On Monday, in a post-trial memorandum opinion in Chertok v. OnSolve (Del. Ch.; 4/26), the Chancery Court found that a company impermissibly conditioned payment of merger consideration on the plaintiff stockholder executing ancillary documents that contained a release of claims. The merger agreement provided that the buyer “shall not pay any amounts” of the merger consideration to eligible stockholders “unless and until” they delivered stock certificates, an executed joinder, indemnification and release agreement, a letter of transmittal and Form W-9. The joinder, indemnification and release agreement was an annex to the merger agreement.
Plaintiff stockholder demanded appraisal, withdrew, declined to sign the joinder agreement and then, three years after closing, sent a letter asserting he was owed merger consideration and unpaid dividends. The company’s certificate of incorporation included the provisions of Section 262 of the DGCL. In Mehta v. Smurfit-Stone Container Corp. (Del. Ch.; 10/14), the Chancery Court read Section 262 as requiring stockholders who demand appraisal to receive merger consideration when no appraisal petition is timely filed and found that the defendant impermissibly conditioned the withdrawal of the stockholders’ appraisal demand (and payment of their merger consideration) on the stockholders signing a settlement agreement. So now, in OnSolve, the court concluded:
Under Section 262(e) of the DGCL, which is incorporated into the Certificate, OnSolve was obligated to pay the Merger consideration to Chertok after he timely withdrew the appraisal demand. But OnSolve insisted that a stockholder could not receive the Merger consideration unless the stockholder provided all of the Required Deliveries, including the Joinder Agreement. OnSolve earlier conceded, for purposes of the motion to dismiss, that Plaintiffs were justified in refusing to sign the Joinder Agreement as a condition to receive the Merger consideration, because “that release would lack consideration.” The court agreed and held that Plaintiffs had stated a claim for breach of contract by conditioning receipt of the Merger consideration on their returning an executed Joinder Agreement.
At trial, Defendant did not alter its position from the motion to dismiss stage. Rather, OnSolve conceded that it could not compel Chertok to execute the Joinder Agreement as a condition to payment of the Merger consideration. Accordingly, the court concludes that OnSolve’s conditioning payment of the Merger consideration upon Chertok’s returning an executed Joinder Agreement breached the Certificate.
I’m also going to point you to some footnotes now, and I’m not quite sure what to make of them.
– In footnote 84, defendant’s concession cited Cigna v. Audax Health (Del. Ch.; 11/14), in which the court held that the requirement to execute a release to receive consideration was unenforceable because it was not included in the merger agreement and not supported by separate consideration, and which somewhat changed the old approach of throwing releases and joinder language into letters of transmittal.
– And footnote 81, citing defendant’s brief, says “Solely for purposes of this motion, OnSolve allows that Plaintiffs could point to [Cigna] to justify their refusal to execute the Joinder Agreement, which contains a release.”
The court doesn’t otherwise touch Cigna in this decision. But note that the release was part of the joinder annexed to the merger agreement and included in the agreement as a condition of payment – very different than Cigna, where the release was not mentioned in the merger agreement at all. (And somewhat akin to the facts in Jhaveri v. K1 Investment Management LLC, (Del. Ch.; 6/25), which the Chancery Court distinguished from Cigna in footnote 86.) That said, the plaintiff’s appraisal demand was withdrawn post-closing, at which point, when the release was being sought, it’s hard to argue that it was a material inducement to the buyer closing the deal. Maybe I’m reading too much into these footnotes…
Plaintiff also argued that he was entitled to receive the merger consideration without any deductions for bonuses to management or incurred expenses, but the court didn’t buy that argument.
As Defendant indicated, if Plaintiffs’ contention were accepted, “no deal [would] ever happen because . . . anyone who is smart, [] would [] dissent, submit an appraisal and then withdraw it, . . . [to] get a better deal.” That is incompatible with the Merger deal structure and Delaware law.
