A recent Fried Frank article (plus summary HLS blog) discusses Delaware Court of Chancery decisions – Roofers Local v. Fidelity National(Del. Ch.; 5/25) and Wei v. Levinson(“Zoox”) (6/25), which we’ve blogged about before – that highlight the unpredictability of outcomes where entire fairness is applied. Because both of these involved litigation pending prior to February 17, the recent DGCL amendments were not applicable, and neither case involved a transaction structured to comply with MFW.
In Roofers, the court dismissed the case at the pleading stage, holding that although the process may have been flawed, the price appeared to be fair.
In Zoox, by contrast, the court rejected dismissal of the case at the pleading stage, holding that the allegations that a majority of the board that approved the transaction was conflicted was itself sufficient to indicate that both the process and the price may have been unfair—even though the transaction at issue appeared to provide more value to the stockholders than any other transaction proposed to the board.
The alert says, context matters:
Roofers involved a transaction with a conflicted controller – but the transaction was approved by two concededly independent directors, and the process was apparently pristine other than for a question about fairness based on the timing of the parties’ announcement of the transaction. The independent special committee was fully authorized, functioned well, and was focused on ensuring that the transaction be on terms at least equivalent to “a public market deal.”
Zoox, involved a sale to a third-party buyer following a process with multiple bidders, none of whose proposals provided as much value to the common stockholders – but the transaction was approved by a majority-conflicted board. There was no “distance” between the Preferred Stock holders and the directors they had appointed; the officer-directors were promised material non-ratable personal financial benefits; and the officer-directors had spoken of “forc[ing]” the deal on the stockholders.
But here’s the key: Both transactions “could have met the requirements for safe harbor protection (if the Amendments had been applicable) based on approval by the special committees.” Here are practice points from the blog in light of these differing outcomes and the March DGCL Amendments:
– Consider structuring conflicted transactions to come within the new DGCL safe harbors. The requirements for availability of the safe harbors are far easier to satisfy than the MFW prerequisites for business judgment review, particularly as (other than for going-private transactions) only approval by an independent special committee (and not by the minority or disinterested stockholders) is required.
– Consider including at least two independent directors on the board—so that conflicted transactions can be structured to come within the new safe harbors. The board should establish a record, when making independence determinations, that it obtained all relevant information and carefully considered the issue. Preferred stockholders appointing directors should carefully consider the benefits and disadvantages of appointing directors who hold control or leadership positions with the preferred stockholder.
– Contextualize fairness of price.When entire fairness applies (i.e., when the new DGCL safe harbors and MFW are unavailable), it still may be possible to obtain pleading-stage dismissal of fiduciary claims challenging conflicted transactions—at least where, as in Roofers, the plaintiff fails sufficiently to allege unfairness of the price and there was a strong (even if somewhat flawed) process. Analysis of fairness of the price should include what the company received in exchange for what it gave, as well as a comparison of the terms to what would be market. Although fairness of the price may be the predominant consideration, fairness of the process always should be addressed as well, no matter how fair the price.
– Other process points:
A special committee should establish a record that it considered alternatives, and the reasons it rejected them.
A buyer, to protect against claims of aiding and abetting sell-side fiduciary breaches, should maintain a record of deal term concessions made during the negotiations.
A transaction generally should not be announced before the special committee has done any work.
Management and directors should avoid statements about a personal vision, mission or dream for the company—although the court’s view as to whether such statements indicate motivation based on “personal interests” will no doubt depend on the specific language used and the overall factual context.
Management and directors should understand that comments they make to a counterparty during a sale process, purportedly “off the record,” are likely to come to light in the event of litigation and could have serious negative consequences.
In 2023, as part of a broader transaction, Dr. Jeffrey Alexander (defendant) purchased an ownership interest in Weil Holdings II, LLC (plaintiff), a holding company that owns multiple companies that operate in the podiatry industry, including Weil Foot and Ankle Institute (WFAI) and executed the plaintiff’s LLC agreement, which contained a noncompete provision that prohibited him from competing against the plaintiff or an “affiliate practice” within the “restricted territory” for so long as the defendant held an ownership interest in the company and for two years afterwards . . .
