krafton representatives.
The court found that the terminations failed to meet the limited “cause” definition negotiated and memorialized in the purchase agreement, and that Krafton’s attempt to pivot justifications for the terminations during litigation was impermissible. It also disagreed that the founders’ decision to download company data to their personal devices breached the agreement, as the purchase agreement permitted the use of confidential information to monitor their rights.
But the remedies are what’s most notable here:
The court enforced the EPA’s express provision that irreparable harm would result from any breach and that the nonbreaching party was entitled to specific performance, and ordered the following:
– The court ordered the reinstatement of Gill as CEO of Unknown Worlds with full operational authority, effective immediately. The court declined to reinstate Cleveland and McGuire, finding that restoring Gill alone was sufficient to vindicate the sellers’ operational control rights under the EPA [. . .]
– The July 1, 2025, board resolution through which Krafton seized control of the studio was declared ineffective to the extent it infringed on Gill’s operational control right.
– The court equitably extended the earnout testing period by 258 days, the duration of Gill’s wrongful ouster, moving the base deadline from December 31, 2025, to September 15, 2026, with Fortis retaining its contractual right to further extend the period to March 15, 2027.
The alert shares a number of important takeaways from this case — including that the Chancery Court may order an equitable (and exact) extension of the earnout if there’s wrongful interference by the acquiror. It also points out that:
The acquiror’s use of an AI chatbot to develop strategies for avoiding the earnout, and the subsequent deletion of those logs-featured prominently in the court’s factual findings. Parties should treat AI-generated content as they would any other business communication: subject to discovery, preservation obligations, and potential adverse inference.
I love this case, not just because of the AI chatbot consultation, but because I have a lot of experience with Subnautica. I can’t say that about many games, but my husband is a big fan of all types of games. Since he buys very few video games and has a slight obsession with submarines, I’ve sat on the couch with Subnautica in the background many a time. It’s not my favorite background track — I find the music stressful. But submarines are probably the most common theme of the movies and video games playing in the background in our house. A few weeks ago, a neighbor texted me that my daughter said to her kids, “Thank goodness you were home. My parents are cleaning the house and watching something called Das Boot.” Apparently, they prefer Subnautica.
Last week, at PLI’s SEC Speaks program, Heather Rosenberger, Chief Accountant at Corp Fin, shared several helpful observations on Rule 11-01(d)’s list of considerations when evaluating whether an acquisition of a component of an entity (not a subsidiary or division) constitutes a business. Based on our notes from the event and subject to the standard SEC disclaimers, she reminded listeners that:
The list in Rule 11-01(d) is intended to provide guidance on the meaning of the term “business” to assist registrants in determining whether financial statements related to an acquisition are required, but it is not meant to create a required checklist. When the rule was adopted, the Commission stressed that registrants would need to exercise judgment. There are two guiding principles in the adopting release:
– That the acquisition — which can involve something more or less than a complete standalone business — needs to be evaluated in the specific context of the facts and circumstances; and
– That the evaluation needs to focus on whether there is sufficient continuity of the acquired operations so that the disclosure of prior financial information is relevant and material to the understanding of future operations.
She gives some specific examples where OCA has received interpretive requests on this guidance:
It’s not uncommon for a seller to have cash flow problems and stop or pause clinical development. OCA believes that the length, nature, and extent of that dormancy are relevant. If the entire operations were discontinued during the period for which financial statements would otherwise be required, that fact pattern would be evaluated differently than one where acquired operations were only on hold for a short time prior to the acquisition.
There are differences in approach when acquired operations are to be continued by the registrant for a limited period of time after the acquisition. OCA suggests thinking about whether the disclosure of prior financial information would be material to understanding future operations, depending on the length and nature of the post-acquisition activity.
Acquired licenses or entities entering into licenses could represent the acquisition of a business for reporting purposes depending on the existence of operating rights or production techniques, and the continuity of related operations. Again, the focus should be on whether there is sufficient continuity of acquired operations before and after the transaction such that disclosure of the relevant financial information would be material to the understanding of future operations. Continuinty can refer to the drug development activity, the terms of the license, what the licensee is permitted to do with the IP, and the nature and significance of the expenses.
OCA believes there are limited circumstances where Rule 11-01(d)’s presumption regarding subsidiaries would be overcome, although it’s possible. For example, sometimes an acquisition might involve putting in place a holding company on the seller side for tax purposes. OCA doesn’ expect that legal entity — when the acquisition could have been completed without it — to be a determining factor in the Rule 11-01(d) analysis.
Arguments about changes in the value of assets, changes in the management team, or different financing structures are not arguments they find persuasive in the Rule 11-01(d) analysis.
