We’ve all seen the staggering statistic that one-third of all VC dollars invested in 2024 went to AI startups. AI is also a huge driving force behind M&A activity these days as companies look to use M&A to increase their AI capabilities. That means M&A practitioners have been forced to deal with the unique risks of acquiring an AI-focused company and how to address these risks in agreements.
This Torys memo says that AI-specific representations and warranties are increasingly being used for this purpose — especially when AI is a critical element of the target’s business. The memo includes a non-exhaustive list of AI-related considerations for reps and warranties, which relate to the scope of AI, AI training and data use, ownership and license, use and functionality, governance and oversight, use of third-party AI or open-source code, compliance with law/industry standards and incidents/litigation. Here are a few examples:
– [W]hether AI should be a defined term and, if so, the potential scope of the definition. Definitions of AI should generally be drafted considering the ordinary meaning of “artificial intelligence”, which includes AI beyond genAI and the factual matrix surrounding the transaction.
– Depending on the circumstances, whether the target’s personnel have sufficient internal expertise to perform the various applicable oversight, use, maintenance, and similar functions within the organization may also be a consideration.
– In certain circumstances, buyers may seek to confirm AI models have sufficient logs and that results are sufficiently explainable and auditable.
– Where there is a lack of consensus as to the relevant industry standard, or where such standards are underdeveloped, parties may be better served by drafting properly scoped sector-specific representations to address compliance.
– The parties should consider whether there are any (i) instances of the target’s use of AI causing harm to individuals or demonstrating an undesired bias; (ii) complaints regarding the target’s use of AI; or (iii) threatened or pending litigation relating to the target’s use of AI.
This Cooley M&A blog takes a look at 2024 activism trends. One of the oft-cited 2024 trends is the targeting — and subsequent replacement — of CEOs. As the blog explains, “activists had greater success in driving executive shakeups, logging 27 CEO resignations following the launch of a campaign (an all-time high, representing a 69% increase over the four-year average and a 170% increase since 2020).”
2024 may seem like a lifetime ago, but proxy contests are up and these trends are still relevant and top of mind for boards and activism defense counsel — as was very evident from the engaging panel “Shareholder Activism and the Polarization of ESG and DEI” at Tulane’s Corporate Law Institute earlier this month. The Tulane panleists noted that criticism of a company’s strategy and operations has always been an indirect criticism of management, but that activists focus on leadership when the board isn’t taking the hard steps to make change when it’s needed. At the same time, one panelist noted that the 2024 data may not solely reflect activist influence since some of the boards may have already been contemplating or preparing for change in management.
CEOs and other members of management looking at this data may be wondering what they can do to get ahead of activist concerns that could lead to a costly and time-consuming engagement. The blog makes a few suggestions for management teams in that regard. Below I’ve highlighted the suggestions focused on ensuring the company’s current strategy is in its shareholders’ long-term best interest and effectively communicating that to investors:
– Taking proactive measures to improve cost and operational efficiency, including streamlining workflows, outsourcing non-core functions and embracing automation where possible.
– Publicly laying out the company’s long-term vision and strategy for addressing secular changes in the company’s market, including potentially through holding an investor day (although note that detailed long-term targets can often be used against you in a later activist campaign).
– Proactively monitoring and engaging with the investor base, including laying conceptual groundwork for material strategic transactions outside existing strategy and maintaining a detailed contact log with top shareholders.
– Taking investor feedback into account and taking credit for proactive changes in investor materials and communications. – Monitoring performance relative to peers, including on a total shareholder return basis over one-, three- and five-year periods.
This Goodwin alert asserts that the first merger challenge under the new Republican-led FTC is most notable for what it doesn’t say. Specifically, the March 6 complaint filed in federal court challenging the proposed acquisition of Surmodics by GTCR BC Holdings is silent on private equity roll-up and add-on practices. It relies on a traditional theory of harm. That’s contrasted with the two Democratic Commissioners’ concurring statement, which characterizes the transaction as an example of a “problematic playbook… [of] a private equity” company.
