On Friday, Corp Fin posted a handful of new CDIs. Most address questions related to Dodd-Frank clawbacks, but new Exchange Act Rules CDI 253.03 addresses co-registrants in a deSPAC transaction. Here it is:
A SPAC completed a de-SPAC transaction wherein the target company or companies were included as co-registrants on the effective Securities Act registration statement for the de-SPAC transaction. As a result, these co-registrants incurred an obligation to file reports under Section 15(d) of the Exchange Act upon effectiveness of the de-SPAC registration statement. Notwithstanding that a class of securities offered and sold using such registration statement remains outstanding, consistent with the Commission’s discussion beginning on page 204 of Release No. 33-11265 (Jan. 24, 2024), once the de-SPAC transaction has closed, the staff will not object if each target company files a Form 15 to suspend its 15(d) reporting obligations in reliance on Rule 12h-3 as long as the target company is wholly owned by the combined company and the target company remained current in its 15(d) reporting obligations through the date of filing the Form 15.
Ropes & Gray recently published a survey of trends in Private Equity mergers & acquisitions. One interesting development noted in the survey is the increasing use full equity backstops in PE deals. In a fully backstopped deal, the sponsor provides an equity commitment in the full amount of the purchase price, so that the deal will close even if the debt piece of the financing falls apart.
This deal structure has been around for some time, but in recent years, the use of reverse termination fees to provide sellers with some comfort about closing certainty has been a much more common approach. Ropes & Gray says that based on data from the deals the firm’s been involved with, that’s changed over the past year:
The thawing of the financing markets in 2024 made for a more competitive landscape, and PE sponsors increased their use of the “full equity backstop” (as compared to reverse termination fees (RTFs)) to make their bids more attractive. In the more challenging M&A landscape of 2023, the use of the full equity backstop declined in our dataset to the lowest level in five years, and over 60 percent of our 2023 transactions used the RTF construct. However, in transactions that R&G closed in 2024, PE sponsors once again took advantage of the “full equity backstop” structure, and 60 percent of our transactions included that construct, which was the highest percentage that we have ever seen.
The survey also found that financing conditions, which were common in prior decades, didn’t appear in any of the deals reviewed in 2024, and the average size of reverse termination fees for sponsor-backed deals that used that structure remained in the 5 to 6% range.
I’m on record as not being a fan of letters of intent. That being said, a lot of clients are, and every deal lawyer needs to know their way around the barrel full of issues associated with them. This recent Mintz memo provides an overview of some of the key issues that sellers should have a full understanding of before signing up for a letter of intent. This excerpt addresses purchase price adjustments:
In US M&A the standard is for businesses to be purchased on a cash free, debt-free basis and delivered with a normalized level of working capital. It is common for LOIs to simply leave it there; however, sellers should evaluate if it is favorable to have a bespoke calculation of working capital (i.e. specifically including or excluding certain items) and/or separate credits or adjustments to the purchase price for other items such as tax assets.
Additionally, sellers should evaluate if a working capital collar (i.e. a band surrounding the working capital target where no adjustment up or down is made) is appropriate to avoid nickel and diming in the ultimate working capital adjustment. Addressing these points at the LOI stage is more likely to yield a positive result for the sellers as the buyer is more likely to make concessions at this point in order to secure the deal and get the sellers to sign the LOI and agree to exclusivity.
Other topics include indemnification & RWI, earnout considerations, equity rollover arrangements, and exclusivity and other binding provisions of the LOI. If you’re looking for more resources on letters of intent, be sure to check out our “Letters of Intent” Practice Area and the discussion beginning on page 120 of the Practical M&A Treatise.
President Trump’s decision to impose unprecedented tariffs on nearly all countries has thrown markets into turmoil and have added another bundle of legal and business issues for dealmakers to consider as they work through potential acquisitions. This excerpt from a recent Squire Patton Boggs memo highlights some of the tariff-related legal considerations that both buyers and sellers should keep in mind. Here’s an excerpt:
– Due diligence – Consider the impact on valuation and financial metrics, supply chains and production, product costs and profitability, demand and price increases, and the relative effect on competitors. Due diligence should focus on tariff exposure in supply chains, reviewing import classifications and historical compliance with trade laws.
