Last week, in Paramount Global v. Rhode Island Office of the Treasurer, (Del.; 3/26), a divided Delaware Supreme Court affirmed a prior Chancery Court ruling holding that, under appropriate circumstances, a stockholder could establish a credible basis for suspected wrongdoing based on post-demand evidence and anonymous sources. This excerpt from Gibson Dunn’s memo on the case summarizes the Court’s decision:
Post-Demand Evidence: The Delaware Supreme Court held “under exceptional circumstances, the Court of Chancery may, in the exercise of its sound discretion, consider post-demand evidence that is material to the court’s credible-basis inquiry and not prejudicial to the corporation.” The Court reasoned that there is nothing in Section 220’s text that prohibits the consideration of post-demand evidence. However, the Court endorsed the general rule “that when a stockholder seeks relief under § 220, it will be limited to evidence identified in the demand and the information available to the stockholder when the demand was made.”
Hearsay in Confidentially Sourced News Reports: The Court affirmed that hearsay from anonymous sources in news articles, if found to be sufficiently reliable, can support a credible basis. The Court expressed unease with the Vice Chancellor’s suggestion that “[n]ews articles from reputable publications that rely on anonymous sources will generally be sufficiently reliable for a court to consider when assessing whether a stockholder has a credible basis to suspect wrongdoing,” but was satisfied that the Vice Chancellor did not rely exclusively on the news outlets’ reputations in reaching his conclusion. The Court noted that an inquiry into the reliability of hearsay evidence is “fact-specific” and concluded that the Vice Chancellor’s reliability determination fell “within the permissible range of choices available in this case.”
Chief Justice Seitz and Justice Valihura dissented from the Court’s decision to permit consideration of post-demand evidence. The dissenters noted that “confining stockholders to evidence in existence at the time of the demand discourages stockholders from filing Section 220 litigation lacking a concrete basis at the time of the demand” and incentivizes them “to bring books and records disputes only after the dispute has matured into a concrete dispute or transaction.”
There’s an interesting new letter opinion from Magistrate in Chancery Hume that addresses when optimistic statements by a buyer about its future plans for the target’s business that fail to materialize cross the line and become actionable fraud. Shareholder Representative Services v. Sphera Solutions, (Del. Ch.; 3/26), arose out of the 2024 sale of SupplyShift, a provider of supply chain sustainability and responsible sourcing solutions, to Sphera Solutions.
In the negotiations leading up to the transaction, Sphera Solutions made a number of statements concerning its future plans for the target company. The plaintiff contended that these optimistic statements played a central role in the target’s decision to sell the company and its willingness to agree to an earnout. Magistrate Hume’s opinion identifies four specific statements cited by the plaintiff in support of its fraud and breach of contract claims:
(1) Sphera’s CEO stated that Sphera would market SupplyShift product offerings to “all [its] 7,000 . . . customers.”
(2) Sphera’s Head of Corporate Development stated that Sphera would both substantially increase SupplyShift’s marketing budget and focus on cross selling efforts of SupplyShift products to Sphera customers.
(3) Sphera’s Head of Corporate Development represented that Sphera already had a “substantial integration plan” that would it implement immediately post closing.
(4) Sphera’s Head of Corporate Development articulated to SupplyShift’s CEO that successfully cross-selling Sphera’s lowest price offering to only 7.5% of Sphera’s extant customer base would increase ARR to more than $10 million. Moreover, successfully cross-selling SupplyShift’s average price offering to only 3% of Sphera’s customers would increase ARR by more than $13 million. The ARR benchmark for a full earn-out payment was only $8.5 million.
Sphera responded to the plaintiff’s claims by contending that certain of the cited statements were “mere puffery” and did not rise to the level of fraud. It pointed to the Chancery Court’s statements in Trifecta Multimedia Hldgs. Inc. v. WCG Clinical Servs., (Del. Ch.; 6/24), to the effect that a party’s “optimistic statements praising its own ‘skills, experience, and resources’ are ‘mere puffery and cannot form the basis for a fraud claim” and that “vague statements of corporate optimism” are similarly insufficient to support such a claim.
Citing the Chancery Court’s decision in Trenwick America Litigation Trust v. Ernst & Young, (Del. Ch.; 8/06), Magistrate Hume said that a forward-looking statement goes beyond mere puffery where it is both “sufficiently specific” and “fraudulently conceived,” and that a plaintiff’s fraud claims will survive the pleading stage if “the plaintiff sets forth particularized facts about (1) the circumstances of the promise, (2) inferences that the promise was and (3) defendant’s incentive to mislead.”
Applying this standard, Magistrate Hume held that several of Sphera’s statements were simply puffery, including its representation that it would market SupplyShift’s products to all 7,000 of its customers. However, he held that Sphera’s statements about increasing its marketing budget and focus on cross-selling efforts were a different matter:
But Sphera’s promise to substantially increase its marketing budget and dedicate resources to cross-selling departs mere puffery’s safe harbor into more treacherous waters. While this statement taken by itself could be puffery, SRS’s pleading meets the standard this Court set forth in Trenwick.