The alert says the fact that this first challenge focuses “on the horizontal combination of two direct head-to-head competitors with high combined market shares in an allegedly concentrated market, rather than the fact that the deal involves a private equity add-on [. . .] suggests that the anti-private equity perspective is now a minority view within the FTC, and that the Republican-led FTC will apply conventional competitive harm analysis based on established antitrust principles.”
Public companies would be well advised, on a lovely, clear day (in the Delaware sense), to update their advance notice bylaws. In the normal course these bylaws receive little attention, but in the event of an activist campaign they are critical to the board’s ability to discharge its fiduciary duties.
Since recent cases have addressed the enforceability of advance notice bylaws, Milbank prepared a model that the blog says is focused on gathering information on the activist’s plans and proposals, the degree of alignment between the activist and the company’s other stockholders and the qualifications and independence of the activist’s nominees, all of which are intended to ensure that the company’s other stockholders receive accurate and timely disclosure and the board has the necessary information to discharge its fiduciary duties in connection with settlement discussions and its recommendation for or against the activist’s nominee. The blog highlights a number of “key features” of the model, some of which are excerpted below:
Clarity. The Alignment ANB is drafted in a clear and direct manner, without setting up potential foot faults and boobytraps for activists seeking to nominate directors. The information sought, while comprehensive, is only what is necessary to provide boards and stockholders with a proper foundation for their decision-making. The bylaw heeds the Delaware Supreme Court warning in Kellner v. AIM Immunotech, Inc. that “[a]n unintelligible bylaw is invalid under ‘any circumstances.’”
Voting Borrowed Shares. While lending shares of the corporation to cover short sales may provide income for large fund complexes, it is unlikely that these fund complexes (or other long-term holders) wish to promote empty voting in a contested corporate election. Permitting the voting of borrowed shares by an activist – amplifying the activist’s voting power when there is no meaningful economic stake in the shares being voted – misaligns voting power with the economic consequences of the vote and does not promote good long-term decision making. The Alignment ANB accordingly requires the nominating stockholder and allied participants in the solicitation to waive their right to vote shares in excess of their collective net long position – in other words, to waive the right to vote shares that were borrowed or otherwise subject to an offsetting sale or delivery obligation.
Independence of Nominees. In some cases, activists will nominate their own employees as directors, in a clear bid to drive their platform (which platform, as noted above, should be made transparent to voting stockholders). In other situations, activists will nominate “independent” directors, with the apparent intention of bringing independent expertise to the problems faced by the corporation. At times, however, the term “independent” is applied rather liberally, making it less clear whether the nominee was put forth in order to drive the activist’s platform, or to serve as an independent technocrat. The Alignment ANB seeks to make the connections between nominees and the activist clearer, requiring disclosure of whether the nominee and activist have had discussions to align on a shared agenda for the corporation (and if so, the result of such discussions), on financial, social and family ties, and finally, on whether the nominee is expected to share confidential board information with the activist going forward. The degree of independence of any given nominee will matter acutely to voting stockholders, particularly if they are not fully on board with the activist’s platform or if their financial interests do not clearly align with the activist’s.
If you were among those hoping that the Trump administration’s antitrust regulators might revisit the controversial 2023 Merger Guidelines, this WilmerHale memo says you’re going to be disappointed. Here’s the intro:
Since their release, the federal antitrust agencies’ 2023 Merger Guidelines (2023 Guidelines) have faced significant criticism from many. There was speculation that the Federal Trade Commission (FTC) and Department of Justice (DOJ) under the new Trump Administration would revoke or significantly revise the 2023 Guidelines. On February 18, however, FTC and DOJ Antitrust Division leadership confirmed that the joint FTC/DOJ 2023 Merger Guidelines will remain in effect as the agencies’ framework for the merger review process.
The timing of these announcements was notable. They came just as the FTC was receiving a rush of Hart-Scott-Rodino (HSR) notifications, many of which seemingly were expedited to avoid the new HSR form that went into effect on February 10, 2025. The new HSR form is another major change during the Biden Administration that apparently will survive the turnover at the agencies.