The court determined the plaintiff was entitled to the merger consideration and dividends, plus prejudgment interest, but not to any other amounts beyond the merger consideration.
In a recent CLS Blue Sky Blog, Baker McKenzie’s Pete Korzynski argues that M&A practitioners may want to ignore the DExit debate when it comes to the choice of governing law for an acquisition agreement. He says that, while recent outcomes pushed some companies to consider other jurisdictions for governing their internal affairs, the choice of governing law for an acquisition agreement primarily concerns the target’s “’external affairs,’ specifically, its relationship to an acquirer.”
That choice implicates two other choices. First, if a dispute arises between the target corporation and the acquirer, what background rules will apply to interpreting the agreement terms? Second, who will apply those rules to resolve that dispute?
While the law of the state of incorporation will govern many parts of the acquisition process, including approval requirements, Delaware may still have a leg up on other jurisdictions, even for Nevada or Texas-incorporated targets.
Parties typically seek predictability and enforceability, and by contrast with states like Nevada and Texas, Delaware has a well-developed jurisprudence – and well-established merger-agreement terms based on that jurisprudence – for (i) managing the target corporation directors’ fiduciary duties and (ii) determining whether a target corporation has suffered a “material adverse effect,” the absence of which is a market-standard condition to an acquirer’s obligation to close a U.S. public company transaction. Equally important, Delaware judges are experienced in handling disputes over sophisticated transactions quickly and strictly in accordance with the parties’ agreement and well-established case law.
He acknowledges that this is all quite complicated:
Given how intertwined corporate internal and external affairs are in a merger, layering Delaware law and courts over Nevada or Texas corporate law is potentially complex. Target corporation stockholders, for example, may bring claims under the corporate law of the target’s state of incorporation with respect to breaches of fiduciary duties related to the transaction ,while the target corporation and acquirer may dispute contract terms in Delaware under Delaware law. Some parties opt for a compromise, especially in an international cross-border transaction. They expressly split the merger agreement governing law and, potentially, forums, providing the state of incorporation for internal affairs and Delaware for all other matters. In making that compromise, parties often seek to retain Delaware law specifically for its developed jurisprudence on “material adverse effects” while focusing disputes related to internal affairs in one jurisdiction.
But he still concludes that other states are simply behind when it comes to developing jurisprudence on fiduciary outs and no-shops and material adverse effects and other elements of acquisition agreements “that have similarly received extensive treatment under Delaware law by Delaware judges,” allowing deal parties to “make informed and enforceable risk allocations through their agreements.”
Gallagher (which recently acquired Woodruff Sawyer) is out with its latest Guide to D&O Insurance for De-SPAC Transactions. In addition to many practical tips for navigating the underwriting process, it suggests some questions you should ask potential brokers before choosing yours.
1. What level of experience does the particular brokerage team you are talking to (not just the brokerage firm, but your particular team) have when it comes to placing D&O coverage for companies going public through a de-SPAC transaction?
It is critical that your D&O insurance broker has extensive and current experience working with companies going public through a de-SPAC transaction. The D&O insurance market for companies going public changes rapidly. Unless your broker is in the market every day, you will miss out on the latest developments in the terms and conditions of your policy, which are critical elements of your negotiated, customized D&O insurance program.
2. What reach does the brokerage team have in the D&O insurance markets?
Ask whether the brokers on your team have extensive and long-term relationships with SPAC D&O and RWI underwriters. Having a broker with years of experience and rapport built into their underwriter relationships can make a significant difference in the terms and pricing of your policies and the speed with which they can be placed.
3. Will the broker be using a wholesaler or making a direct placement?
Many brokers only do a limited amount of public company D&O insurance business, particularly for companies becoming publicly traded for the first time. These brokers may be excellent in other areas but will inevitably have to use a “wholesale” broker to work on your going-public D&O insurance if they do not transact a large volume of this business routinely. That can be a big negative for you, especially if there is a claim, because the person you are talking to will have no relationship with the insurance carrier that will be deciding whether to pay or deny your claim.
