Delaware Enacts Sweeping Changes to the Delaware General Corporation Law
On March 25, 2025, the governor of Delaware signed into law Senate Bill 21, over much opposition from the plaintiffs’ bar and some academics. The bill, which amends Sections 144 and Section 220 of the Delaware General Corporation Law, 8 Del. C. (the “DGCL”), seeks to provide clarity for transactional planners in conflicted and controller transactions, and seeks to limit the reach of Section 220 books and records demands. These amendments significantly alter the controller transaction and books and records landscape.
Background
Senate Bill 21 comes in the backdrop of heightened anxiety over whether Delaware will retain its dominance in the corporate law franchise. Businesses have cited a seemingly increased litigious environment in Delaware, and when coupled with a handful of high-profile companies redomesticating or considering redomesticating to other jurisdictions (see our blog article about the Tripadvisor redomestication here), other states such as Texas and Nevada making a strong push to accommodate for new incorporations and redomestications, and a series of opinions out of the Delaware Court of Chancery that were unpopular in certain circles, concern was growing of Delaware falling from its position as the leading jurisdiction for corporate law.
This is not the first time the Delaware legislature has acted to re-instill confidence in Delaware corporate law to the market. Senate Bill 21 also comes less than a year after Senate Bill 313 was signed into law. Senate Bill 313, coined the “market practice” amendments, sought to address the decisions in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, 311 A.3d 809 (Del. Ch. 2024), Sjunde AP-Fonden v. Activision Blizzard, 124 A.3d 1025 (Del. Ch. 2024), and Crispo v. Musk, 304 A.3d 567 (Del. Ch. 2023), which many found surprising. And perhaps most famously, Section 102(b)(7), the director exculpation clause (now the director and officer exculpation clause following an amendment in 2022), was enacted in the wake of the Delaware Supreme Court’s decision in Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), which caused shockwaves throughout the corporate law community as well as the director and officer insurance market.
Senate Bill 21 Amendments
Section 144. Section 144 of the DGCL was revamped entirely from being a provision speaking on the voidability of conflicted transactions, into a statutory safe harbor for conflicted and controller transactions. The essence of the new Section 144 is defining what a controlling stockholder is, and providing different safe-harbor frameworks for conflicted transactions, controlling stockholder transactions, and controlling stockholder “go private” transactions for public companies.
Controllers are now statutorily designated as those persons (together with affiliates and associates) that (1) has majority control in voting power, (2) has the right to nominate and elect a majority of the board, or (3) possess the functional equivalent of majority control by having both control of at least one-third in voting power of the outstanding stock entitled to vote generally in the election of directors and the power to exercise managerial authority. The last category will likely be the subject of much litigation in the future, but the defined boundaries will limit a plaintiff’s ability to cast a person as a controller.
Under the new Section 144, controllers (and directors or officers of a controlled company) can shield themselves from a fiduciary claim in a conflicted transaction if (1) a committee of 2 or more disinterested directors that has been empowered to negotiate and reject the transaction, on a fully-informed basis, approve or recommend to approve (by majority approval) the transaction, or (2) it is approved by a fully-informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholder. And in a “go private” transaction, both (1) and (2) above need to be accomplished. Such actions will grant the transaction “business judgment rule” deference. This is a significant change from recent Delaware Supreme Court precedent under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), and its progeny holding that a controller transaction providing a non-ratable benefit to the controller will be reviewed under the discerning “entire fairness” standard unless the transaction is conditioned “ab initio” (i.e., at the outset) on the approval of a majority of fully-informed disinterested director and fully-informed, disinterested and uncoerced stockholders. The legislature has spoken that the spirit and structure of MFW will only apply to “go private” transactions, whereas in a non-“go private” transaction the controller needs to meet just one of the MFW prongs, and a disinterested director cleansing does not have to be “ab initio.” Note also that Section 144 provides that controllers are not liable for monetary damages for breaches of the duty of care.
New Section 144 also creates a new presumption that directors of public corporations that are deemed independent to the company under exchange rules are disinterested directors under Delaware law (and, if the director meets such independence criteria with respect to a controller, the director is presumed disinterested from such controller). To overcome this presumption, there must be “substantial and particularized facts” of a material interest or a material relationship with a person with a material interest in the act or transaction. Note that NYSE and NASDAQ independence is a somewhat different inquiry from director disinterestedness under Delaware corporate law. To qualify as independent for exchange purposes, directors cannot hold management positions at the company, its parents or subsidiaries, and former executives are not considered independent for three years after their departures. See Nasdaq Rule 5605 and NYSE Listed Company Manual 303A.02. A director also does not qualify as independent if the director or their families received more than $120,000 in compensation from the company in any 12-month period in the prior three years. In contrast, disinterestedness of a director under Delaware law has been historically a much more fact-and-circumstances inquiry, where judges have looked to things like co-owning an airplane, personal friendships and other “soft” factors.
Section 220. Under Section 220, a stockholder is entitled to examine a corporation’s “books and records” in furtherance of a “proper purpose” reasonably related to the person’s status as a stockholder. The use of this potent tool has proliferated through the years, with stockholders of Delaware corporations becoming increasingly savvy, sophisticated and demanding with their books and records demands to investigate potential corporate wrongdoings before filing suit. Delaware courts have encouraged the use of Section 220, in many cases urging stockholders to use the “tools at hand” ahead of filing suit, presumably with the hope of curtailing bad claims clogging up the docket.
The amended Section 220 limits the universe of what a stockholder may demand under Section 220. Prior to the amendments, a stockholder could pursue materials, even if not “formal board materials,” if they make particularized allegations of the existence of such materials and a showing that an investigation of the suspected wrongdoing was “necessary and essential.” The statute, as amended, limits the ability for stockholders to pursue materials such as personal director or officer emails that may have relevant information, which could be allowed under the prior regime. Under the amended Section 220, if what the stockholder seeks is not part of the nine types of “books and records” spelled out in the statute, the stockholder cannot have access to it in a Section 220 books and records demand.
Questions Going Forward
The amendments to Sections 144 and 220 collide with or directly overturn several Delaware caselaw precedents. The landscape has changed, and we will see how Delaware corporations and its constituents respond. From a transactional planning perspective, the safe-harbors of Section 144 provide much-needed guidance, but with limited caselaw overlay interpreting the boundaries of the safe-harbors, the structuring is not without risk.
Turning back to the backdrop of Senate Bill 21: does this fix the “DExit” concern? Perhaps. But these amendments undoubtedly swing the pendulum to the corporation, controller and management. Whether it is swinging back toward the center is up for debate, but what is not debatable is that preserving the Delaware corporate law franchise depends upon balance. Through the legislative process there were some institutional investors that opposed Senate Bill 21. We will see what kinds of moves, if any, investors of Delaware corporations will make going forward.
Finally, is Section 144 an “opt out” provision? The DGCL is a regime of mandatory statutes, enabling statutes, and default statutes one can opt in or out of. Returning to Section 102(b)(7), this exculpation provision is a well-known example of an opt-in, where a corporation has the option to add that exculpation clause to the company’s certificate of incorporation. Section 203, on the other hand, is an “opt out” statute where a corporation can choose not to have certain restrictions on business combinations with interested stockholders. In the legislative process, several prominent corporate law professors sought to have Senate Bill 21 revised such that it would be a charter “opt-in,” meaning that the default is the status quo, and companies (with stockholder approval) can adopt the controller transaction safe-harbor and books and records limitations in the new Sections 144 and 220. This proposal was ultimately not accepted, but there has been some mention that the text of the new Section 144 suggests it is actually an “opt out” statute. If that is the case, and investors do feel strongly about the Senate Bill 21 amendments, we may see stockholder proposals in the coming years for amendments to the corporate charter to opt out of the new Sections 144 and 220. We will watch the SEC Rule 14a-8 proposals in upcoming proxy cycles to see if this is the case.