[After] WFAI terminated the defendant’s employment and the defendant subsequently began practicing podiatry at an alleged competing practice. The plaintiff brought suit, seeking, among other things, to enforce the noncompete.
The parties disputed whether the non-compete should be treated as one entered into in the sale of business context — which is “subject to a ‘less searching’ inquiry than if the covenant ‘had been contained in an employment contract.” On the one hand, it was included in an LLC agreement, as part of a private equity investment, and defendant made representations to his financial sophistication. On the other hand, it was not part of a sale of a business, and defendant did not negotiate the terms. There was a factual dispute about the degree to which the defendant could have negotiated the LLC agreement but the court decided it was immaterial — neither a “more” or “less” searching inquiry would change the outcome, which “not a close call.” The court found:
[T]he duration of the noncompete was potentially indefinite, rendering it invalid, because the LLC agreement did not afford members a mandatory redemption right. While the LLC agreement gave the plaintiff the option to repurchase the defendant’s ownership interest, this did not matter for purposes of the court’s analysis because the defendant did not have the power to divest himself of his ownership interests and therefore start the clock on the two-year tail period.
[P]reventing the defendant from practicing podiatric medicine in four states, including two where the defendant had never practiced, is not appropriately tailored to protecting the plaintiff’s legitimate business interests. The court was also concerned that the restricted territory could change because it was tied to affiliate practices as the defendant expanded the location of its practices or opened entirely new practices.
The alert notes that this term — ownership period plus a two-year tail — is common in private equity. The decision is on appeal but, if it stands, may mean that sponsor-backed companies should re-evaluate the scope of their restrictive covenants.
While it is standard practice to require members, including employees, to sign onto LLC agreements with noncompetes, these restrictions must still be reasonable in both duration and geographic scope, otherwise the restrictions are likely to be invalidated completely if challenged.
– If the durational scope of the provision is tied to the member’s ownership of interests in the company, the member must be able to divest their interest to start the clock on the noncompete tail. This could be accomplished with a put right that requires the company to repurchase the ownership interest upon termination of the employment relationship at a stated price depending upon the circumstances.
– If the noncompete is tied to a geographical area, those areas should ideally not be subject to change and should only prohibit competition in areas necessary to protect the company’s legitimate business interests.
This Skadden memo reviews recent Delaware decisions addressing M&A indemnification provisions and says that those decisions underscore the importance of avoiding ambiguity in defining the scope of indemnification, identifying when compliance with a provision is material, and determining damages. Here are some key takeaways:
– Each case featured allegations of noncompliance with law, an area fraught with the potential for loss. Although devoting more attention to drafting compliance provisions may increase costs and time to close, the added certainty may be worth the price to avoid litigation. Additionally, sellers need to take steps to ensure that their companies are in compliance with the law to limit the possibility of litigation.
– If a post-merger agreement modifies indemnification provisions, the parties should assess how fraudulent inducement and other claims may interact in order to avoid ambiguity in their modifications.
– Contracting parties need to carefully draft the notice requirements for indemnification: (1) to create a condition that is material to the exchange under the Restatement (Second) of Contracts § 241 factors, or (2) if the condition is immaterial to the exchange, the parties should avoid drafting a notice provision that would cause a disproportionate forfeiture under Restatement (Second) of Contracts § 229
The memo also recommends specifying the multiple or liquidated damages that would apply in the event of a breach of representations regarding key contracts instead of facing the possibility of needing to expend resources to prove damages with expert testimony, and says that the decisions highlight that a record of the parties negotiations may be decisive at trial in establishing the meaning and materiality of a contractual term.
According to this McKinsey article, carveouts account for almost 30% of all M&A transactions. There are good reasons why carveouts are attractive to buyers and sellers, but they also present unique integration challenges because of the need for coordination between the parties. The article offers some advice on how to address the integration issues associated with carveouts. This excerpt discusses how the parties can create day-one readiness and prepare for post-closing integration:
– Determine prioritization. Unlike more straightforward integrations, buy-side carve-outs demand extra focus on identifying entanglements and day one separations and cut overs. In these situations, the final design of the organization and other complex initiatives may need to be temporarily deprioritized, depending on the team’s capacity.