4. Can your broker clearly articulate the business and legal risks you face?
There is little chance your D&O or RWI insurance broker will do a good job of ensuring you have insurance coverage for critical risks if your broker cannot clearly articulate them. If your broker is not an expert in understanding the risks you face, you are talking to the wrong person.
5. What experience does your broker have in terms of advocating for coverage payments with carriers on behalf of clients with complex claims?
Many brokers have an anemic claims function at best, and often the same claims person who handles claim auto or workers’ compensation claims is also being asked to handle your difficult D&O insurance or RWI claims. Given the complexity of D&O insurance and RWI claims, this is a mistake. Find out if your broker has specialists who can swing into action on your behalf.
Yesterday, the Chancery Court addressed which forum selection bylaw should apply to derivative actions in the following fact pattern: (1) a company announces a proposal to redomesticate (and adopt a new forum selection bylaw); (2) derivative suits challenging the redomestication are filed in the current state of incorporation, as required by the current forum selection bylaw; and (3) days/hours after filing, company stockholders approve the redomestication and the new forum selection bylaw. (As you may suspect, the company is Tesla and the states are Delaware and Texas.) In In Re Tesla, Inc. Derivative Litigation (Del. Ch.; 4/26), Vice Chancellor David wrote:
Although the plaintiffs advocate for an inflexible rule requiring the Court to assess proper venue based on the facts as they existed when the complaints were filed, courts sometimes look to later points in time when determining venue, such as when the defendant appears or at the time a movant seeks transfer. Courts in other jurisdictions have enforced forum selection bylaws adopted after derivative lawsuits were filed. And the unique facts of this case present a strong case for enforcement, since the Texas forum selection bylaw was publicly announced before these actions were initiated and became effective just days later, before the defendants appeared and any meaningful litigation occurred.
The plaintiffs argue that enforcing the Texas forum selection bylaw would violate two sections of the Delaware General Corporation Law. For reasons explained below, it does not. They also argue that enforcement would be unreasonable or unjust, including because Texas law is less favorable to stockholders. I will not second-guess Tesla stockholders’ chosen forum by purporting to weigh the advantages and disadvantages of Texas law and procedure relative to our own. The owners of the corporation voted to require that derivative litigation be filed in a Texas forum. On the present facts, it is not inequitable to enforce their decision.
As to the claims that enforcing the later adopted bylaw violates Delaware law, the plaintiffs point to Section 266(e), which provides:
The conversion of a corporation out of the State of Delaware in accordance with this section and the resulting cessation of its existence as a corporation of this State pursuant to a certificate of conversion to non-Delaware entity shall not be deemed to affect any obligations or liabilities of the corporation incurred prior to such conversion or the personal liability of any person incurred prior to such conversion, nor shall it be deemed to affect the choice of law applicable to the corporation with respect to matters arising prior to such conversion.
To that, Vice Chancellor David said (citations omitted):
They first contend that enforcing the Texas Forum Bylaw here would impermissibly “affect” Tesla’s “obligation” to litigate the Actions in Delaware as required under the Delaware Forum Bylaw. This argument fails because Plaintiffs never had any vested right or obligation to litigate in a particular forum. “Our corporate law has long rejected the so-called ‘vested rights’ doctrine,” the notion that a corporation’s governing documents cannot be amended in a manner that diminishes or divests pre-existing stockholder rights [. . .]
The Texas Forum Bylaw does not change the choice-of-law analysis; it “merely regulates ‘where stockholders may file suit.’” [. . .] But Plaintiffs say that if Delaware law applies, then under Section 115, Tesla could not adopt a provision in its bylaws that prohibits bringing internal corporate claims in Delaware. This argument also misses the mark. Regardless of what substantive law governs Plaintiffs’ derivative claims, “Section 115 does not apply here” because that statute governs Delaware corporations and Tesla “was not incorporated in Delaware when it adopted the [Texas Forum] Bylaw.”