Finally, if you’re submitting an interpretive request and you’re concerned that staff might not agree with your position, she noted that you can add a waiver component to that request (but do not skip the analysis and jump straight to the waiver process).
Late last week, the FDIC announced it had rescinded a 2009 statement of policy that restricted non-bank entities’ participation in failed-bank auctions. This Sullivan & Cromwell alert notes that this change was previewed in a speech by the FDIC chairman earlier this month and follows other recent FDIC actions with similar motivations. Here’s some background from the alert:
The Policy Statement prospectively imposed terms and conditions on covered “private investors” in a company seeking to acquire any part of the deposit franchise of a failed bank. These terms and conditions included:
– a prohibition on private investors utilizing “complex and functionally opaque ownership structures,”
– a requirement to disclose to the FDIC information relating to the private investor’s chain of ownership and affiliates,
– a requirement that private investors maintain their investment for a three-year minimum term, and
– a requirement that the investors undertake in certain circumstances to pledge the stock acquired in one depository institution to the FDIC as a form of “cross-support” in the event of the failure of any other depository institution under common ownership by the investors.
The Policy Statement also imposed conditions on the acquiring institution in which a private investor invested, most notably a requirement to maintain a ratio of Tier 1 common equity to total assets of at least 10% throughout the first three years from the time of acquisition and an outright prohibition on extensions of credit to affiliates of the private investor.
The FDIC recognizes that nonbank entities such as private equity firms can play a significant role in the resolution process, given their ability to access and
deploy significant pools of capital. Because the Statement of Policy is more restrictive than certain statutory requirements, and also introduces another point of approval and uncertainty for nonbanks in the failed bank acquisition process, the FDIC believes that continuing to apply the Statement of Policy may have a deterrent effect on private capital investment and inhibit the infusion of a potentially significant flow of capital into failed institutions.
Given the increased speed with which a bank failure may occur, in part driven by the advancement of technology and ongoing evolution of the financial system, these impacts could, in turn, result in considerably increased costs of resolution and risk to the Deposit Insurance Fund. Potential investors willcontinue to be required to comply with existing laws and regulations—including those governing capital, control, affiliate transactions, and antimoney laundering/countering the financing of terrorism requirements— and will be expected to operate in a safe and sound manner following an acquisition. Rescinding the Statement of Policy will improve the ability of nonbanks to participate in the resolution process.
After a US district court vacated the rules implementing the FTC & DOJ’s overhaul of the HSR reporting regime, the FTC appealed the decision to the Fifth Circuit. At the time, due to a temporary stay of the order while the Fifth Circuit considered the FTC’s request for a stay pending appeal on the merits, HSR filings were still being prepared under the new regime. That’s no longer the case, as of late last week.
That’s because a Fifth Circuit panel ruled against the FTC on its motion for a stay pending appeal, so the district court’s ruling is currently in effect. The FTC’s Premerger Notification Program posted these notices:
IMPORTANT NOTICE: On March 19, 2026, the U.S. Court of Appeals denied the Commission’s motion for a stay pending appeal. Therefore, the district court’s judgment vacating the new form is effective immediately. The Commission is now accepting HSR filings using the Form and Instructions that were in place before the February 10, 2025, effective date of the new rule. The agency is in the process of updating its website to effectuate the court’s order and will be making relevant HSR filing materials available for filers soon. The agency will continue to accept HSR filings made pursuant to the February 10, 2025, Form and Instructions should filers voluntarily decide to submit them. (03/19/26)
The HSR Form and Instructions that were in place prior to February 10, 2025, are now available. Additional filing guidance is forthcoming. Please also refer to the PNO’s submission requirements and tips. (03/20/26)
The 2024 Rule Is No Longer in Effect. As of March 19, 2026, the premerger notification requirements have reverted to the prior HSR rule. While transacting parties may opt to file under the 2024 Rule’s form, there is no obligation to do so. Regardless of the FTC’s decision, the Court’s decision will not affect the recently-announced jurisdictional thresholds and filing fees for 2026.
The FTC May Promulgate Revised HSR Filing Requirements. The Court’s decision rests on procedural grounds, not a rejection of the FTC’s authority to modify the HSR form. Given the previous bipartisan FTC support for changes to HSR filing requirements, the FTC still may promulgate a new, more burdensome rule with a more developed administrative record. Dealmakers should not expect a permanent return to the pre-2024 filing regime.
Agency Staff Retain Significant Investigative Tools. Despite the 2024 Rule’s vacatur, FTC and DOJ Antitrust Division staff retain authority to request similar information from merging parties on a voluntary basis during the initial HSR waiting period, and on a mandatory basis at a later stage for transactions that trigger a Second Request. The practical implication: the information the FTC sought to require upfront through the 2024 Rule, including ordinary course business documents, will likely still be requested in transactions that draw agency interest.