– Run a joint day-one-readiness workshop. As a deal’s close approaches, it’s beneficial to run a day-one-readiness workshop with all parties. This group can focus on a detailed sequencing of activities that will take place before, during, and after the deal’s close. Exploring what-if scenarios in a cross-functional group setting is helpful to align responsibilities for each required step and ensure that all needs are covered and risks mitigated.
– Prepare for the unexpected. The complexity of a target’s simultaneous separation and integration may lead to unforeseen issues, regardless of preparation. Setting up a robust day one hypercare effort with rapid escalation processes can be critical to minimizing disruptions.
The article also provides recommendations on how to foster alignment between the buyer’s and seller’s integration teams and on scoping and providing resources for work streams.
The Committee on Foreign Investment in the United States recently delivered its 2024 Annual Report to Congress. This Fried Frank memo reviews the report. Here are some of the highlights:
– While CFIUS remained busy in 2024, the 325 total filings it reviewed was below the level of prior years. This slowdown likely reflects the overall pace of deal-making in 2024.
– The CFIUS process was more efficient again in 2024, with decreases (or no change) in both the number and percentage of notices proceeding to investigation, declarations that required a subsequent notice filing, and withdrawn notices. However, CFIUS was still responsible for scuttling four deals in 2024.
– CFIUS remained very active in enforcement and monitoring in 2024. It requested filings for 12 non-notified transactions, imposed four penalties for violations of mitigation agreements or CFIUS regulations, and issued additional notices of noncompliance for failure to make mandatory filings. The President also blocked two transactions that CFIUS reviewed in 2024.
The memo notes that the report indicates that China was once again the largest filing country, but that the number of notices filed by Chinese acquirers was still below 2022 and 2023 levels. The memo says that the decline in the number of notices filed by Chinese buyers is “likely a product of the perceived hostile CFIUS environment and particularly strict scrutiny by CFIUS of inbound Chinese investment.”
The SEC’s Division of Corporation Finance threw a bit of a monkey wrench into this year’s proxy season when it issued new and revised CDIs that narrowed the scope of investor engagements that could be undertaken without investors risking their eligibility to use Schedule 13G. Many investors responded to Corp Fin’s guidance by either pausing engagements with the companies in which they invest or by adopting a more conservative approach to those engagements, and it’s fair to say that their approach is continuing to evolve.
A recent article by H/Advisors Abernathy offers some suggestions for boards and management teams on how to respond to this evolving environment. Here are some of the firm’s recommendations:
– Use offseason to deepen or refresh investor understanding of governance, valuation and growth strategies. Engaging with investors now can help uncover concerns about corporate governance and other matters ahead of the next proxy season and enable companies to incorporate feedback from conversations into their proxy statement and related disclosures. These conversations also can serve to strengthen relationships with investors and build trust, which can be critical to garnering support in the event of an activist campaign. Additionally, regular investor engagement in the offseason helps you stay on top of new vulnerabilities and concerns and mitigate risks in advance.
– Review and enhance the proxy. A company’s proxy statement continues to be the most effective tool to communicate with investors. Conduct a thorough review of the disclosure in light of changing engagement regulations to ensure the proxy can truly stand on its own as an annual investor narrative vehicle. Elevate the content to contain bigger picture themes, as the upfront letter, director descriptions and compensation sections will carry greater weight in this environment. The aesthetic matters too, and a refreshed proxy design can help bring the story to life.
– Build an owned, outbound communications pipeline. In an era where issuers may not be able to rely on learnings from engagement with investors, it is even more important for companies to execute an investor-focused campaign of outbound communications. Build your IR website into an investor-focused news hub, with “owned” content and news flow designed to help manage investor perception and control your narrative. Execute a more assertive, yet disciplined, campaign of media interviews, appearances and coverage to amplify your company’s results, track record and differentiators.