The Dealmaking Slowdown: A Time for Startups to Prepare
As the slowdown in dealmaking continues, both buyers and sellers are left to consider their options moving forward during this period of extreme uncertainty and market volatility. To put the current slowdown in perspective, EY had previously forecasted M&A activity to rise by 10% this year.[1] However, they recently adjusted that outlook, saying the M&A market entered a “watchful phase” in February of this year. Their data shows a downturn in the number and total value of deals of more than $100 million. The volume of those deals dropped by 5.9 percent YoY and 19.5 percent from just January of this year, and combined deal value also fell 53 percent YoY and 34 percent from January.
Whenever we see this kind of significant pause in dealmaking, buyers typically have the advantage, but not always. There are certain dynamics that can vary based on industry, the nature of the assets, and, of course, macroeconomic factors. Below, we look at the balance of power between buyers and sellers during a slowdown and how each side can best position themselves for success when conditions improve.
Who Has the Upper Hand?
Most of the time, the buyer is going to have the upper hand in this kind of situation. When there are fewer people willing to buy, those who are can often negotiate much more favorable terms. Buyers can also be highly selective, taking their time to conduct thorough due diligence on their targets and consider all options available. When the economy is in turmoil, it can also present an opportunity for buyers to target distressed or capital-constrained businesses.
While sellers are not usually in the driver’s seat when dealmaking is lagging, there are some opportunities for them to still have leverage. This is particularly true if they have an especially unique proposition or a high-performing and proven concept. There are also some areas that tend to be recession-proof or continue to grow despite contributing economic factors. Those startups who might have the best leverage are those who are not under pressure to sell as they can either wait until deal activity picks back up or negotiate more aggressively for more favorable terms.
What Can Sellers Do Now?
When it’s slow out there, sellers should make sure their fundamentals are solid. Focusing on cash flow and operational efficiencies can help to demonstrate a strong foundation to potential buyers, as well as looking at growth strategies that can move the business forward. It is also important for sellers to look at ways they can extend their runway. When mergers and acquisitions slow down, VC funding often follows suit. This means it is critical that startups ensure they have ample capital reserves to wait out the dealmaking doldrums until more favorable market conditions emerge.
Most importantly, sellers must remain consistently deal ready. The global economic and geopolitical factors that are contributing to this downturn are shifting rapidly, and that means that there could be an uptick in deal activity at any time as trade deals are struck, the markets stabilize, or conflicts and tensions are eased. While this will not happen overnight, founders should be ready to make a move when the timing and the buyer are right. Buyers will no doubt be using this time to do their diligence, so they are ready to move fast when conditions improve and look at the kinds of strategic investments that best fit their long-term goals. Founders would be wise to establish the kinds of connections today that will allow them to execute their exit plans once deals start flowing again.
[1] https://sgbonline.com/ey-ma-outlook-signals-cautious-us-deal-market/
ESG Update: Corporate Directors May Be Obligated to Assess Political Risk
Right now, much about the world is uncertain. Risks posed by political changes dominate the headlines and also weigh heavily on many decisions made by corporations, their advisors, and their stakeholders.
Businesses, of course, want to succeed even in chaotic environments. Success requires appropriate planning, and planning can help lead to predictability. Good corporate governance — making sure directors have appropriate information to timely assess compliance with legal obligations and fulfill duties they owe to the business, its employees, and stakeholders — can help mitigate downside impacts to businesses.
Delaware law obligates corporate directors to, among other things, take steps sufficient to assess corporate legal compliance. What has come to be known as “Caremark liability” attaches when directors fail to adequately oversee the company’s operations and compliance with the law. Below we frame out what Caremark liability is, how it applies to evaluating a politically uncertain environment, and outline six steps companies can take to appropriately manage risk.
Caremark Liability Defined
Caremark liability takes its name from the 1996 decision In re Caremark International Inc. Derivative Litigation, which established that directors of a Delaware corporation have a duty to ensure that appropriate information and reporting systems are in place within the corporation.
Caremark stems from an action where shareholders of Caremark International alleged that they were injured when Caremark employees violated various federal and state laws applicable to health care providers, resulting in a federal mail fraud charge against the company. In a subsequent plea agreement, Caremark agreed to reimburse various parties approximately $250 million. Caremark shareholders filed a derivative action against the company’s directors alleging that the directors breached their duty of care to shareholders by failing to actively monitor corporate performance.
Key points of Caremark liability under Delaware law include:
Duty of Oversight: Directors must make a good faith effort to oversee the company’s operations and ensure compliance with applicable laws and regulations.
Establishing Systems: Directors are expected to implement and monitor systems that provide timely and accurate information about the corporation’s compliance with legal obligations.
Breach of Duty: To establish a breach of Caremark duties, plaintiffs must show that directors either utterly failed to implement any reporting or information system or controls, or, having implemented such a system, consciously failed to monitor or oversee its operations.
High Threshold for Liability: Proving a breach of Caremark duties requires evidence of bad faith or a conscious disregard by directors of their duties.
Good Faith Effort: Directors are generally protected if they can demonstrate that they made a good faith effort to fulfill their oversight responsibilities, even if the systems in place were not perfect.
Caremark liability emphasizes the importance of proactive and diligent oversight by directors to prevent corporate misconduct and to demonstrate that directors are acting in good faith. Cases following Caremark emphasize that liability only attaches when directors disregard their obligations to companies, not when their business decisions result in “unexceptional financial struggles.”
Caremark claims remain difficult to plead but remain viable and, therefore, may lead to significant defense costs.
Is Caremark “ESG litigation”?
Yes. Since the November 2024 election, discussions of environmental, social, and governance (ESG) activities have been commonplace, with discussions of whether corporations should walk back prior commitments dominating the headlines. Caremark claims are distinct from claims frequently lumped together as “ESG litigation.” These “ESG litigation” claims typically involve either “greenwashing”-style product marketing claims (for examples, see here and here) or claims that investment managers, by factoring in ESG investment criteria, deprived investors of appropriate returns (two recent decisions are here and here). Caremark focuses on the “G” in ESG; it speaks directly to corporate governance and directors’ duties to monitor and oversee in good faith a corporation’s compliance with laws.
While the nomenclature of corporate governance may be shifting away from “ESG,” corporate officers remain obligated to oversee corporate operations and ensure compliance with the law. Caremark claims can be used to assess their efforts.
Corporate Governance and Political Risk
Political uncertainty in the United States is affecting regulated entities ranging from Fortune 100 corporations to law firms and from mom-and-pop importers to universities. Recent US Supreme Court decisions including Trump v. United States and Loper Bright v. Raimondo have fundamentally reshaped relations both between the branches of government and between the government and the regulated community.