Plaintiffs also argued that the Texas bylaw is unreasonable or unjust “as applied” and should not be enforced. This also didn’t sway her:
Plaintiffs cannot undermine enforcement of the Texas Forum Bylaw by challenging the Redomestication. A party “cannot escape a valid forum selection clause . . . by arguing that the underlying contract was invalid for a reason unrelated to the forum selection . . . clause itself.” [. . .] Plaintiffs attack the Redomestication, but they do not argue that Tesla’s stockholders were misled about the effect of the Texas Forum Bylaw in requiring derivative litigation to be brought in Texas rather than Delaware courts.
In the latest annual Carve-Out Survey from AURELIUS, approximately 80% of respondents expected an increase in divestitures of non-core businesses in 2026. According to the announcement:
Refocusing on core operations remains the dominant driver of corporate divestment plans for 2026, cited by 73% of respondents (up slightly from 70% last year). Disposing of unattractive non-core assets is again the second-ranked motivator. By contrast, deleveraging has slipped sharply down the agenda: only 5% cite debt reduction this year, versus 9% last year and 52% two years ago. Decisions to divest may be accelerated by global trade tensions, with 72% of respondents feeling rising tariffs and protectionist policies are affecting corporate decisions to divest non-core businesses in 2026.
With that in mind, BakerHostetler recently shared some practical structuring and drafting tips for carve-outs focused on improving deal certainty. For example, the memo discusses considerations for buyers and sellers when including a “wrong pocket” provision.
Because of these complexities and the often-expedited timelines associated with M&A, another way to address the heightened risk of inadvertently excluding – or wrongfully transferring – a certain asset or liability is to include a “wrong pocket” provision within the purchase agreement. This provision requires a party that has misallocated an asset or a liability from within or outside the target to transfer it to the other party post-closing, typically for no additional consideration.
– Buyers will undoubtedly want a broad provision that will allow them to identify any diligence gaps post-closing and retain the benefit of the business they believed they were buying, especially given that they have less visibility into the target business than does the seller prior to closing.
– Sellers, on the other hand, should push to limit the scope to avoid a situation where a buyer is over-reliant on post-closing diligence and looks to cherry-pick assets from all of the seller’s affiliates.
While a wrongpocket provision should be carefully crafted by the parties to ensure it adequately reflects their intent without undue additional risk, these provisions are no substitute for thorough diligence and precise identification of the transaction perimeter.
The memo also discusses tricky issues associated with carve-out financials, TSAs, transferring employees, technology & data, insurance and restrictive covenants.
Enactment of the SB 21 safe harbor for transactions with a controlling stockholder was accompanied by much wailing and gnashing of teeth from plaintiffs’ lawyers. However, a recent lawsuit challenging Skechers’ 2025 controller-backed LBO suggests that anyone who bought into arguments that SB 21 slammed the door on litigation challenging controller transactions may have seriously underestimated the resourcefulness of the plaintiffs’ bar.
This excerpt from a recent “D&O Diary” blog by Sarah Abrams discusses how the plaintiffs in that case have attempted to plead around the SB 21 safe harbor:
The recent Delaware Supreme Court decisions upholding SB 21 and in Moelis could reshape the legal framework applicable to disputes involving controller-led transactions, like the deal outlined in the Skechers Complaint. Transactions involving controlling stockholders that satisfy specified procedural protections, such as approval by a fully empowered and independent special committee and a majority-of-the-minority vote, may now qualify for business judgment review rather than the more exacting entire fairness standard.
Against that backdrop, the allegations in the Skechers Complaint, if substantiated, appear aimed at placing the transaction outside of this emerging safe harbor framework. The plaintiff alleges that the process was dominated by the company’s controlling stockholders, that the special committee was either ineffective or insufficiently independent, and that the transaction lacked meaningful procedural safeguards. If proven, these allegations could preclude application of the more deferential standard of review and instead subject the transaction to traditional entire fairness scrutiny, under which defendants would bear the burden of demonstrating both fair dealing and fair price.
