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.
Last week, in In re Saama Technologies Litigation(Del. Ch., 9/26), the Delaware Chancery Court not only rejected a founder’s claim for an earnout payment but also found that he acted in bad faith and breached his fiduciary duties in attempting to maximize the earnout, awarding the defendant buyer $7.3 million in damages for harm the plaintiff caused to its software business. Paul Weiss, which represented the defendant buyer, The Carlyle Group, in the litigation, believes this “is likely the first time a buyer defendant has both defeated earnout claims and won damages on a counterclaim in the Court of Chancery.”
Target company, Saama Technologies, which operated a clinical data platform, was acquired by The Carlyle Group in 2021. Earnout payments were dependent on hitting a revenue threshold and annual recurring revenue bookings that the founder and sellers’ representative knew were difficult to achieve.
After signing the Merger Agreement, Katta accelerated Saama’s strategy to “aggressively win business” and “sell anything by the end of the year” to achieve the earnout. Certain employees were offered “72-27 bonuses” based on their contribution to ARR Bookings. Katta told VP of Customer Success Gondhali that he needed to “aggressively” push the “72-27 goals” or risk being replaced, since Katta needed someone “who [could] drive this upwards and onwards.”
Katta’s plan to achieve the earnout had two main components. First, Saama abandoned its historical pricing discipline […] Second, Katta directed his teams to rewrite contracts to artificially maximize ARR […] [M]any of the […] products sold to customers either did not exist or were in early stage development.
When the earnout statement was received, The Carlyle Group formally objected after PwC’s review questioned the revenue recognition practices reflected in the earnout statement. The business deteriorated post-closing, in part due to the founder’s overcommitments. The founder commenced litigation, and defendants made counterclaims related to the merger agreement’s express terms, the implied covenant and breach of fiduciary duty. As Paul Weiss notes:
Following a five day trial in March 2026 Vice Chancellor Lori Will found that Carlyle’s objection to making the earnout payment was “substantively correct” and made in good faith, and that Katta was “singularly focused on the earnout,” leading him to manipulate contracts, offer unprecedented discounts, and sell products that did not yet exist in pursuit of his goal, “culminat[ing] in an unsustainable trajectory that impaired Saama’s product business.” As the court held, this “was not a flawed business strategy; it was bad faith.” Accordingly, the court entered judgment in Carlyle’s favor on Katta’s claims and granted Carlyle $7.3 million for Katta for his bad-faith efforts to secure the payment.
It makes you wonder whether the founder made himself worse off by filing the lawsuit for the earnout claim. This decision reminds us that earnout disputes may not be purely contractual and that fiduciary obligations underlie a seller’s post-closing conduct when that person continues to manage the business.
Seyfarth Shaw recently published the 12th edition of its “Middle Market M&A SurveyBook,” which analyzes key contractual terms for over 160 middle market (i.e., purchase price of less than $1 billion) private target acquisition agreements signed in 2025 and the first half of 2026. Check out the full survey for info on trends in private target acquisition agreements. For example, they found that earnouts were more common in this latest survey set but the value tied to the earnouts had moderated a bit.
Of the deals surveyed in 2025/2026, 19% included earnouts, as compared to 13% in 2024/2025. In addition, of the deals surveyed in 2025/2026 with earnouts:
– 15% of such deals provided for earnout amounts of 50% or more of the purchase price (as compared to 45% in 2024/2025).
– 67% of such deals provided for earnout amounts between 10% and 50% of the purchase price (as compared to 30% in 2024/2025).
– 18% of such deals provided for earnout amounts less than 10% of the purchase price (as compared to 25% in 2024/2025).
The shift toward earnouts falling between 10% and 50% of the purchase price, rather than 50% or more, suggests that while earnouts became more common in 2025/2026, they are also being structured with more moderate stakes tied to future performance. This is generally a more balanced position for sellers, as it reduces the share of total consideration contingent on post-closing performance while still preserving (and increasing the use of) the earnout as a deal mechanism.
When the FTC issues an HSR Second Request, it may subsequently determine to modify that request if it “determines that a less burdensome request would be consistent with the needs of the investigation.” Last week, the FTC amended Section 2.20(b)(3) of its Rules of Practice to clarify that it may take into account all “relevant factors” in determining whether to modify the request.
The amended rule specifies that relevant factors may include “timing agreement negotiations, the competitive issues involved, the manner in which information and documents are maintained by the recipient, the type of information available to the recipient, the relative burdens to the recipient(s) of producing the requested information, and whether a less burdensome request would be consistent with the needs of the investigation.” This Gibson Dunn memo discussing the amendments offers some key takeaways for dealmakers. These include:
Greater Transparency in Second Request Negotiations. The amended rule codifies factors FTC Staff may consider when negotiating Second Request modifications, providing parties with a clearer framework for engaging with Staff on scope and burden. Notably, the amended rule now expressly states the linkage between modifications and timing agreements—a concept that has long been applied by FTC Staff but had not been codified until now. Parties and their counsel can now point to the enumerated factors—including the relative burden of production and timing agreement negotiations—when advocating for modifications that narrow the scope of a Second Request.
Proactive Engagement with FTC Staff Remains Critical. Parties receiving Second Requests should engage FTC Staff early and proactively regarding the scope of production. The codified factors, particularly those relating to how information and documents are maintained and the relative burdens of production, may provide avenues for productive dialogue about narrowing or tailoring requests.
The memo points out that the amendment applies only to FTC-issued Second Requests, but that it represents a continuation of updates to Second Request procedures by both the FTC & the DOJ. It also notes that substantive standard for the information that the FTC may seek through the Second Request process remains unchanged.
Last month, Meredith blogged about Verisk Analytics v. ExactLogix, (Del. Ch.; 8/26), in which the Delaware Chancery Court held that because a prospective buyer’s actions were the “primary cause” of the FTC issuing a second request that prevented the HSR waiting period from expiring prior to the “drop dead” date, it could not terminate the merger agreement. The Court further ordered the buyer to continue using commercially reasonable efforts to obtain antitrust clearance and to close the transaction if it was obtained.
This Cooley blog says that the decision and the Chancery Court’s approach to the specific performance remedy are sufficient to take specific performance clauses out of the realm of boilerplate and into the boardroom. This excerpt focuses on what the Court did not find regarding the buyer’s conduct in reaching its decision and crafting its remedy, and the implications of that for buyers and their boards:
The striking part is what the court did not find. This was not a classic buyer’s-remorse case where the purported termination was a way to get out of a deal that the buyer regretted post-signing. The court found virtually no evidence that Verisk intended to scuttle the acquisition. Verisk met with the FTC nearly 30 times, hired experienced advisers and lobbyists, and spent almost $8 million responding to the agency.
Verisk lost anyway. Under the language the parties negotiated in the merger agreement, an intentional business decision terminating negotiation of an enhanced integration with a competitor of AccuLynx, was enough to eliminate Verisk’s right to validly terminate the merger agreement if that decision was the “primary cause” of the failed closing condition. This was so, even if that decision was not made in bad faith, not an action constituting a breach of the agreement and not undertaken as a deliberate effort to kill the deal.
For boards and CEOs, that makes Verisk more important than another bad-buyer morality tale. It shows that ordinary post-signing conduct can have extraordinary contractual consequences. A key question that board members should ask their counsel before signing is now: “If the transaction encounters obstacles to closing, what are each party’s continuing performance obligations?” Well-seasoned outside counsel should be able to give precise rationale for each provision’s language and how they interrelate and ensure that the rules of the road between signing and closing are communicated all the way down the chain.