Over time, members of the regulated community have increasingly faced pressure not just to comply with the law but also to take positions on political issues outside their immediate economic environment. While corporations may have systems in place to monitor risk incident to product liability or supply chain issues, they may not be monitoring risks related to the whipsawing of political positions on issues such as diversity, equity, and inclusion (DEI), the challenges posed by a dramatically slimmed (and thus less responsive) bureaucracy, or recissions of expected government funding.
These political issues can generate corporate risk. Good corporate governance practices can help cabin new corporate risks, thereby minimizing the potential for financial impacts on the corporation. Practices which could be evaluated include:
Ensure appropriate data-gathering and compilation. Political policies do not arise in a vacuum. Internal and external policy advisors, trade associations, and business contacts can help track potential political risks.
Review and assess policy positions and evaluate whether they continue to be appropriate on a regular basis. At the federal level, we have seen DEI-related activities move from being universally lauded to potential reasons for imposition of federal civil or criminal liability. Executive Order 14173, issued on January 21, directed the US Attorney General to develop an enforcement plan to target private sector DEI programs believed to be unlawful. Actions like designating corporate personnel tasked with understanding points of emphasis in government enforcement and mapping them across a corporate footprint may be appropriate.
Evaluate what corporate efforts are appropriate to use in marketing efforts in the current political environment. Recent years have seen sustainability reports become key tools to influence stakeholders ranging from consumers to employees. Businesses which previously leaned into social issues or community involvement in the ESG-era may want to deemphasize aspirational goals and/or provide additional data on their factual conclusions, practices, and achievements.
Review and assess places where rollbacks in federal, state, or local government spending could impact the viability of business operations. Investments reliant on federal grants or subsidies need to be reviewed.
Review corporate compliance programs in light of federal priorities. The US Department of Justice has listed initial federal compliance priorities including terrorism financing, money laundering, and international restraints on trade. As above, taking a systematic approach to understanding and evaluating points where corporate activities could be impacted by enforcement priorities may be appropriate.
Finally, the regulated community should conduct a thorough census of regulations or statutory laws that have the potential to negatively impact corporate operations. They should assess whether any impediments can be addressed through a forward-looking government relations strategy, especially given current efforts to streamline regulations and government operations, particularly related to environmental and energy issues. (For more, see here and here.)
When directors fail to consider and weigh political factors and shifts in governmental initiatives and program enforcement such as those listed above, stakeholders may ask why the board made no effort to make sure it was informed about an issue so intrinsically critical to the company’s business operation.
Can An Employer Require Employees To Invest In The Business?
Employee stock bonus, stock purchase, and stock option plans are extremely common. Most employees and prospective employees are undoubtedly happy to receive these types of equity compensation awards, but can an employer require an employee to invest in the employer’s business. The California Labor Code provides:
Investments and the sale of stock or an interest in a business in connection with the securing of a position are illegal as against the public policy of the State and shall not be advertised or held out in any way as a part of the consideration for any employment.
Cal. Lab. Code § 407. This would seem to be a problem.
Fortunately, Section 408(c) of the Corporations Code provides:
Sections 406 and 407 of the Labor Code shall not apply to shares issued by any foreign or domestic corporation to the following persons:
(1) Any employee of the corporation or of any parent or subsidiary thereof, pursuant to a stock purchase plan or agreement or stock option plan or agreement provided for in subdivision (a).
(2) In any transaction in connection with securing employment, to a person who is or is about to become an officer of the corporation or of any parent or subsidiary thereof.
A similar provision was added in 2015 with respect to domestic and foreign limited liability companies. Cal. Corp. Code § 17704.01(e).
This does not mean that corporations and LLCs are out of the woods in every case in which it is alleged that the employee was forced to invest. In Hulse v. Neustar, Inc., 2019 WL 13102321 (S.D. Cal. Dec. 18, 2019), the court denied the defendant’s motion for judgment on the pleadings because the plaintiff alleged that the defendant required the plaintiff to participate in an equity rollover that was separate and apart from the terms of the initial stock option plans pursuant to which the plaintiff acquired his equity.
Momentum on Voting on the Omnibus Delay and Updating Corporate Sustainability Reporting Requirements
Vote to delay
On 1 April 2025, the European Parliament approved the “urgent procedure” with regards to the “Omnibus” package of proposals to streamline corporate sustainability requirements.
The next step to vote on the “stop-the-clock” proposal will take place on 3 April 2025.
The approval of the urgent procedure of the Omnibus passed with a comfortable majority, but the division among political groups remains evident. If the stop-the-clock proposal is approved on 3 April 2025, co-legislators, being the European Parliament and the Council of the European Union, will begin negotiations to finalize the legal text.
Movement on substantive requirements
On 28 March 2025, Maria Luís Albuquerque, the European Commissioner for Financial Services and the Savings and Investments Union, sent a letter to the EFRAG Sustainability Reporting Board (EFRAG SRB) outlining the European Commission’s mandate for simplifying the first set of European Sustainability Reporting Standards (ESRS), which are the standards followed for Corporate Sustainability Reporting (CSRD). Commissioner Albuquerque emphasized the urgency of implementing these simplifications, highlighting their significance in the current geopolitical and economic context.
In response to this mandate, EFRAG has committed to a fast-track process aimed at substantially reducing mandatory data points and easing the practical application of the ESRS. The key dates are:
15 April 2025: EFRAG will inform the European Commission of its internal timeline to simplify the ESRS; and
31 October 2025: EFRAG has been tasked by the European Commission to provide its technical advice by this date so that the European Commission has time to adopt legislation in time for “companies to apply the revised standards for reporting covering financial year 2027, potentially with an option to apply the revised standards for reporting covering financial year 2026 if companies wish so”.
On this basis, it appears that the European Commission plans to adopt the revised and streamlined ESRS before the end of 2026, and that companies in the first wave of reporting would have the option to utilise the new ESRS should they wish to do so.
FinCEN Adopts Interim Final Rule Limiting CTA Reporting Requirements to Foreign Reporting Companies
US legal entities are no longer subject to the reporting requirements of the Corporate Transparency Act (CTA). On March 21, 2025, the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of Treasury (Treasury), adopted an interim final rule that (i) narrows the CTA reporting requirements to entities previously defined as “foreign reporting companies,” (ii) extends the earliest reporting deadline to April 25, 2025 and (iii) exempts foreign reporting companies from having to report the ownership information of any US person who is a beneficial owner.
The interim final rule amends the definition of a “reporting company” to legal entities formed under the law of a foreign country and registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office. The interim final rule did not eliminate any of the original 23 exemptions from the definition of reporting company.
If you read our previous reports to determine whether to file or update a report on behalf of an entity formed under the law of a US State or Indian tribe, you can feel comfortable that no such beneficial ownership information report will be required without further rule changes.In adopting the interim final rule, FinCEN acknowledged that it intends to issue a final rule this year, after review of public comments. The comment period for the interim final rule ends May 27, 2025.
Involved With a Delaware Corporation? Three Major Changes to Know
On March 25, 2025, Delaware Governor Matt Meyer signed Senate Bill 21 into law, effecting significant changes to the General Corporation Law of the State of Delaware (DGCL), the statutory law governing Delaware corporations. With over two-thirds of Fortune 500 companies domiciled in Delaware, it continues to be the preferred state of incorporation for businesses drawn to its modern statutory law, renowned Court of Chancery, and developed case law.
