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 Cloudfare 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…
Last month, the Federal Deposit Insurance Corporation (FDIC) announced that it had approved a notice of proposed rulemaking to modernize and reform FDIC reviews of bank mergers under the Bank Merger Act (BMA). The announcement says:
Notable reforms under the proposed rule would include: accounting for credit unions and centrally booked deposits in the competitive effects analysis; establishing a letter filing process with “deemed approval” for “de minimis merger transactions;” tailoring other merger filing requirements to reduce burden and processing times; limiting and clarifying the FDIC’s discretion to remove a filing from expedited processing; and reforming the FDIC’s approach to evaluating the statutory factors under the BMA. More broadly, the proposed rule would impose discipline around timelines and modernize the framework to better reflect today’s banking environment.
This Simpson Thacher alert says that the proposal contemplates a “more structured and, in several respects, more transaction-facilitative approach, but that “the practical effect of the timing reforms will depend on agency discipline, particularly with respect to completeness determinations and follow-up information requests.” The alert notes “the DOJ, Federal Reserve and OCC have not indicated that they will align with the FDIC’s proposed framework, particularly with respect to competitive effects.”
Comments on the proposal are due 60 days from the date of publication in the Federal Register.
Last week, in Viasat, Inc. v. L3Harris Technologies, Inc. (Del. Ch.; 9/26), the Chancery Court addressed motions for summary judgment in a post-closing purchase price adjustment dispute. The asset purchase agreement provided that any dispute regarding the working capital adjustment would be resolved by an independent accounting expert. When the expert largely resolved the disputed items in buyer’s favor, the seller sued seeking to overturn those judgments on the basis that they were inconsistent with the APA.
The APA established a three-tier hierarchy of accounting principles for calculating adjustments to Working Capital and clarified that the “Reference Statement of Working Capital” shall “take precedence” over GAAP.
Viasat contends that Grant Thornton impermissibly interpreted the legal scope of the “shall take precedence” clause by proceeding to consider GAAP (Tier 2) after concluding that Viasat complied with the Reference Statement (Tier 1) as to the three disputed items. After doing so, Grant Thornton rejected Viasat’s calculations for non-compliance with GAAP, flipping the outcome to L3Harris. L3Harris counters that because the Reference Statement and GAAP are in different tiers, Grant Thornton properly sought to satisfy both requirements when possible. L3Harris also contends that Grant Thornton’s interpretation of certain APA terms is subject to manifest error deference.
On these questions, Vice Chancellor Will sided with Viasat.
L3Harris’s argument that the court should defer to Grant Thornton’s interpretation of the “shall take precedence” clause lacks merit. To be clear, the court defers to the expert’s accounting determinations—such as whether an item constitutes a “loss” or an “account receivable.” But Grant Thornton approached the Accounting Principles as a checklist and evaluated whether Viasat’s calculations complied with the Reference Statement and also with GAAP. Whether that approach is consistent with the text of the APA presents a pure “question of contract interpretation, and therefore, of law” that requires no specialized expertise. Grant Thornton’s interpretation of the “shall take precedence” clause is afforded no deference.
L3Harris’s reading of the “shall take precedence” clause—like Grant Thornton’s interpretation—conflicts with the plain terms of the APA. Black’s Law Dictionary defines “precedence” as “[g]enerally, the quality, state, or condition of going before something else according to some system of priorities.” Applied here, it means that if the Reference Statement resolves an issue, the inquiry ends. If the Reference Statement and GAAP produce conflicting outcomes, the Reference Statement is prioritized and controls [. . .]
Finally, L3Harris insists that this reading of the “shall take precedence” clause is absurd because no reasonable buyer would agree to an approach contrary to GAAP. “An unreasonable interpretation produces an absurd result or one that no reasonable person would have accepted when entering the contract.” It is not absurd, however, for sophisticated parties to negotiate bespoke accounting metrics that depart from GAAP to allocate risk in a post-closing true-up. That L3Harris now wishes it had negotiated differently is of no consequence. “Parties have a right to enter into good and bad contracts, the law enforces both.”
Ultimately, Vice Chancellor Will determined that Grant Thornton misapplied the three-tier hierarchy set forth in the APA with respect to one disputed adjustment because the first tier of the hierarchy, not GAAP, applied. For two other adjustments, she found that it was appropriate that the inquiry didn’t end with the first tier.
Disputed Items 2 and 3 present a different situation. For each, the Reference Statement supplies a procedural mechanism for evaluating an adjustment but, unlike Disputed Item 1, lacks a definitive substantive constraint. For both Disputed Items 2 and 3, the Reference Statement does not fully resolve the disputed issue. Tier 1 is therefore not determinative, meaning that Tier 2—GAAP—applies under the Accounting Principles’ hierarchy.
Last week, in ACON Igloo Holdings, LLC v. Dometic Corporation (Del. Ch.; 9/26), the Chancery Court resolved an earnout dispute arising from Dometic Corporation’s 2021 acquisition of Igloo Acquisition Holdings Corporation (the cooler company) from a private equity firm. This case involved facts similar to the decision I blogged about yesterday, but with a better outcome for the continuing CEO, who discussed but did not pursue actions that might have maximized the earnout at the expense of long-term value.
The agreement contemplated a contingent payment dependent on hitting an EBITDA target by year-end 2022. When it became apparent that Igloo wasn’t going to make the target, its continuing CEO “presented Dometic with a binary choice between strategies he titled ‘Deliver Earnout’ and ‘Optimize Long Term Value.'” (Hm…) At that point, Dometic’s leadership reminded him that “any short-term measures to achieve the earnout had to remain consistent with Igloo’s past practices.”
Eventually, the PE firm seller filed suit alleging that the buyer breached the purchase agreement and the implied covenant “by interfering with Igloo’s ability to operate in the ordinary course during the earnout period.” In a post-trial decision, the Chancery Court disagreed.
To show that Dometic breached the Ordinary Course Covenant, ACON focuses on Vargues’s October 23 email to Allen. ACON contends that the email barred Allen from taking any “short term actions” including “customer campaigns with discounted prices.” “After the email,” Allen was allegedly deprived of “reasonable authority to run the daily operations . . . consistent with the past practices of ACON” because his “team was not permitted to move forward with its planned sales programs and other short-term actions to achieve its EBITDA [t]arget.” ACON’s reliance on this email is misplaced.
This email was not a bar on Allen’s authority to operate Igloo consistently with its past practices before the acquisition. Vargues merely reminded Allen and Peak that the Purchase Agreement required Igloo’s business to be conducted during the earnout period “in the ordinary course of business consistent with past practices.” He further advised them that any short-term measures contradicting the principle stated in the previous sentence (i.e., measures that were not in the ordinary course of business and consistent with past practice) must be approved by Dometic.
The trial record demonstrates that Allen’s proposed measures were not ordinary course actions consistent with past practices. They were last-ditch efforts coordinated with ACON and its counsel to either achieve the earnout through unusual pricing and sales strategies or force a renegotiation. The very titles of Allen’s scenarios—“Deliver Earnout” and “Optimize Long Term Value”—make that plain.
Ultimately, the continuing CEO never implemented the plan to maximize the earnout. From what I can tell, there was talk of shutting down promotions or discounts completely to force a renegotiation of the earnout, but no action on that plan either. So, while the buyer made counterclaims in this case, they were for tortious interference with confidentiality agreements. And while the court agreed that some confidential information was inappropriately shared with the PE firm seller, it also found that the buyer had not proven an injury.