A recent Mayer Brown memo discusses the advisability of considering forfeiture for competition (FFC) clauses in acquisition transactions in lieu of the more traditional non-compete agreements. Here’s an excerpt:
Under recent Delaware decisions, numerous non-competition provisions have failed to pass reasonableness muster. Given this uncertainty, we noted in a previous Legal Update . . . that buyers should consider using FFC provisions alongside or in place of traditional non-competition provisions.
Upheld only recently by the Delaware Supreme Court, FFC provisions provide that the buyer will deliver to a party a supplemental benefit (i.e., something distinct from the purchase price, such as the payment of an additional sum of cash), that can be revoked or clawed back if the party chooses to compete against the acquired company. Because FFC provisions provide an incentive not to compete and are not an absolute bar on competition enforced by an injunction, they generally are not subject to judicial reasonableness review.
If your reaction to this is “well, what if we just limit our remedy under the non-compete to damages?” instead of using a FFC provision, it looks like that’s probably not going to work. The memo points to Vice Chancellor Zurn’s letter ruling in Fortiline v. McCall, (Del. Ch; 6/25), in which she held that, because reasonableness review of non-competes is based on the restrictions to which an individual is subject and not the remedy, this kind of workaround would not avoid that kind of review. The Delaware Supreme Court subsequently issued an order affirming the Vice Chancellor’s decision.
My former Calfee Halter colleague Sam Totino recently published a blog addressing issues that sellers should keep in mind when considering rolling over a portion of their ownership interest in the target into a stake in the acquiring entity. This except discusses call option mechanics:
An entire article could be dedicated to “call option” mechanics that are included in nearly all equityholder agreements of a buyer. However, in short, a “call option” is an option available to the buyer to repurchase the equity of the buyer held by a rollover seller in certain circumstances (often triggered by a termination of employment of the seller post-closing). While a full discussion of all the nuances of the mechanics of a call option is beyond the scope of this article, this is one area where sellers really need to pay attention to avoid ending up in a situation the seller may not have bargained for at the time the deal closed.
Buyers can use a call option as a future negotiating tool and a significant source of post-closing leverage over a seller, given that the consequences of exercising the call option may lead to less than desirable outcomes for the seller (for example, the potential in some circumstances for repurchasing the buyer equity held by the seller at a purchase price less than fair market value, the ability to pay any purchase price over an extended term of years, etc.).
While certain rollover sellers may have the leverage to negotiate an elimination of the call option, that may not be possible for many (most) sellers. Therefore, careful consideration should be given to call option mechanics to ensure that, at the very least, the seller understands the “rules of the game” and appropriate limitations on the buyer’s ability to exercise the call option are included where possible.
The blog also highlights the reasons why buyers and sellers may find an equity rollover to be an attractive option and addresses points sellers should keep in mind when it comes to preemptive rights, tag-along rights, and information rights.
Debevoise recently published “Special Committees in Conflict Transactions: A Practical Guide,” which provides practical guidance on the “when, why and how” of the appointment and operation of transactional special committees. Here’s an excerpt from the Guide’s discussion of the selection of advisors to a special committee:
The special committee will generally need legal and financial advisors to help it negotiate and evaluate a proposed transaction. While the company may identify a selection of potential independent advisors for the committee’s consideration (alongside any advisors that the committee may independently identify), the choice must be made by the committee in the exercise of its independent judgment.
Although it may be tempting to use advisors that have a preexisting relationship with the company because of the special committee members’ familiarity with those advisors, those advisors may have their own conflicts of interest or create the appearance of improper coordination between the company and the special committee.
The special committee should investigate any connections that its advisors—including individual deal team members—may have with the parties or other relevant individuals or entities to make sure they are not beholden to anybody else involved in the transaction. It is not required that advisors have no prior, current, or prospective relationships with transaction parties; instead, those relationships must be disclosed so that the special committee can form a view as to whether the relationships are sufficiently material to compromise independent judgment and advice.
The recent material business relationships of any advisors with the company and the acquirer must be disclosed to the company’s stockholders under SEC and FINRA regulations. Insufficient disclosure of advisor conflicts could subject the transaction to entire fairness review. In recent years, courts have focused increasingly on the importance of disclosing potential conflicts on the part of legal advisors.
Other topics addressed in the Guide include when to form a special committee, the selection of its members, what to include in the resolutions establishing the committee, and how the business of the special committee should be conducted and documented.