Consequently, below are three major takeaways for businesses incorporated in Delaware or individuals involved with a Delaware corporation—as a director, officer, or stockholder—here are three major takeaways:
1. Procedural Safe Harbor Cleansing Related Party Transactions
Under Delaware corporate law, related party transactions involving a fiduciary, such as where a director of a corporation stands on both sides of a transaction, are potentially subject to the entire fairness standard of review. This onerous standard of reviewing a fiduciary’s actions in certain conflicted transactions places the burden on the fiduciary to prove that the self-dealing transaction was fair—both in terms of the process (fair dealing) and substantive (fair price)—given corporate law theory that the fiduciary’s interests may not be aligned with maximizing stockholder value.
Senate Bill 21 establishes a safe harbor pursuant to Section 144 of DGCL for these conflicted transactions (other than take-private transactions) if the transaction is approved by either:
A majority of the disinterested members of the board or
A majority of the votes are cast by the disinterested stockholders—in each case, subject to certain additional requirements. Consequently, if transactional planners and corporations follow the new procedural safe harbor when entering certain related party transactions, they greatly minimize the likelihood of a successful challenge of any breach of fiduciary duty claim against the corporation’s board.
2. Limiting Who Qualifies as a Controlling Stockholder
Prior to the enactment of Senate Bill 21, whether a stockholder was a “controlling stockholder” and was therefore subject to certain rules under Delaware corporate law, was not set forth in DGCL. Rather, Delaware case law helped transactional planners to determine if a stockholder would be treated as such.
Senate Bill 21 codifies the definition of this term in Section 144 of DGCL. Under the revised Section 144, a “controlling stockholder” is a stockholder who:
Controls a majority in voting power of the outstanding stock entitled to vote generally in the election of directors;
Has the right to control the election of directors who control the board; or
Has the functional equivalent of majority control by possessing at least one-third in stockholder voting power and power to exercise managerial authority over the business of the corporation. This update provides transactional planners and corporations with clear guidelines over who qualifies as a controlling stockholder.
3. Narrowing Stockholder Information Rights
Over the past years, many Delaware corporations have been subject to an increasing number of “Section 220 demands” and related litigation that is often expensive for corporations to handle. Section 220 of DGCL provides stockholders with a statutory right to inspect a corporation’s books and records if the stockholder satisfies certain requirements.
Senate Bill 21 amends Section 220 of DGCL by narrowing what books and records of a corporation the stockholder is generally entitled to review after satisfying certain requirements. Specifically, the term “books and records,” as defined in Section 220 of DGCL, is now limited to certain organizational and financial documents of the corporation, including its annual financial statements for the preceding three years, board minutes, stockholder communication, and other formal corporate documents. Additionally, a stockholder’s demand must describe with “reasonable particularity” its purpose and requested books and records, and such books and records must be “specifically related” to the proper purpose.
In summary, Senate Bill 21’s amendments to DGCL give transactional planners and corporations additional clarity over cleansing conflicted transactions, who qualifies as a controlling stockholder, and the books and records a stockholder may access under Section 220.
Minority Shareholder Protection – What Law Applies?
Many of my clients live in other states but own part of a company based here in New Jersey. That is often a recipe for mistreatment of minority shareholders – out of sight, out of mind. But an owner in such a situation has significant protections afforded to them under the law.
If you own shares in a New Jersey-based company but live out of state, New Jersey law protects you. As I have discussed for over 20 years now in this blog, the court can deem that a minority shareholder is oppressed and order – among other things – a buyout of the minority shareholder’s interest. It makes no difference where you live. But the law or even the jurisdiction that applies might not necessarily be based on where the company is physically located. For example, even if the company is based in one state, the shareholders’ agreement (or operating agreement) might require that any lawsuit be brought in another state. Even if that is the case, you still have the protections of New Jersey law.
Also, the fact that the company is located in New Jersey does not make it a New Jersey company. A company might have been created as a creature of one state but be physically located in another. For example, if your company is a Delaware LLC but operates in a state that has minority shareholder protections (like New Jersey), Delaware law likely still applies, and Delaware does not have a minority oppression statute.
So, when you are creating a company, it is critical where you incorporate and what law applies – especially if you are a minority owner. This is especially true since oppressed minority shareholder protections cannot be waived. In one instance, a client shared that in a new venture, his majority shareholder partner initially asked if he (the 20% minority owner) would waive the protections of the oppression statute when they were drafting a shareholders’ agreement. The client was not aware that those protections could not be waived. He was happy to see that his partner dropped that demand, only to insist that the company be a Delaware company operating in New Jersey. When I advised the client that when he agreed to this, he was agreeing to a set of laws that did not protect him, he believed he had been hoodwinked by his partner.
“That’s why he wanted to make it a Delaware corporation!”
The minority shareholder was still able to sue in New Jersey, under Delaware law, for breach of fiduciary duty, but the protections were nowhere near as broad, and the case was more difficult.
So, pay attention to where the company is being formed, and what that means to you, at the outset of your business relationship. The issue of where the company will operate does not necessarily determine all your rights. If the agreement was created years ago and cannot be changed now, ask an experienced shareholder dispute attorney what – and where – your rights are.
MAKING SMART TCPA MOVES: Rocket Mortgage Follows Up Its Redfin Purchase With STUNNING $9.4BB Take Over of Mr. Cooper
So multiple outlets are reporting that Rocket is set to absorb the nation’s largest mortgage servicer Mr. Cooper.
With Rocket having just recently acquired Redfin it looks like the company is poised to be an absolute behemoth in the mortgage industry.
Just like with Redfin, however, the TCPA is likely driving this initiative.
Yes, mortgage servicing can be profitable in its own right but it is MASSIVELY valuable to an originator to have a large servicing pool.
Why?
Who is more likely to NEED mortgage or refinance than folks who already have a mortgage product? And with trigger leads now widely available (probably illegal under FCRA but don’t tell the CRAs that) having a massive servicing book means you can LEGALLY call folks who just submitted an application elsewhere and convince them to stay.
This is because the DNC rules will soon allow Rocket to call all of the MILLIONS of Mr. Cooper customers it just acquired WITHOUT CONSENT.
Pretty slick, eh?
So with Redfin providing consent on the front end and with access to a massive pool of mortgage customers now bolted on to the backend Rocket can make ready use of the phones to bring customers into its ecosystem–and keep them there.
Pretty clever. And it was all brought to you by the TCPA.
People think of the statute as a profit killer. But leveraged correctly it can actually drive profits by building a moat around your customers and a barrier-to-entry for others in your vertical.
Smart money uses the law as a competitive advantage. Nicely done Rocket.
Seeking a Revenge Premium in Business Divorce: Resisting the Urge to Plunge Headfirst Into Quicksand
When longtime business partners in private companies go through a business divorce, emotions often run high. One or both of the partners may be seeking a “revenge premium” in the business divorce process based on their perceived mistreatment by the other partner during their time together. While the urge to extract a pound of flesh from a soon-to-be former partner during a business divorce is understandable, it is likely to be self-defeating. Seeking pay back from the other partner is likely to result in heightened conflicts, a longer time to complete the process, and more distractions for the business. By contrast, when partners keep their emotions in check, they can achieve mutually positive financial outcomes and increase the opportunity to preserve their business and personal relationships.