The article also recommends developing a customized digital content strategy to help reach investors quickly and identifying – and appropriately preparing – members of the board who are effective communicators to respond to particularly difficult situations.
– Activists have won 86 board seats in US companies during the first half of 2025, an increase of 16% over the same period in 2024, primarily due to an increase in settlements (37 in H1 2025 v. 28 in H1 2024). Almost half of the settlements during H1 2025 came through private negotiations without a prior public campaign announcement.
– Proxy fights have proven more successful for activists so far this year than they were last year. Activists won seats in four of the eight U.S. proxy contests that went to a vote in H1 2025, winning 38% of the seats they sought. In the prior comparable period, activists won seats in 23% of proxy contests and gained 15% of the seats they sought.
– During H1 2025, ISS and Glass Lewis supported 69% and 85%, respectively, of dissident nominees. Last year, ISS and Glass Lewise supported 29% and 37%, respectively, of dissident nominees. ISS-backed candidates ISS won 56% of the time this year vs. 50% of the time during the prior period. Glass Lewis-backed candidates won 50% of the time this year and 40% of the time last year.
– The most popular activist objectives were board change (43% of global campaigns), M&A (33%) and strategy & operations campaigns (25%). Reflecting the more challenging M&A environment, demands for M&A were well below their 45% four-year average.
– The lines between activists and sponsors continue to blur as activists partner with PE sponsors to catalyze sales and PE sponsors increasingly engaging in activist tactics.
The report cites KKR’s “white squire” investment in Henry Schein as an illustration of its point about the blurring of lines between sponsors and activists.
It seems the days of RWI being limited to deals of $50 million or more are over. This Woodruff Sawyer blog says that RWI providers are now offering products with features that make sense for smaller deals.
Small deals have always faced a structural mismatch with RWI. The diligence burden, underwriting timelines, and fee structures were designed for complexity and scale. For a $20 million add-on, the traditional RWI process can feel disproportionate, both in terms of cost and time. Insurers are now responding with products that preserve the core value proposition of RWI—risk transfer, deal certainty, and clean exits—while eliminating friction.
It describes two new offerings — MIO Fusion and Blue Chip Aqua — and says that these signal a broader shift in the market for RWI — which is moving toward more options with tiered offerings to align with deal size & complexity and the sophistication of the buyer. In fact, this Horton Group blog says they’ve seen coverage for deals as small as $5 million and premiums for as little as $30,000.
Woodruff Sawyer predicts other innovations in the RWI market, including:
Automated Underwriting: AI-driven platforms that reduce underwriting time from days to hours
Modular Coverage: Buyers select specific reps or risk areas, reducing cost and complexity
Integrated Solutions: RWI bundled with escrow, tax indemnity, or post-closing support
Don’t ignore Vice Chancellor Will’s opinion in Edwards v. GigaAcquistions2, LLC (Del. Ch.; 2025) just because you see right on page one that the claims were dismissed in full for either standing issues, the statue of limitations or being not reasonably conceivable. Give it some time because this Fried Frank briefing says, “Edwards indicates that the court may refuse to toll the statute of limitations for fraud where it perceives that the party who allegedly received false information engaged in a due diligence process that, in the court’s view, was limited.”
In Edwards v. GigaAcquistions2, LLC (July 25, 2025), the Delaware Court of Chancery dismissed a case, at the pleading stage, in which former members of Cloudbreak Health, LLC, a high-performing health care company, claimed that Cloudbreak was fraudulently induced to join in a de-SPAC combination with a group of financially distressed health care companies (the “Portfolio Companies”). The combined company went bankrupt post-closing. Cloudbreak had received oral assurances and management presentations indicating that the Portfolio Companies were financially sound and positioned for success. A few years after the closing, it came to light that the information about the Portfolio Companies’ financial wellbeing, that had been provided by the Portfolio Companies, their financial advisor and the SPAC sponsor, was false. The court dismissed the plaintiffs’ claims on several grounds—most notably, refusing to toll the statute of limitations for fraud, which had lapsed shortly before the suit was filed.