The Skechers Complaint further alleges that the controlling stockholders structured the transaction to provide themselves with differential consideration and ongoing governance rights, including through rollover equity and post-closing influence. The plaintiff appears to advance these allegations in an effort to align the claims with the types of controller conduct that Delaware courts have historically scrutinized under the entire fairness framework. If substantiated, such allegations could reinforce arguments that the transaction was not conditioned on protections sufficient to replicate an arm’s-length process.
The blog goes on to make the point that while the Delaware legislature and its courts have tried to map a clear pathway for controller transactions to receive the protections of the business judgment rule, the ability to achieve that result remains highly dependent on the integrity of the transaction process. In other words, in order to reach the safe harbor, fiduciaries may still need to navigate a fairly narrow channel.
Whatever you may think of the merits of RWI and other transaction insurance products, you can’t accuse the industry of being lacking when it comes to innovation. The emergence of Regulatory Termination Fee, or RTF, insurance is a great example of that. This product is designed to shift the risk of paying a reverse termination fee based on the failure to obtain regulatory approvals away from a buyer and onto the underwriters of an RTF policy.
While an RTF policy’s benefits to a buyer are significant, this White & Case memo notes that its use may significantly change the buyer’s incentives when it comes to the regulatory approval process:
If a buyer’s obligation to pay an RTF is eliminated from the equation or substantially reduced because the obligation is shifted to an insurer, the buyer’s incentive to obtain required regulatory approvals may be meaningfully reduced. This is particularly true because in most transactions (particularly those in which the buyer is a private equity firm or other financial buyer), in circumstances where the buyer is obligated to pay the seller or the target an RTF, the recovery of that RTF by the seller or target is usually the sole and exclusive remedy for the buyer’s breach of the transaction agreement.
Accordingly, if a buyer can obtain RTF insurance for the cost of the premium, and its only exposure in the event all required regulatory approvals cannot be obtained is the amount of the retention or deductible under the insurance policy, the buyer may be more likely to conclude that the economic and other costs of any required regulatory remedy or other action exceed the transaction’s economic and other benefits to the buyer.
While a retention or deductible under an RTF insurance policy will leave a portion of the RTF exposure with the buyer, this portion will usually be relatively small as a percentage of the amount of the RTF, and a competitive RTF insurance market will likely work in favor of buyers in this regard.
Although the memo notes that specific performance provisions may help keep the buyer’s feet to the fire, it says that because regulatory efforts clauses are often open to broad interpretation, it may be difficult to obtain an order that would allow a seller to obtain specific enforcement of such a clause.
A recent FTI Consulting report says that cyber-attacks occur frequently following the closing of an M&A transaction, and that most companies aren’t adequately prepared to prevent those attacks. Here are some of the report’s rather alarming takeaways:
Impact on Deal Value and Post-Transaction Targets: More than two-thirds of those who experienced a cyber incident during or after a transaction claim it had a negative impact on the transaction in some capacity. Nearly half claimed the deal value was reduced as a result of the cyber incident, and another 20% stated that the transaction was paused or delayed. A majority (58%) believe the incident impaired the company’s ability to reach financial targets after the transaction.
Minimized Role for CISOs in Decision Making: A plurality of CISOs do not have a seat at the table during transaction due diligence, with one in three indicating they do not believe they have the ability to kill a transaction if the risk to the organization is too high during or after a transaction.
Disconnect between Growth Goals & Cybersecurity Risk: Pressure to close deals quickly comes at the expense of carefully weighing cybersecurity defenses (or lack thereof) during the due diligence process, exacerbating the somewhat inherent tension between growth and risk mitigation.