Introduction – The Costs of Pursuing a Revenge Premium
Securing a revenge premium from the other partner during a business divorce is not just difficult to obtain; the decision to go down this road virtually guarantees that both partners will be engaged in a more protracted, expensive process. These negative results include: (1) incurring substantial legal fees that may escalate rapidly into six figures (or more), (2) participating in multiple rounds of negotiations that do not produce a financial windfall, and (3) dealing with the negative reactions from other key stakeholders in the business, including employees, clients and other owners. In addition, the company’s performance and total value may decline precipitously in the midst of a contentious business divorce because management will be focusing on conflicts between the partners rather than prioritizing the company’s operations.
The lose-lose type of scenario described above is one that both partners should take pains to avoid. Pursuing a business strategy that is guaranteed to increase conflicts, expense and time away from a focus on the business is akin to voluntarily jumping into quicksand. The remainder of this post therefore focuses on strategies for business partners to consider in efforts to optimize the outcome of their business divorce.
Opt-In Strategies
When a business divorce takes place, the majority business owner may have become frustrated by the minority partner’s conduct and therefore insist that the minority partner accept a purchase price for the partner’s interest in the business that is less than its fair market value. That is what we refer to as a revenge premium. To head off the serious conflicts likely to ensue from the pursuit of a revenge premium, however, the majority owner may want to consider an entirely different strategy and approach to the business divorce.
Majority Owners: Paying a Peace Premium to Departing Minority Partners
Specifically, the majority owner is advised to consider paying a purchase price for the minority owner’s interest that is well above its fair market value (FMV), which we refer to as the “peace premium.” We are not suggesting that the majority owner deliver a huge windfall to the minority partner, but instead to consider a purchase price that is 20%-35% larger than the FMV of the minority interest. The majority owner’s initial reaction to this suggestion may be that making this “excess” payment is rewarding bad behavior by the minority partner in the past, but for the reasons set forth below, the majority owner may want to consider biting the bullet and paying the peace premium to the minority partner.
A prompt exit that results from the payment of the peace premium to the minority partner will save the majority owner both time and money because it will lessen the legal expense involved and remove a significant distraction for the owner in the operation of the business. When the minority partner’s exit from the business results in addition by subtraction, securing the benefits of this exit as promptly as possible is good for the company (and the majority owner).
If the business is on a positive trajectory, the longer the minority partner remains part of the company, the higher the price the majority owner will have to pay to purchase the minority interest. Stated another way, if the business is appreciating in value, all of that appreciation (or the lion’s share of it if there are other partners) will be going to the majority owner once the minority partner has been bought out.
To the extent that other owners and employees in the business learn that a peace premium was paid to the minority investor, this will serve as an incentive. It will show that the company is healthy, that the returns on exit from the business will be substantial, and that departing partners are treated fairly and with respect.
Finally, paying a peace premium to the departing minority partner should also engender some good will from that partner. This payment will tend to make the minority partner a continued positive spokesperson for the company, and it will help to maintain a good personal relationship between the partners themselves.
Minority Investors: Buying Into a Soft Exit From the Business
For minority partners, their approach may be to demand an exorbitant purchase price for their interest, which is paid to them promptly. If the minority partner has not secured a buy-sell agreement from the majority owner, however, the minority partner has no contractual basis to issue a buyout demand to the majority owner. Therefore, making a demand like this would be akin to seeking a revenge premium because the minority partner has no legal basis for it. Indeed, in response to demands of this nature from the minority partner, the majority owner may elect to remove the minority partner from all operational and management roles in the business. When this type of squeeze out is implemented, the minority partner will be left with no access to further compensation, distributions or dividends from the company, and the partner may have to wait for years for some type of liquidity event to take place to monetize the investment in the business.
While the minority partner who has no buy-sell agreement in place with the majority owner can resort to a litigation strategy in efforts to bring the owner to the bargaining table to secure a buyout, a more effective, less contentious approach should be considered. Specifically, the minority investor could propose a soft exit from the business that permits the investor’s interest to be purchased over time by the company and on terms that do not create a financial hardship for the business.
This type of structure might involve a combination of a cash payment that is paid to the minority partner over time, as well as a revenue share for some period of years. All of these terms are subject to negotiation, but a soft exit for the minority partner could look like this:
The minority partner accepts a purchase price of an amount that is below the FMV of the business, which is paid out over five years with 20% paid up front. This would not be a steep discount, but perhaps 10-20% below the FMV;
To balance the shortfall in the purchase price for the minority partner’s interest, the company also agrees to pay the minority partner a set percentage of the company’s revenues for three years; and
The minority partner and the company agree on a ceiling and a floor for the revenue share. In this regard, the company guarantees that the total amount of the future revenue share paid to the partner will not be less than a set amount, and the parties also agree that the amount of the revenue share will not exceed a capped total amount. Thus, the parties agree to a range of additional potential payments to be made to the minority partner after closing.
This type of soft (negotiated) exit from the business provides an opportunity for the minority partner to secure an exit from the company for a value that may meet the investor’s financial objectives, but without bankrupting the company.
A Third Path: An Exit Facilitated by Third Parties
Another path for business partners to consider when they need a business divorce is one facilitated by third parties. The agreements the partners entered into may require them to attend a pre-suit mediation, but even if a mediation is not required by contract, there is generally little downside to attending a mediation with a business mediator skilled in facilitating business divorces. This type of pre-suit process is non-binding, and it will permit the mediator to help the parties explore efforts to resolve their claims/differences in a creative manner, which will avoid the time, substantial expense, and inconvenience of engaging in litigation.
If a mediation is not successful, the partners may also consider submitting specific issues to arbitration. It is not unusual for the main conflict between partners in a business divorce to be the value of the business, and if they are at an impasse regarding valuation, they may end up in court over this issue. When litigation is the only option, that will result in a battle of the experts where both parties hire business valuation experts and present competing valuation reports to the judge or the jury for resolution. That approach will involve years of costly litigation, which will require the partners to incur the fees of both their legal counsel and valuation experts.
One alternative is to limit the partners’ dispute to the issue of valuation and submit that issue for resolution by a single arbitrator or arbitration panel. This type of arbitration is much faster than litigation as it can take place in a matter of a few months rather than over multiple years; the company’s value will be determined by experienced business lawyers or former judges selected by the parties; and the arbitrator’s determination will be final without any appeal. If the partners are confident in their determination of the company’s value, this may be a better, less costly option to consider when company valuation is the primary conflict between them.
Conclusion
Businesspeople are not immune to emotional reactions, and business divorces tend to magnify the feelings of the partners that caused them to separate. That is why it is common for business partners in this situation to pursue outcomes that seek to extract some type of revenge premium. But when partners ratchet down the emotions and engage in efforts to find pragmatic solutions — such as peace premiums, soft exits or the use of mediation or arbitration — they can save themselves from severe financial headaches and lasting emotional heartaches.
Partners who are able to control their emotions during a business divorce can achieve outcomes that produce an array of positive benefits, which extend beyond their own transaction. More specifically, partners who focus on securing a win-win outcome in their business divorce place themselves in position to secure reasonable value for themselves; they will maintain (and perhaps enhance) their professional reputations; they will protect the enduring value of the business; and they will preserve their personal relationships. Setting aside the urge to obtain vindication is not just an appeal to the better angels of business partners, it is a strategy that is designed to produce the best possible outcome for them and also for the business.