– Purchase agreements – Address tariff-related risks through pricing mechanisms, representations and warranties, and indemnification provisions. Key terms such as “Material Adverse Effect” or “Material Adverse Change” and “ordinary course of business” must be carefully considered.
– Policy matters – Obtain real-time policy advice from experts “in the know” to develop effective strategies to address potential future impacts. Influence policy through lobbying efforts, trade groups or otherwise to ensure you are heard at the right time, by the right people
Other legal considerations identified in the memo include how the changes to the competitive landscape resulting from tariffs may impact the review of a proposed transaction by governmental authorities and the need to develop mitigation strategies to reduce the financial impact of tariffs.
One of the points raised in the excerpt I quoted is the need to consider the implications of the new tariff regime on MAE or MAC definitions. Over on LinkedIn, Prof. Stephen Bainbridge raised the question of whether the fallout from “Liberation Day” would trigger MAC clauses and whether we can expect to see changes in tariff policies join the events that are specifically addressed in future MAC definitions. We may have to wait a bit for the answer to his first question, but it seems to me that’s inevitable that future MAC clauses are going to address the impact of changes in tariff policies in one way or another. After all, experience suggests that every calamity that leaves a scar on dealmakers usually gets added to that list.
I recently blogged about the possibility of constitutional challenges to Delaware’s SB 21. That possibility became a reality last week with the filing of a complaint in a case captioned Plumbers & Fitters Local 295 Pension Fund v. DropBox. The case has been assigned to Chancellor McCormick, but the complaint was filed under seal, so we don’t yet know the details of its allegations. If the challenge is along the lines of what was suggested in that blog, a finding that SB 21 is unconstitutional could create the potential for some pretty significant collateral damage.
Here’s why – as noted in that blog, the argument that SB 21 is unconstitutional is premised on the idea that the Delaware General Assembly doesn’t have the authority under the state’s constitution to restrict the Chancery Court’s equitable jurisdiction to less than what it was in 1792. If that’s right, then at least one other significant statutory provision of Delaware law may be at risk. According to this 2011 law review article by Prof. Lyman Johnson – which Prof. Eric Talley cited in suggesting that SB 21 may be unconstitutional – the ability of LLCs to avoid judicial review of provisions in their operating agreements purporting to waive fiduciary duties also may run afoul of Delaware’s constitution.
While a conclusion that contractual fiduciary duty waivers weren’t bulletproof wouldn’t matter to public companies, it would be a very big deal to thousands of Delaware LLCs, and as the article points out, would make Delaware’s LLC statute much more indeterminant than those of many other states. So, in a worst-case scenario, a challenge to Delaware’s legislative efforts to address uncertainty regarding transactions with controlling stockholders could conceivably result not just in a judicial decision that invalidates key parts of those efforts, but one that creates significant uncertainty for alternative entities organized under Delaware law.
Last year, the Delaware General Assembly added Section 261(a)(1) to the DGCL in response to the Chancery Court’s 2023 decision in Crispo v. Musk. That statute provides, among other things, that a target company may include in a merger agreement a provision that allows the target to seek lost premium damages against a buyer that has breached its obligations to close. It’s been nearly a year since Section 261(a)(1) was adopted, and this recent White & Case memo analyzes the extent to which lost premium provisions have been included in merger agreements.
The authors reviewed merger agreements for public deals announced between August 1 and December 32, 2024 that were governed by Delaware law, had a minimum equity value of $250 million and provided for the acquisition of 100% of the target company’s equity. This excerpt summarizes their conclusions about the prevalence of lost premium damages provisions and the reasons why they may not have been included in some deals:
Of the 38 merger agreements reviewed, 22 of them (58%) provided for lost premium damages and 16 (42%) did not. The fact that slightly less than one-half of the agreements did not provide for lost premium damages is presumably due to the following reasons:
1. As discussed in greater detail below, of the 16 merger agreements that did not provide for lost premium damages, 13 of them (81%) followed the private equity model, which generally limits the target company’s remedies in the event the buyer fails to close the transaction in breach of the agreement to a reverse termination fee from the buyer and the right to sue the buyer for damages capped at the amount of that fee;
2. The outcome of arms’ length negotiations between the parties regarding the issue; or
3. An oversight by the parties in light of the relatively recent adoption of the amendments to Section 261(a)(i).
The memo also discusses the interplay among lost premium damages, other remedies and reverse termination fees, and identifies some key practice pointers.