According to the language of the complaint, when Sphera’s Head of Corporate Development made this statement, Sphera had already finalized its budget for the following year that failed to devote adequate resources to support its promise to SupplyShift. Moreover, Sphera had every incentive to mislead SRS. The complaint alleges that Sphera induced SupplyShift to enter the arrangement where a significant portion of the purchase price was deferred to the true-up and earn-out stages based on Sphera’s representation.
While the merger agreement for the transaction did include an integration clause, Magistrate Hume concluded that this clause did not include clear non-reliance reliance language, and that as a result, the plaintiff’s fraud claims were not precluded. Accordingly, he declined to dismiss those claims at the pleading stage.
Morris Nichols recently posted the 2026 edition of its “Mergers & Acquisitions: A Delaware Checklist,” which may be downloaded for free at the firm’s website. The 192-page Checklist summarizes essential Delaware decisions addressing fiduciary duties, poison pills, deal protections and other merger agreement provisions, structural issues, appraisal rights and preferred stock and negotiated acquisitions.
EY Parthenon recently issued its monthly report on M&A activity for February 2026. One of the trends noted in the report is the increase in PE sponsor-backed take private deals. Here’s an excerpt:
PE acquisitions increased 9% in February from the prior month, including a continued focus on select public-to-private transactions. Recent take-private activity highlights how financial sponsors are pursuing public companies that exhibit strong underlying assets while facing structural constraints in executing long-term strategic plans within public markets.
By transitioning these businesses to private ownership, PE sponsors can pursue accelerated operational improvements and cost efficiency while selectively repositioning operating platforms toward higher-growth adjacencies or more efficient commercial models. This pattern reflects a renewed conviction in PE’s ability to capture multiyear value-creation opportunities through focused governance and faster decision-making cycles.
Overall deal activity in February showed deal value rising by 139% and volume declining by 15%. EY says this reflects a continuing emphasis on larger transactions. Transactions of $100 million and above are up 224% in value and down 9% in volume on a year-over-year basis, while $1 billion and above deals surged 319% in value and rose 38% in volume.
Alvarez & Marsal recently published the latest edition of its US Activist Alert, which highlights three market trends driving M&A-related activism. These trends are increasing M&A activity driven in part by rising foreign direct investment, an emphasis on portfolio optimization, and an enhanced focus on margin improvement and cost discipline.
The article highlights Elliott Management’s recent campaigns at Honeywell and Pepsico as examples of activists’ focus on portfolio optimization, and sets forth the following considerations for boards and management’s at companies that may be vulnerable to this type of activist campaign theme:
Clear and compelling total equity story: Companies must articulate how each business unit, segment, or product line contributes to strategic coherence and capital efficiency. Not all segments warrant standalone status, and in many cases, assets are stronger together. Management teams and boards that effectively articulate this to the market can build investor conviction in the company’s portfolio and longterm value creation narrative.
Continuous business simplification: Investors are evaluating whether structural complexity, at the segment or even SKU level, obscures value or dilutes management focus. While activists may at times “overshoot” by ignoring or failing to recognize real synergies, companies should proactively assess and explain the rationale for their structures to stay ahead of external pressure.
Disciplined product and segment rationalization: Defenses rooted in legacy synergies or historical strategic fit face heightened skepticism. Arguments for retaining certain assets or segments must be grounded in demonstrable strategic or operational advantages. Otherwise, such arguments may be interpreted as resistance to necessary portfolio discipline rather than evidence of structural advantage.
A&M goes on to say that activists are willing to challenge complexity in a companies’ portfolio of businesses without waiting for underperformance. Instead, they highlight “blurred strategic priorities” and capital misallocation. In this environment, companies need to simplify their business portfolios where appropriate in order to avoid having their strategic narrative coopted by an activist bent on “portfolio optimization” or – as we geriatrics used to call it – a bust-up.
On Wednesday, the FTC and DOJ announced the launch of a public inquiry into the effectiveness of the updated HSR form that was in place for a year until a Fifth Circuit ruling last week. The announcement explains:
The Commission continues to believe that the prior, nearly 50-year-old form is insufficient to review modern mergers and acquisitions. Regardless of the outcome of the litigation challenging the Updated Form, the FTC is considering engaging in a new rulemaking process.
Through the joint request for information, the FTC and DOJ seek to understand whether the requirements of the Updated Form effectively fulfill their intended purpose to:
– Enable the Agencies to identify potentially anticompetitive mergers more efficiently; and
– Allow the Agencies to more quickly determine whether a deal would require the issuance of Second Requests to conduct an in-depth antitrust investigation.
Under the HSR Act, parties to certain mergers and acquisitions are required to submit premerger notification forms that disclose certain information about their proposed deal and business operations. The Agencies use this information to conduct a premerger assessment in the short time allowed under the HSR Act, typically 30 days.
In the joint request for information, the Agencies want to ensure that the requirements of the Updated Form do not impose burdens on filers that outweigh the usefulness of the information provided to the FTC and DOJ. As elaborated in more detail in the RFI, the Agencies are also evaluating whether additional modifications to the Updated Form may be warranted to address developments affecting the HSR review process that have emerged over the past year.
Comments must be received by May 26 and can be submitted at Regulations.gov.
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.