It’s probably an understatement to say that transactions in which directors, officers or controlling stockholders have conflicts have received quite a bit of attention from courts and legislatures in recent years, so this recent Cooley memo (co-authored by Courtney Tygesson and our own Liz Dunshee) that provides a “playbook” for navigating conflict transactions under Delaware & Nevada law is a timely and helpful resource. Here’s an excerpt from the intro:
Completing your initial public offering (IPO) is an exciting time, with capital inflows taking you to the next level. But if you are getting ready to go public – or recently closed your IPO – it is important to recognize the litigation risks that come with selling stock to the public and operating as a public company.
Those risks are amplified in some ways if controlling stockholders, interested directors or officers are in the mix, which is not uncommon, especially for tech companies. Among other things, the US Securities and Exchange Commission’s rules require disclosing related-party transactions and other relationships. Minority stockholders tend to scrutinize decisions that appear to benefit some holders more than others and may challenge them as unfair.
Your best defense is not a heroic legal argument after the fact. It is boring excellence in process and disclosure, especially in the run-up to and during significant transactions and fundraising rounds. That begins with understanding how corporate law safe harbors and guardrails would apply to the company’s circumstances in various scenarios.
Tracking ownership thresholds and approvals, along with the following baseline good practices – such as keeping careful minutes and disclosing accurate information to the board and stockholders – can save you from trouble down the road.
The playbook lays out, in summary fashion, how to assess transactions that may be “conflicted” for Delaware corporations and Nevada corporations. It also contains a brief “cheat sheet” that provides a high-level summary of the applicable legal standards.
In our latest Deal Lawyers Download podcast, Mike O’Bryan of Morrison & Foerster joined me for a discussion of some of the M&A developments and trends identified in his firm’s recent report. We covered the following topics in this 32-minute podcast:
1. Evolving due diligence practices relating to AI
2. Implications of changing antitrust and national security review regimes
3. Evolving contractual arrangements for “acquihires” and other hybrid transactions
4. Most consequential recent tax law changes for M&A
5. Expectations about how the SB 21 safe harbor will influence market practice in controller transactions
6. Drafting to reduce the litigation risk of earnouts
7. Influence of activism on board’s strategic review processes
8. How regulatory uncertainties are being addressed in acquisition agreements
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at john@thecorporatecounsel.net or Meredith at mervine@ccrcorp.com. We’re wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
In the wake of the Delaware Supreme Court decision in Thompson Street Capital Partners, IV v. Sonova (Del. Sup.; 4/25) that applied the equitable doctrine “common law abhors a forfeiture” to noncompliance with a merger agreement’s notice of claims requirement, a number of drafting changes have been proposed. One such suggestion — by Glenn West in Business Law Today — is that the survival clause state that compliance with the notice provisions is a material part of the bargained-for exchange, combined with “time is of the essence” language. This led Glenn and Mitu Gulati to do a deep dive on time-is-of-the-essence clauses in M&A agreements, which they wrote about in the winter edition of The Business Lawyer.
They were surprised by the application of this equitable doctrine in the context of a seller’s indemnification obligation in Thompson Street Capital. They review the history of the doctrine, which resulted from the court’s reluctance to condition the continued grant of possessory land interests on time-based requirements. Time-is-of-the-essence clauses arose in the context of those land-based relationships. They wondered, with the abhorrence of forfeiture being applied to sophisticated M&A agreements, might a time-is-of-the-essence provision work here too? They started with a survey of the inclusion of this language in M&A agreements, and the results surprised them — and everyone else.
We expected to see few or no time-is-of-the-essence clauses in M&A agreements. Instead, between 2010 and 2025, they appeared in roughly 20 percent of the approximately 4,200 publicly available private company M&A agreements our research assistants examined. Except for a handful, the inclusion of these provisions predates Thompson Street Capital. And when these provisions are used, we found that they typically are more all-encompassing regarding the various deadlines found in a private company acquisition agreement than may have been truly intended or necessary.
They had questions about why these provisions were included in these deals and not the other 80%, and there wasn’t already available data to answer those questions. So they conducted interviews with practitioners, including some who drafted the agreements that contained the clauses.
The response we received during our interviews was that there was either no or only limited familiarity with or understanding of the time-is-of-the-essence provision in the M&A bar—at least prior to the Thompson Street Capital decision. And that 20 percent number surprised almost every lawyer we asked about it, including those who had included a time-is-of-the-essence clause in their own documents.
What did the practitioners they chatted with say about Glenn’s proposed drafting fix? Many were in the early stages of considering how to respond to Thompson Street Capital and were open to the suggestion, but worried about “the law of unintended consequences.” To that end, Glenn suggests a “targeted approach” and provides a possible “boilerplate” clause for consideration. It’s worth your time to read the article in full and consider the suggested “Materiality of Conditions” provision.