However, the memo also notes that while the Guidelines remain in place, it remains to be seen how the FTC and DOJ will undertake merger enforcement and the extent to which their enforcement program will differ from that of those agencies during the Biden administration.
I’ve previously sung the praises of Rick Climan & Keith Flaum’s M&A training cartoons, and they’ve recently come out with a new program that’s definitely worth checking out. This time, Rick & Keith are joined by their Hogan Lovells colleague Jane Ross to address fraud-related provisions in acquisition agreements. Topics addressed in this 15-minute video include:
– The legal definition of “fraud”
– Intra-contractual fraud and whether the parties can eliminate their liability for deliberate intra-contractual fraud
– Extra-contractual fraud and non-reliance clauses
Rick, Keith and Jane do a terrific job distilling some pretty complex concepts and I think both new and more experienced lawyers will find their presentation to be entertaining and informative. The video ends with a promise that modifying the definition of fraud and negotiating fraud indemnities will be addressed in a subsequent session, so stay tuned!
There was a lot of optimism among dealmakers heading into 2025, but according to reports from last week’s Tulane Corporate Law Institute the chaotic first six weeks of the Trump administration appear to have put a damper on things. Here’s an excerpt from a U.S. News article:
Attendees described a current chill on dealmaking, attributing it to a lack of predictability coming from Washington. M&A activity in the U.S. during the first two months of this year was the slowest in more than two decades, with only 1,172 deals worth $226.8 billion through Friday, according to data compiled by Dealogic. That was down by about a third from the same time last year by both volume and size and the slowest open by volume since 2003.
Jennifer Muller, managing director and co-head of investment bank Houlihan Lokey’s board advisory and opinions practice, said that a few months ago, consensus estimates pegged M&A deal volume in 2025 at $3.5 trillion versus $3 trillion last year.
“Given the rocky start, that may be harder to achieve. And in this case, when I say may, I actually mean will,” Muller said during a panel.
The article says that dealmakers remain optimistic about M&A activity for the rest of the year. As for me, well, the horse is loose in the hospital again, so I guess I’m inclined to temper my enthusiasm until I see how the DC “tariff-o-rama” and “Musk-a-thon” play out. But I can’t blame the Tulane crowd for wanting to sound positive. After all, as Arthur Miller put it in Death of a Salesman, “A salesman is got to dream boy, it comes with the territory.”
We’ve recently posted another episode of our “Understanding Activism with John & J.T.” podcast. This time, J.T. Ho and I were joined by Garrett Muzikowski, Managing Director, M&A, Activism & Governance Advisory at FTI Consulting. We spoke with Garrett about recent developments and trends in activism.
Topics covered during this 20-minute podcast include:
– The rise of new activists
– The potential for a rise in private equity “white knight” investors
– Trends in activist demands
– Trends in timing of activist approaches
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We continue to record new podcasts, and they’re full of practical and engaging insights from true experts – so stay tuned!
Last week, the Delaware Bar’s Corporation Law Council offered some proposed revisions to SB 21, the controversial proposed amendments to the DGCL that would, among other things, provide a safe harbor for certain transactions involving a corporation and its controlling stockholder. This excerpt from Ann Lipton’s recent post on The Business Law Prof Blog summarizes the CLC’s proposed changes:
Under the original version of the law, if the transaction did not involve a controlling shareholder, board level cleansing was achievable even if the board was majority-conflicted. As long as the disinterested directors voted in favor of the deal, it was cleansed – meaning, a board 4-1 conflicted could still cleanse the deal, so long as that single director voted in favor. If the transaction did involve a controlling shareholder, board-level cleansing required the creation of a majority-independent committee, but there was no specification as to how many committee members were necessary – one, in other words, would do.
The new statute says that board level cleansing, either for controller transactions or simply transactions where the board is majority-conflicted, requires the creation of a committee. The committee must have at least two people. All committee members must be disinterested.