This focus on the continued success of the business also applies to the departing minority partner, who should care about the business even after the partner’s interest has transferred. First, the departing partner may have a revenue share that is directly tied to the future performance of the business. Second, even if the departing partner does not have a revenue share arrangement in place with the company, there is likely a payout of the purchase price, and the partner will not want to deal with a monetary default if things go south in the business. Finally, if the business does continue to flourish, the departing partner should be able to point to his or her role in the business with legitimate pride in having contributed to the company’s success.
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Important New Safe Harbors and Other Clarifying Changes to Delaware Corporate Law
The governor of the State of Delaware—consistent with his pledge to protect the “Delaware franchise”—recently signed into law amendments to Section 144 of the Delaware General Corporation Law (the DGCL) relating to certain acts or transactions involving directors, officers, controlling stockholders, and members of a control group, and Section 220 of the DGCL relating to stockholder demands for inspection of corporate books and records.
The amendments to Section 144 are intended to provide greater predictability and clarity to Delaware corporations considering acts or transactions that may implicate the fiduciary duties of directors, officers, controlling stockholders, and members of a control group. The amendments to Section 220 are intended to provide clarity and certain limits on stockholder inspection of books and records given the increasing growth in volume and scope of stockholder actions for inspection brought in the Delaware Court of Chancery.
Amendments to Section 144
The amendments to Section 144 provide safe harbor procedures for acts or transactions involving one or more directors, officers, controlling stockholders, and members of a control group that might, absent compliance with the safe harbor procedures, give rise to breach of fiduciary duty claims. The amendments to Section 144 also exculpate controlling stockholders and members of a control group from liability for duty of care violations.
The safe harbor provided by amended Section 144 is protection from equitable relief or an award of damages by reason of a claim based on a breach of fiduciary duty.
Safe Harbor for Acts or Transactions Solely Involving Directors or Officers
Acts and transactions involving one or more directors or officers or in which one or more directors or officers have an interest get the benefit of the safe harbor under amended Section 144(a) if:
The material facts as to the relationship or interest and the act or transaction are disclosed or known to all members of the board or a committee of the board and the act or transaction is authorized in good faith and without gross negligence by (i) the affirmative votes of a majority of the disinterested directors (see below) on the board (except where less than a majority of directors on the board are disinterested directors) or (ii) a majority of the disinterested directors on a committee (where less than a majority of the directors on the board are disinterested directors, the committee must consist of at least two disinterested directors), even though the disinterested directors constitute less than a quorum; or
The act or transaction is approved by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders (see below); or
The act or transaction is fair as to the corporation and its stockholders.
Safe Harbor for Acts or Transactions (Other Than Going Private Transactions)
Involving a Controlling Stockholder or Control Group. Acts or transactions between the corporation or one or more of the corporation’s subsidiaries on the one hand and a controlling stockholder (see below) or control group (see below) on the other hand and acts or transactions from which a controlling stockholder or control group receives a financial or other benefit not shared with the stockholders generally (each a Controlling Stockholder Transaction) get the benefit of the safe harbor under amended Section 144(b) if:
The material facts as to the Controlling Stockholder Transaction are disclosed or known to all members of a committee of the board (consisting of at least two disinterested directors) that has been expressly delegated by the board the authority to negotiate or oversee the negotiation of and reject the Controlling Stockholder Transaction and the Controlling Stockholder Transaction is approved or recommended for approval in good faith and without gross negligence by a majority of the disinterested directors then serving on the committee (Disinterested Committee Approval); or
The Controlling Stockholder Transaction is conditioned—by its terms (as in effect at the time it is submitted to stockholders for approval or ratification)—on approval or ratification by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders and such approval or ratification is obtained (Disinterested Stockholder Approval); or
The act or transaction is fair as to the corporation and its stockholders.
Safe Harbor for Going Private Transactions Involving a Controlling Stockholder or Control Group
A “going private transaction”—defined as a Rule 13e-3 transaction (for a corporation having a class of stock listed on a national securities exchange) or a Controlling Stockholder Transaction in which all of the capital stock held by disinterested stockholders is canceled, converted, purchased, or otherwise acquired or ceases to be outstanding (a Going Private Transaction)—gets the benefit of the safe harbor under amended Section 144(c) if:
The Going Private Transaction receives Disinterested Committee Approval and Disinterested Stockholder Approval; or
The act or transaction is fair as to the corporation and its stockholders.
Defining a “Controlling Stockholder,” “Control Group,” “Disinterested Director,” and “Disinterested Stockholder”
For purposes of applying the above safe harbor procedures, amended Section 144 defines the foregoing key terms as follows:
A “controlling stockholder” means a person that, together with affiliates and associates:
Owns or controls a majority in voting power of stock entitled to vote generally in the election of directors or in the election of directors having a majority in voting power of all directors; or
Has the right (by contract or otherwise) to cause the election of its nominees to the board and such nominees constitute a majority of all directors or a majority in voting power of all directors; or
Has the power functionally equivalent to that of a stockholder owning or controlling a majority in voting power of stock entitled to vote generally in the election of directors by virtue of ownership or control of at least 1/3 in voting power of stock entitled to vote generally in the election of directors or in the election of directors having a majority in voting power of all directors and power to exercise managerial authority over the corporation’s business and affairs.
A “control group” means two or more persons that are not controlling stockholders but by virtue of “an agreement, arrangement, or understanding” between or among them constitute a controlling stockholder.
A “disinterested director” means a director who is not party to the relevant act or transaction and does not have a material interest in, or a material relationship with a person that has a material interest in, the relevant act or transaction. Amended Section 144 also contains a rebuttable presumption as to the “disinterestedness” of directors satisfying the independence criteria of the national securities exchange (modified as provided in amended Section 144) on which a class of the corporation’s shares are listed.
A “disinterested stockholder” means a stockholder that does not have a material interest in the relevant act or transaction or a material relationship with either the relevant controlling stockholder or a member of the relevant control group or any other person with a material interest in the relevant act or transaction.
Defining a “Material Interest” and “Material Relationship”
Section 144 also defines the key terms “material interest” and “material relationship” as follows:
A “material interest” means an actual or potential benefit (including avoidance of a detriment), other than one devolving on the corporation or the stockholders generally, that (i) in the case of a director, would reasonably be expected to impair the objectivity of the director’s judgment when participating in the negotiation, approval, or authorization of the relevant act or transaction and, (ii) in the case of a stockholder or other person that is not a director or officer, would be material to the stockholder or other person.
A “material relationship” means a financial, employment, familial, professional, or other relationship that (i) in the case of a director, would reasonably be expected to impair the objectivity of the director’s judgment when participating in the negotiation, approval, or authorization of the relevant act or transaction and, (ii) in the case of a stockholder, would be material to such stockholder.
Amendments to Section 220
The amendments to Section 220 define the scope of books and records that a stockholder may demand to inspect and set forth conditions that must be satisfied for the stockholder to inspect a corporation’s books and records.
Scope of Books and Records That May Be Inspected by a Stockholder
Amended Section 220 generally defines the “books and records” of the corporation that a stockholder may inspect as the certificate of incorporation, bylaws, minutes of meetings (or consents in lieu of meetings) of stockholders (for the preceding three years) and the board or committees of the board, communications with stockholders generally (within the prior three years), materials provided to the board or committee in connection with action taken by the board or committee, annual financial statements (for the preceding three years), D&O questionnaires, and contracts made by the corporation with one or more current or prospective stockholders (or one or more beneficial owners of stock), in its or their capacity as such, entered into under Section 122(18) of the DGCL.