We’ve recently discussed two Chancery decisions addressing the oft-litigated proper purpose requirement for books and records inspection requests. Specifically, the Amazon and Paramount decisions addressing when a stockholder has a “credible basis” to infer wrongdoing.
This Cleary article says that the Amazon and Paramount decisions may initially appear to point in different directions. In Amazon:
The magistrate judge’s opinion reasoned that while investigations and lawsuits may provide the necessary evidentiary basis for an inspection, the mere fact of their existence is not enough to satisfy the credible basis requirement. Documents related to these investigations and lawsuits at most contained unproven allegations, and the court reasoned that such allegations alone are not sufficient to justify a demand. Indeed, the court reasoned that even detailed government complaints or reports are insufficient without some factual or evidentiary basis, such as attached exhibits, to support them.
Whereas, in Paramount:
To support its showing of a credible basis, the stockholder relied primarily on news articles published in the Wall Street Journal, New York Times, and Financial Times, among others, that reported on the sudden departure of four company directors . . . The Court of Chancery reasoned that, despite many of the news articles’ reliance on confidential, anonymous sources, the articles had been published in reputable news outlets, such as the Wall Street Journal, with a strong editorial reputation, and there were 47 such articles, many of which were lengthy and detailed in their description of the alleged wrongdoing. Because of these indicia of reliability, the fact that they relied on anonymous sources and hearsay statements did not preclude the news articles from constituting sufficient evidence to meet the credible basis standard. The Paramount court specifically contrasted its analysis with a case in which the news articles relied upon by the stockholder lacked external evidence.
But despite these differing outcomes, the article says they both underscore the same basic principle:
Like in Amazon, the Paramount decision reinforced that for third-party documents like subpoenas or news articles to support a Section 220 demand, such articles or other documents must reflect a reliable evidentiary basis for their claims, and not be based on speculation or conjecture. Documents that do not reflect their evidentiary basis should be given no weight in the “credible basis” analysis . . . Mere allegations in unproven complaints or inquiries in subpoenas, standing alone, are not sufficient to satisfy this burden.
After Paramount, news articles too are not sufficient unless they reflect the evidentiary basis of the reporting or show other strong indicia of reliability. In Paramount, it was the detailed factual statements by witnesses and the number of articles in highly respected publications that together constituted sufficient evidence to meet the credible basis standard. Only public or third-party sources that solidly reflect the evidentiary basis for the claims can help a stockholder satisfy the credible basis requirement.
Two important notes on these cases: First, while Delaware’s recently adopted SB 21 changes Section 220, the article points out that these decisions will continue to be relevant. Second, last week, VC Laster certified interlocutory appeal in the Paramount case, saying the “Delaware Supreme Court’s insights on [post-demand evidence and confidential sources] would be helpful and can be obtained efficiently now through an interlocutory appeal.”
WTW recently released the results of its 2024 Acquirers’ Incentive Plan Survey and reported that 56% of respondents provided special, one-time compensation to employees involved in M&A. But these companies typically did not formalize their approach to these special incentives through a policy or written guidelines. Only 16% reported that they had a policy. 45% had a history, past practice or guidelines, but no formal policy, and 39% had no policy or guidelines before doing so.
These awards are generally not provided to top execs, and the target value ranged substantially by employee level. Employees in shared services functions were most likely to be included. More than half of the companies waited until after closing to communicate the awards.
The alert concludes that companies could improve their approach to these special awards to ensure they are delivered strategically. It notes the following “improvement opportunities” identified by survey respondents:
– Set clear objectives from the start against which to measure
– Include different principles/parameters for successful vs. unsuccessful M&A
– Better communicate any changes
– More formal/consistent process for acquisitions
– Reserve bonuses for larger divestitures/integration executive
– Use a more robust framework for varying deal sizes/effort
– Look for a dedicated/more meaningful incentive plan
– Having a checklist/process for bringing on oversees employees
After challenging years of post-Brexit CMA merger reviews, this Fried Frank article points to some promising trends for merger reviews in the UK in the last few months.