Ann says that this is an improvement over the original bill but argues that problems remain. In particular, she contends that the statute would permit a conflicted board to decide which directors are disinterested and put them on the committee charged with passing on the transaction. In addition, she contends that in the event of a challenge to director independence, the statute doesn’t appear to permit a court to revisit whether the committee was in fact completely disinterested, but only to determine whether a majority of the actually disinterested members voted in favor of the transaction.
In other SB 21 developments:
– Harvard’s Lucian Bebchuk argues that SB 21 throws the Delaware courts under a bus by communicating the legislature’s judgment that “(a) the Delaware courts have gotten their work wrong and developed inferior doctrines with respect to important subjects, and (b) the courts nonetheless applied these doctrines for a substantial period of time.”
– UCLA’s Stephen Bainbridge responds by saying that the Delaware courts have it coming to them, because they’ve gotten the law of conflicted controller transactions “egregiously” wrong.
– Boston College’s Brian Quinn highlights the proposed legislation’s retroactivity language and says that it’s a not-so-subtle hint to the Delaware Supreme Court about how it should decide the Tornetta appeal.
– Columbia’s Eric Talley suggests an “opt in” alternative to the mandatory safe harbor contemplated by SB 21.
– Former Chancellor William Chandler & Widener Law Professor Emeritus Lawrence Hamermesh penned an editorial supporting SB 21 as an effort “to reestablish long-accepted rules once familiar to the Delaware courts and are nothing less than a sincere effort by public officials to protect the interests of their constituents.”
– Evan Epstein provides a terrific compendium of commentary on SB 21 in his recent newsletter – and the Chancery Daily’s Lauren Pringle has pulled together one on an even grander scale.
– And in the “Who asked you anyway?” category, Texas Gov. Greg Abbott provided a reminder of why Delaware is hustling to enact these proposed changes by inviting businesses to head to The Lone Star State in a WSJ opinion piece called “Forget Delaware – Y’all Street is Open for Business.”
Speaking of hustling, Lauren Pringle has a LinkedIn post in which she suggests that this legislation isn’t just on a fast track, but on a rocket sled – and that it could be voted upon as soon as March 20th.
Yesterday, Corp Fin released an updated version of Securities Act Sections CDI 239.13 and Securities Act Forms CDI 225.10 governing the use of Form S-4/F-4 to register offers and sales of a buyer’s securities after it has obtained “lock-up” commitments from target insiders to vote in favor of the transaction. The CDI permitted registration in certain circumstances but noted that the Staff has objected to the subsequent registration of offers and sales to any of the target shareholders where the insiders also previously executed consents approving the deal – because it viewed the offer and sale as already completed privately.
Now, as you can see from the redline, the CDI provides that the Staff will not object to the subsequent registration on Form S-4/F-4 where the target company insiders also deliver written consents, as long as (1) those insiders will be offered and sold securities of the acquiring company only in an offering made pursuant to a valid Securities Act exemption and (2) the registered securities will be offered and sold only to target company shareholders who did not deliver written consents.
At the same time, Corp Fin also released five new Tender Offer Rules and Schedules CDIs (101.17 through 101.21), adding to the 34 CDIs released in March 2023. The five new CDIs address the “general rule” that an offer should remain open for at least five business days after a material change is first disclosed and clarify the Staff’s views regarding when a change related to financing and funding conditions constitutes a “material change.” For example, to paraphrase three of the CDIs:
– CDI 101.18 clarifies that the Staff views a subsequent securing of committed financing to be a material change where an offeror had commenced an all-cash tender offer without sufficient funds or committed financing. The CDI details steps the offeror must take in that situation.
– On the other hand, CDI 101.20 and 101.21 clarify that the Staff does not view either the substitution of a funding source or the actual receipt of the funds from the lender when the offeror had already obtained (and disclosed) a binding commitment letter to be a material change. The CDIs address disclosure considerations for these situations and where the lender does not fulfill its obligation to provide the funds.
We will post related memos in our “Tender Offers” Practice Area.