Where the corporation does not have any minutes or consents of stockholders (for the preceding three years) or the board or committee, annual financial statements (for the preceding three years), or, in the case of a corporation having a class of stock listed on a national securities exchange, D&O questionnaires, the Delaware Court of Chancery may order the corporation to produce the functional equivalent of these books and records if the stockholder has complied with the conditions to inspection set forth in Section 220(b) and only to the extent necessary and essential to fulfill the stockholder’s proper purpose.
In addition, the Delaware Court of Chancery may order the production of other specific records if and to the extent (i) the stockholder has complied with the conditions to inspection set forth in Section 220(b), (ii) the stockholder has demonstrated a compelling need for the inspection of the records to further such stockholder’s proper purpose, and (iii) the stockholder has demonstrated by clear and convincing evidence that the specific records are necessary and essential to further the proper purpose.
Conditions to Stockholder Inspection
Amended Section 220(b) requires a stockholder demanding inspection of the corporation’s books and records to:
Make its demand in good faith and for a proper purpose (e.g., a purpose reasonably related to the stockholder’s interest as a stockholder); and
Describe with reasonable particularity in its demand for inspection the stockholder’s proper purpose and the books and records sought to be inspected (which books and records must be specifically related to the stockholder’s proper purpose).
Amended Section 220(b) expressly permits the corporation to:
Impose reasonable restrictions on the confidentiality, distribution, and use of the books and records inspected;
Require that the stockholder agree to incorporate information contained in the books and records inspected by the stockholder by reference in any compliant filed by or at the direction of such stockholder relating to the subject matter of demand; and
Redact portions of the books and records not specifically related to the stockholder’s purpose.
Effective Date of the Amendments
The amendments to Section 144 and Section 220 became effective upon signature by the governor on 25 March 2025 and apply to acts and transactions occurring before, on, or after such date, except for actions or proceedings that are completed or pending, or any demands for inspection made, on or before 17 February 2025.
Australian Mandatory Merger Clearance: Regime Details starting to Emerge – Government publishes Draft Determination, ACCC publishes Draft Guidelines
On 28 March 2025, the Australian Government (the Government) published its draft Determination providing the beginnings of detail about the acquisitions that are the subject of mandatory notification, some of the exceptions to notifications, the position regarding supermarket acquisitions and the draft notification forms.
On the same day, the Australian Competition and Consumer Commission (ACCC) published its draft merger process guidelines, following on from its earlier analytical, and transition guidelines.
This Insight is part of a series of publications designed to guide clients through the upcoming Australian mandatory merger clearance regime, as the details becomes available.
In Brief
Whilst this Insight focuses on the key definitions in the Government’s draft Determination, We will shortly publish additional articles focusing on the ACCC’s draft guidelines. The determination:
Confirms or defines the types of acquisitions that are the subject of the regime.
Clarifies that the test for whether an acquisition is to be notified is based on the turnover of the acquirer and the target – and no other measure.
It then clarifies that the relevant measure of turnover of each of the acquirer and the target is the current Goods and Services Tax (GST) Turnover of the relevant entity and connected entities (being associated entities and controlled entities).
As a practical matter, this means the following for parties seeking to enter into negotiations for mergers and acquisitions (M&A), including considering the broader meaning of “acquisition”, at an early stage of the proposed acquisition or deal:
The acquirer needs to, for the purposes of ACCC Notification, consider the turnover of itself and the target;
The acquirer needs to calculate the GST turnover for the 12 months up to the date of the signing (and notionally at the commencement of negotiations) of both itself, including connected companies, plus, the GST turnover of the target (and its connected entities in the case of acquisitions of shares), to seek to calculate the AU$200 million or the AU$500 million threshold;
The above calculation will also be relevant to the calculation of the AU$50 million or AU$10 million threshold; and
The acquirer needs to consider the market value of, or consideration for, all the shares or assets the subject of the transaction for assessment of the AU$250 million transaction value threshold.
The same assessment in respect of serial or creeping acquisitions is set out below.
It provides detail about exceptions from notification under the regime, namely acquisitions:
Of land in certain circumstances;
By liquidators/administrators etc;
In the context of succession; and
Of financial securities, exchange traded derivatives, in money lending situations and in trust circumstances.
Mandatory notifications in the case of acquisitions by Coles or Woolworths.
The information requirements in Notification Forms – short and long-form.
In More Detail
As previously mentioned, the Government recently released the exposure draft of the Competition and Consumer (Notification of Acquisitions) Determination 2025 (Determination) and related draft explanatory memorandum.
Additionally, on 28 March 2025, the ACCC published its draft merger process guidelines, building on its earlier draft analytic guidelines and transition guidelines.
As clients are focused on what amounts to a notifiable acquisition and if a transaction is notifiable, and what information is required to be provided to the ACCC, this insight focuses on the Determination. We will shortly publish a follow-up insight focusing on the process of interaction with the ACCC both informally and once a formal application is made.
What is an Acquisition
The Determination confirms that acquisitions are mandatorily notifiable in the following circumstances:
The acquisition is of shares in the capital of a body corporate or assets;
The shares or assets are “connected with Australia”;
The acquisition satisfies the combined acquirer/target turnover test on the contract date or the accumulated acquired shares or assets turnover tests (set out in more detail below); and
The acquisition is not covered by the exceptions.
We elaborate on these issues below, apart from confirming that the term “assets” is very broad, including:
Any kind of property;
Any legal or equitable interests in tangible assets such as options for land, leases etc;
Any legal or equitable right that is not property or intangible assets such as intellectual property, goodwill etc;
Any interest in an asset of a partnership, or an interest in a partnership that is not an interest in an asset of the partnership; and
Interests in unit trusts and managed investment schemes.
What is an Acquisition That is “Connected to Australia”
An acquisition is notifiable if it meets the thresholds (below) and it is an acquisition of shares or assets connected with Australia. This means in relation to:
A share: the share is in the capital of a body corporate that carries on business in Australia or intends to carry on business in Australia; or
An asset that is an interest in an entity: the entity carries on business in Australia or intends to carry on business in Australia.
How the Turnover Tests are Assessed
General or Economy Wide Turnover
The general or economy wide turnover test for mandatory notification is as follows:
The acquirer or acquirer group and target have a combined Australian turnover of at least AU$200 million; and either
The Australian turnover of the target is at least AU$50 million (for each of at least two of the merger parties); or
The global transaction value is at least AU$250 million.
The Determination has clarified how the turnover is to be calculated:
In relation to the acquirer or target turnover test, if the sum of all of the following is AU$200million or more:
The current GST turnover of each of the principal party or acquirer, together with each connected entity of the principal party;
Where the target acquisition is in shares of a body corporate, the current GST turnover of the body corporate and each connected entity of the body corporate; and
Where the target is an asset, the current GST turnover of the target attributable to the asset,
AND
In relation to the target, the acquired shares or assets turnover test is the sum of all of the following is AU$50 million or more:
Where the acquisition is in shares in a body corporate, the current GST turnover of the body corporate together with the current GST turnover of each connected of the body corporate; and
Where the acquisition is of an asset, the current GST turnover of the target to the acquisition to the extent that is attributable to the asset.
In relation to the above:
Connected entity meaning an associated entity as per section 50AAA of the Corporations Act, and any entity controlled by the principal party as per section 50AA of the Corporations Act; and
Current GST turnover (which is well understood by business given it is used by business to report the value of their taxable and GST free supplies) has the same meaning as section 188-15 of A New Tax System (Goods and Services Tax) Act.