With a renewed political focus on positioning the UK as “open for business,” the government has signalled an appetite to recalibrate the CMA’s approach. The abrupt dismissal of the CMA’s Chair in January 2025 and the appointment of Doug Gurr — a former Amazon executive — in his place, underscores a desire for more business-friendly leadership. In March 2025, the CMA announced several initiatives aimed at restoring confidence in the merger regime: a new “Mergers Charter” signalling a more pragmatic and efficient approach to reviews; a consultation on its remedies policy; and a commitment by the CMA to clarify its jurisdictional scope.
This “Mergers Charter” sets forth four principles and expectations regarding how the CMA will engage during merger reviews — and those include improving the pace and predictability.
Pace – faster pre-notification and straightforward Phase 1 reviews: the CMA will aim to conduct reviews as quickly and efficiently as possible and streamline reviews to focus on areas of concern. To this end, the CMA indicated[11] that it was looking to introduce a new ‘key performance indicator’ that will aim to complete the pre-notification phase of a merger review within 40 working days (rather than the current average of 65 working days) and straightforward Phase 1 cases to 25 working days (from the current 35 working days target).
Predictability – revisiting jurisdictional thresholds and better engagement with merging parties during review procedure: the CMA will look to improve the predictability of the merger control regime by clarifying the scope of its jurisdiction—specifically, the circumstances under which it considers transactions in scope for review. To that end, the CMA will launch a consultation seeking feedback on improving transparency on the (currently vague) jurisdictional thresholds (described below). Separately, the CMA will invite increased direct engagement between investors and the CMA in merger procedures (as opposed to current channelling through advisors) to streamline communication and accelerate the review process.
It also says that the CMA will look to use its powers to clear deals with remedies, rather than prohibit them. The alert also notes that, “the CMA’s intention to align with remedies agreed in other jurisdictions reflects a forward-thinking and coordinated approach to global mergers, ensuring that parties are not unduly burdened by conflicting international regulatory requirements,” with the overall goal to make “the remedies process more business friendly.”
Some predicted the demise of SPACs after the new disclosure rules went effective last summer, but this Norton Rose Fulbright memo says companies looking to go public should be seriously considering a de-SPAC as a quicker, cost-effective way to go public during a limited IPO market. While it acknowledges that “regulatory loopholes were the founding principle of SPACs,” it argues that the new rules will improve the process and, by doing so, render SPACs “an even more appealing option.”
Here are a few of the benefits the article says the de-SPAC approach still offers versus IPOs:
– Price certainty: The price discovery process in a traditional IPO typically occurs one day prior to the IPO, at the conclusion of a six-month process of going public. The underwriters typically undervalue the company to provide an advantage to their traditional institutional clients. In contrast, the price discovery process in a SPAC merger typically occurs upfront, typically upon the signing of a term sheet, and is a bilateral negotiation between the SPAC and the target. This process frequently results in a higher valuation of the company.
– Timing: Usually taking 9 to 24 months, traditional IPOs expose businesses to a range of outside economic changes that could compromise valuation and lower investor appetite. The regulatory load related to IPOs, comprised of extensive SEC additional filings and compliance measures, further extends the time period it takes for a company to go public. On the other end of the spectrum, the likelihood of negative market conditions derailing the public listing process is significantly reduced by choosing to execute a SPAC transaction within a six-month window.
– Projections: Critics contend that SPACs are susceptible to inflated valuations due to the excessive scope for speculative projections they allow. Nevertheless, pro forma projections are indispensable for emerging companies that possess disruptive innovation and limited historical performance. In a traditional IPO, historical performance is predominantly considered. In contrast, SPACs allow companies to provide forward-looking projections, thereby being more attractive to such investors who attach premium to a company’s long term economic performance and growth. The problem is not the projections themselves, but rather the necessity for enhanced regulatory oversight to guarantee transparency—a matter that the SEC’s new regulations are attempting to resolve.
– SPAC Sponsors: SPAC sponsors will often raise debt or private investment in public equity (PIPE) funding in addition to their original capital to not only finance the transaction, but also to stimulate growth for the combined company. The purpose of this backstop debt and equity is to guarantee the successful completion of the transaction, even if the majority of SPAC investors redeem their shares. Furthermore, a SPAC merger does not necessitate an extensive roadshow to pique the interest of investors in public exchanges (although raising PIPE necessitates targeted roadshows). Sponsors of SPAC are frequently seasoned financial and industrial professionals. They may utilize their network of contacts to provide management expertise or assume a role on the board.