As the briefing notes, when refusing to toll the statute of limitations for fraud, “the court emphasized that Cloudbreak—rather than relying on the oral statements and management presentations provided to it—could have “request[ed] additional information on [the companies’] financial wellbeing.” The court rejected the plaintiffs’ argument that, as the companies were privately held, the information about them was entirely in the defendants’ hands and therefore undiscoverable.”
The “fundamental due diligence dillema” highlighted in the decision — i.e., that due diligence responses are provided by people acting on behalf of your counterparty and requesting additional information may simply mean getting more false information — just underscores the need to view diligence responses with a healthy dose of skepticism and to specifically address any particularly important (or potentially suspect) information in reps and warranties. The alert then provides some practice points on running a strong diligence process, and also this tip for buyers to quickly validate information post-closing:
Post-closing diligence review. We note that, where in the due diligence process a company was portrayed as financially sound, and post-closing the company is failing, a post-closing diligence review should be considered so that possible fraud (or breach of representations and warranties) can be established before expiration of the statute of limitations (or any agreed indemnification period). A post-closing checklist should be maintained to serve as a reminder of important dates and deadlines under law or set forth in the parties’ agreement.
And don’t forget to check out the great resources posted in our “Due Diligence” Practice Area here on DealLawyers.com.
Last week’s Chancery Court decision in Arthur J. Gallagher & Co. v. Agiato (Del. Ch.; 7/25) involved a dispute, not about earnout milestones, but about whether conduct by sellers’ founder (who also acted as sellers’ representative) relieved the buyer from making an earnout payment. The asset purchase agreement provided for a $50 million upfront purchase price with $150 million in possible earnout payments if the newly formed division of the buyer (run by the sellers’ founder) achieved certain Net Commissions and Fee Income thresholds. After initially delivering an earnout statement that excluded certain cash payments buyer felt should not count towards the total, the buyer eventually stipulated in the litigation that the amount of cash generated and received by the new division equaled or exceeded the first earnout threshold. It nonetheless argued that it was excused from paying the earnout because, it alleged:
The founder failed to conduct the business of the new division in accordance with buyer’s business practices, policies, and procedures and failed to manage the division for the long-term benefit of buyer’s shareholders;
The founder failed to comply with his Employment Agreement; and
Certain representations and warranties in the APA were inaccurate.
Vice Chancellor Will was not persuaded that these were conditions precedent to the earnout.
Although “‘[t]here are no particular words that must be used to create a condition precedent,’ a condition precedent must be expressed clearly and unambiguously.” “Parties’ intent to set a condition precedent to performance may be evidenced by such terms as ‘if,’ ‘provided that,’ ‘on condition that,’ or some other phrase that conditions performance” connoting “an intent for a condition rather than a promise.” . . .
None of these provisions bear on whether Gallagher owes the Year 1 earnout. Although Gallagher requests I imply conditions to payment of the earnout, Delaware courts “cannot rewrite contracts or supply omitted provisions.” The APA places no conditions on payment of the earnout once the NCFI threshold is achieved. Because it is undisputed that the NCFI threshold for Year 1 was met, the corresponding earnout payment is past due and owed to the Sellers.
VC Will also determined that she needn’t resolve whether the APA was breached since that was irrelevant to whether the earnout was owed.
Such a breach would provide it with grounds to seek indemnification—not to withhold the earnout. The APA sets out an intricate process for one party to obtain remuneration from another for “breach of, or . . . failure to fulfill, any representation, warranty, agreement, or covenant” in the APA. It describes the process for making a written claim, and sets both a base amount required to seek indemnification and a cap.
The Escrow Agreement facilitates the APA’s indemnification process by ensuring that funds are set aside to compensate Gallagher for a valid indemnification claim. The APA’s earnout provisions omit any reference to indemnification process. The APA also does not condition earnout payments to the Sellers on their fulfillment of the representations and warranties in Section 6. The sole condition to payment of the Year 1 earnout is meeting the NCFI threshold, which has indisputably occurred.
On this issue, VC Will granted the motion for partial judgment by sellers’ representative and ordered the payment of the first earnout amount, with interest.