In relation to the assessment of the AU$250 million transaction value, an acquisition will meet this threshold if the greater of the following is AU$250 million or more:
The sum of all market values of all of the shares and assets being acquired as part of the contract or arrangement; or
The consideration received or receivable for all of the shares and assets being acquired as part of the contract or arrangement.
As a practical matter, this means the following for parties seeking to enter into negotiations for M&A, including considering the broader meaning of “acquisition”, at an early stage of the proposed acquisition or deal:
The acquirer needs to, for the purposes of ACCC Notification, consider the turnover of itself and the target;
The acquirer needs to calculate the GST turnover for the 12 months up to the date of the signing (and notionally at the commencement of negotiations) of both itself, including connected companies, plus, the GST turnover of the target (and its connected entities in the case of acquisitions of shares), to seek to calculate the AU$200 million threshold;
The above calculation will also be relevant to the calculation of the AU$50 million threshold; and
The acquirer needs to consider the market value of, or consideration for, all the shares or assets the subject of the transaction.
Very Large Corporate Group Turnover
The very large corporate group turnover test for mandatory notification is as follows:
The acquirer or acquirer group (i.e. the principal acquirer party and each connected entity) have a combined Australian current GST turnover of at least AU$500 million; and
The Australian current GST turnover of the target (the same approach to the assessment being the same as above) is at least AU$10 million (for each of at least two of the merger parties).
The Assessment of Serial or Creeping Acquisition
An acquisition satisfies the AU$50 million or AU$10 million threshold for accumulated acquired shares or assets turnover test for notification if:
The acquisition is of shares or assets; and
The principal acquirer or each connected entity have acquired other shares or assets in the three years ending the date of entering into the agreement or arrangement; and
Both the current acquisition (of shares or assets) and the previous acquisition, related directly or indirectly to the carrying on of a business involving the supply or acquisition of the same or substitutable or otherwise competitive with each other (disregarding geographic factors or limitations); and
The acquisition of the previous shares or assets and the current shares or assets, if treated as a single acquisition would satisfy the AU$50 million or AU$10 million acquired shares or assets turnover test; unless
The current GST turnover of the target of the current acquisition (and as relevant connected entities) is less than AU$2 million.
Exceptions to the Requirement Make a Mandatory Notification
In addition to the exception to the requirement to notify in respect of acquisition of partial shareholdings that was included in the amending Act, the Determination sets out that acquirers are not required to notify in the following circumstances:
Certain Land Acquisitions
Land acquisitions made for the purposes of developing residential premises; and
Acquisitions by businesses primarily for engaging in buying, selling or leasing land, where the acquisition is for a purpose other than operating a commercial business on land (i.e. the exemption is for property development or operating a property development business rather than operating a commercial business on the premises).
Liquidation, Administration or Receivership
An acquisition by a person in the person’s capacity as an administrator, receiver, and manager, or liquidator (within the meaning of the Corporations Act).
Financial Securities
An acquisition that results from a rights issue, a dividend reinvestment and underwriting of fundraising or buybacks, or an issue of securities (as per the Corporations Act).
Money Lending and Financial Accommodation
An acquisition of shares or assets that is a security interest taken or acquired in the ordinary course of business of the person’s business of the provision of financial accommodation (as long as the person whose property is subject to the security interest is not an associate of the acquirer).
Nominees and Other Trustees
An acquisition of an asset, that is an interest in securities, by a person as a bare trustee, if a beneficiary under the trust has a relevant interest in the securities.
Exchange-Traded Derivatives
An acquisition of an asset in the form of exchange-traded derivative and if at the time, the derivative confers an equitable interest in a share or assets, the acquisition of that equitable interest.
Notification Requirements for Coles and Woolworths
The Determination requires Coles and Woolworths (major supermarkets) and connected entities to make a notification for any acquisition of shares or assets that results in:
Coles or Woolworths acquiring in whole or in part, a supermarket business (a supermarket business as defined in section 5 of the Competition and Consumer (Industry Codes – Food and Grocery) Regulation 2024; or
Coles or Woolworths acquiring a legal or equitable interest in land (in whole or in part), either existing land that has a building with a gross lettable area of 700sqm or if it does not have an existing building, the land is 1,400sqm,
UNLESS
The acquisition is not the extension or renewal of a lease for land upon which Coles or Woolworths was already operating a supermarket on the land.
Notification Forms – Information and Documentary Requirements
The Determination sets out the requirements for each of Short-Form Notifications (for acquisitions that were unlikely to raise competition concerns) and Long-Form Notifications (for acquisitions that required greater consideration of their effect on competition).
The Determination sets out in more detail the requirements and form of each of these notification forms, but in brief, the following are required (identifying the additional requirements for long-form application):
Documents
The final or most recent version of the transaction documents (including sale and purchase agreements, heads of agreement, offer documents/letters of intent and any other agreements between the transaction parties related to the acquisition);
For each party, the most recent audited financial statements and income statements that relate to the supply of goods or services most relevant to the competition analysis; and
An organisational chart to show structure of ownerships of each party and connected entities.
In addition, for Long-Form Applications, documents from each of the parties prepared for or received by the Board, Board Committee, or equivalent (possibly Executive or senior leadership team), or the shareholders meeting within the three years prior to the date of the notification regarding:
The rationale for the acquisition, including the business case for the acquisition or divestment;
The assessment of acquisition including the valuation of the target; and
Industry reports, market reports etc provided to the Board or equivalent within the previous three years describing competitive conditions, competitors, market shares and business plans (unrelated to the acquisition).
Information
The party names, contact details and law firms representing the parties;
An overview of:
The goods or services supplied (or acquired) by the parties, including brands, most relevant to the acquisition;
The transaction or transaction structure;
The rationale for the acquisition;
The consideration for the acquisition; and
If relevant, any foreign filings relevant to the transaction.
Tables for each of the parties setting out:
Connected entities in each of the previous three years; and
Acquisitions made by the parties (including connected entities in each of the last three years);
Details of the competitive effects of the acquisition, including:
The relevant goods and services and the geographic areas in which they are supplied;
The other key suppliers of the goods/services;
The markets that are affected and estimate of market shares (by volume, capacity or turnover in each of the previous three years); and
The contact details of the five closest competitors, five largest customers, five customers closest to the median spend of customers.
Additional Requirements for Long-Form Applications
Details regarding barriers to entry including:
The costs of entry or the infrastructure required to supply the relevant goods or services and time required to put these in place, as well as the extent of these costs that are sunk or not recoverable;
Other barriers such as access to inputs, intellectual property issues, legal and regulatory requirements, customer switching costs and time required to “win” contracts, and overall revenues to achieve minimum viable scale; and
The entry of new competitors, as well as the exits in the previous three years.
The long-form application requires significant additional information for different types of transactions – horizontal and vertical acquisitions etc.
Other relevant information, particularly:
Identifying any goodwill protection provisions and the reasons that these provisions are necessary to protect the goodwill of the purchaser.
The Government has foreshadowed additional Determination, with the Determination itself having “placeholders” regarding waiver applications and the Acquisition Register – which unfortunately will now not be progressed until after the Federal election.
We are happy to provide additional details on any of the above issues.
We will also shortly publish additional Insights focusing on the ACCC’s Guidelines.