Cyber Integration Post Transaction is a Significant Challenge: Most organizations struggle to align and integrate their cybersecurity protocols and procedures post-deal, with 84% of survey respondents citing challenges in harmonizing IT systems and policies.
Companies are Targeted and Potentially Exposed at a Critical Moment: One in four respondents admit that their organization experienced a cyber incident within 24 months after closing a transaction, revealing lasting, real-world consequences for those who do not coordinate their cybersecurity and deal teams.
FTI says that one striking observation is the extent to which companies drop their guard post-closing. The report notes that during a transaction, 50% of executives say they take a fully proactive approach to cybersecurity risks. Post-closing, however, only 23% of executives saying they manage cybersecurity risks proactively.
Investors in portfolio companies that are attractive IPO candidates often pursue a “dual track” exit strategy that involves preparing for initial public offering while also soliciting potential buyers for the company. Done properly, this dual track process can help investors maximize the valuation of their investment by allowing them to choose the path that looks most attractive as conditions evolve.
If you’re working with a company that’s thinking about a dual track exit strategy, be sure to check out this Cooley blog, which discusses some of the things that companies and their advisors should consider before going down this path. This excerpt discusses how to determine which track is most likely to result in the highest valuation:
The valuation of a business by public markets versus a financial or strategic buyer can vary significantly. IPOs are affected by stock market sentiment, volatility and comparisons (whether valid or not) with the recent trading performance of peers. When equity markets are strong, the IPO track can act as a “stalking horse” in eliciting M&A buyers. Valuation in an M&A process, on the other hand, is often driven by considerations such as realizing synergies, pursuing short- versus long-term business plans, obtaining critical assets (often intellectual property), and benchmarking off of industry consolidation trends and recent comparable transactions.
The factors that shape the ultimate choice include:
Valuation dynamics: Does the M&A market fairly value long-term potential? Is an acquirer offering a premium that reflects its strategic rationale?
Execution risk: Are there concerns around market conditions or investor appetite? Is an M&A transaction actually actionable?
Strategic vision: Does the company prefer independence or believe it can achieve greater impact as part of a larger organization?
What makes a dual-track truly effective is leverage. The question is whether a credible IPO story can be maintained in parallel to creating heat in the auction and how speed through diligence, deal terms and consideration can be leveraged in the most effective manner.
Something to remember: Testing the waters remains essential. With a private sale, it will never be possible to know with certainty how the stock market would have valued a business for comparison. However, pre-IPO companies can and should take the opportunity to assess market receptivity by taking advantage of confidential meetings with investors – dubbed “testing-the-waters” meetings in the US – that carefully comply with applicable regulations. These meetings provide valuable intelligence about where public market investors are likely to price your company and thereby indirectly inform how aggressively you should be pushing M&A buyers on valuation.
Other considerations addressed by the blog include the need for stakeholder buy-in, the company’s viability as an IPO candidate, whether investors desire a complete exit, the time frames involved in a dual track process, and the ability of the team to execute two processes at once.
Faegre Drinker’s Oderah Nwaeze and Angela Lam recently put together this handy overview of Delaware’s fiduciary duty of disclosure. The article reviews what the duty of disclosure requires, the settings in which disclosure claims are typically brought, and offers some guidance to boards on how to satisfy their duty of disclosure. This excerpt discusses one area where disclosure claims frequently arise – management projections:
– Delaware law does not require disclosure of all financial projections, especially if they are speculative, unreliable, or not relied upon by the financial advisor.
– But financial projections made in the ordinary course of business and used by financial advisors are typically considered reliable and should be disclosed if relied upon.
– The failure to disclose financial projections may be considered a material omission depending on the specifics.
– And selective disclosure of only some projections can be misleading, causing courts to find that the partial disclosure was inadequate if omitted information would be material to a reasonable stockholder.
Other sources of disclosure claims identified by the authors include financial advisor compensation and conflicts, descriptions of the merger sale process, and director nominations and removal.