Defending Lawsuits

After a US$750 million acquisition, the parties ran the usual post-closing true-up that adjusts the price based on the target’s actual financials at closing. It turned out the seller had misapplied a revenue-recognition accounting standard in its pre-closing books, and once the standard was applied correctly the buyer owed roughly US$38.3 million more. The buyer paid, then sued separately for indemnification, arguing the seller had promised its financial statements complied with accounting standards and that promise was false. The Delaware Court agreed and let the buyer recover the extra payment.

The Court rejected the seller’s arguments that the buyer should have caught the error in due diligence, that the claim belonged in the earlier case, or that a contract clause barring double recovery blocked it. Diligence is not an audit, the claim was not ripe until the true-up concluded, and the anti-duplication clause was meant to prevent collecting twice, not to eliminate indemnity claims. The Court determined that a price true-up fixes the number, but does not by itself decide who bears the cost of an inaccurate representation.

Several U.S. treaty partner jurisdictions have recently become aggressive in extending their taxation rights to cross-border acquisition transactions and the movement of assets, such as intellectual property. As a result, multinational companies should consider seeking advance unilateral or bilateral advance pricing agreements (also referred to as “APAs”) to resolve potential disagreements with foreign tax authorities and avoid lengthy and expansive audits and litigation proceedings.

What are “APAs”?

Commonly, following an acquisition of a foreign company by a U.S.-based multinational company, certain IP assets of the foreign target may need to be integrated with such company’s other operating assets to better align the ownership of IP assets with such company group’s operating structure, functions, other assets, and risks. Such an alignment of assets could involve the license, sale, or transfer of IP to the U.S. parent company or to another member of the multinational company group located in a jurisdiction different than that of the target. A cross-border transfer of assets could result in income recognition based on the value of the assets being transferred.

An APA is an agreement between a multinational company and a taxing authority or authorities regarding the transfer pricing methodology, valuation, and pricing of assets and certain transactions. A bilateral or multilateral APA (which involves the multinational company and two or several tax authorities, respectively) provides a non-adversarial alternative to resolving potential cross-border transfer pricing disputes, among many other benefits. Furthermore, the IRS is expected to be more likely to support valuation methodologies and adjustments that are based on acceptable international tax principles and valuation methodologies. The IRS’s support of a company’s valuation methodology in an APA process could be helpful in a dispute or litigation with a treaty partner jurisdiction in support of a company’s position. As a result, a bilateral or multilateral APA process provides an opportunity to set the stage and level the playing field with the treaty partner country(ies). A bilateral or multilateral APA may be a viable alternative to consider for both treaty partners (including Canada, Germany, India, Israel, Japan, Korea, Switzerland, and others) and other jurisdictions.

As a primary benefit, a bilateral or multilateral APA could eliminate the need for uncertain tax position reporting and provide for penalty protection. It would also help parties avoid repetitive tax and transfer pricing audits; limit tax authorities’ ability to change transfer prices retroactively; allow parties to manage transfer pricing real-time (rather than responding to audits years later); and mitigate the risk, cost, and burden of an audit or potentially harmful tax litigation in the U.S. and in the treaty partner jurisdiction. Other benefits may include the suspension of current tax audits or assessments relating to the transactions covered by the bilateral or multilateral APA negotiations until the APA process has been concluded, which could take several years.

For instance, recently at least one tax jurisdiction has gone so far as to argue on several occasions that the value of a target company’s IP could be higher than the entire purchase price paid to acquire such target company. The argument has been that, surely the buyer has taken into account the tax cost associated with moving the IP following the acquisition and, thus, discounted the purchase price paid for the target company and all of its assets, including its IP. Such a result, in the absence of an APA, can have a significant effect on deal structure, outcome, and consideration if not addressed in advance.

While the taxing authorities and the multinational company are not obligated to reach an agreement, they are generally required to try to reach a mutual agreement pursuant to the applicable income tax treaty, including relevant provisions for the relief from double taxation and mutual agreement procedure.

In a welcome development in the U.S., the IRS released additional guidelines on the IRS’s Advance Pricing and Mutual Agreement Program (APMA), a program that looks to identify multinational companies and matters early in the process that are more likely to successfully reach an APA resolution based on the facts at issue. Multinational companies can contact APMA for a pre-submission review and receive a preliminary opinion on whether to proceed with the APA process within just a few weeks of submitting a pre-filing memo and providing additionally requested information.

APMA considers a number of factors, including: the significance of the transaction; the probability that transfer pricing compliance will be significantly enhanced by engaging with the treaty partner; the scope, materiality, and complexity of the company group-covered transactions in the U.S.; whether there is an actual or potential transfer pricing dispute that would be most efficiently resolved through a bilateral or multilateral APA based on the APMA’s experience; country-specific strategy considerations; and the input of the treaty jurisdiction regarding the APA.

In addition to transactions involving IP assets, a bilateral or multilateral APA can cover the provision of services by a non-U.S. entity, the provision of services by a U.S. entity, sale of tangible property into and from the U.S., use of intangible property by a U.S. entity and by a non-U.S. entity, and other transactions. In the majority of “APAs”, the covered transactions involve numerous business functions and risks.

The Delaware Court of Chancery dismissed a stockholder suit claiming that directors of B. Riley Financial breached their fiduciary duties by failing to catch problems with an investment that later went bad. The suit was framed as a Caremark claim, the label Delaware uses for lawsuits arguing that a board failed to conduct oversight. The Court reaffirmed why those claims are so hard to win: a board’s oversight duty is aimed at the company’s own internal compliance and risk systems, not at policing misconduct by outside parties the company does business with, even where the company has significant money on the line. A failed investment, on its own, is not evidence of bad faith, and stockholders cannot repackage hindsight criticism of a bad bet as a breach of duty. Delaware courts scrutinize process, meaning they evaluate whether the board informed itself and had systems in place, rather than whether that process led to a good outcome.

When allegations of corporate misconduct surface, one of the first questions companies may face is who should oversee the response. In some circumstances, an investigation led by management or in-house counsel may be appropriate. But allegations involving senior executives or directors, mission-critical compliance risks, or questions about management’s independence may require the board — often through an independent committee — to take a more active role.

In a new article for Reuters Practical Law, Sidley partner Holly J. Gregory examines when a board-driven investigation may be warranted and how boards can structure those investigations to withstand scrutiny from regulators, prosecutors, shareholders, and courts.

The article also considers recent Delaware decisions addressing directors’ responses to compliance red flags and highlights practical considerations for board-led investigations, including committee independence, investigative scope, preservation, privilege, documentation, whistleblower protections, self-disclosure, reporting, and remediation.

A Delaware Court of Chancery decision in Siegel v. Morse reaffirmed that courts will not entertain challenges to advance notice bylaws absent an actual, existing dispute. Even after the Delaware Supreme Court’s Kellner decision raised the bar for facial validity claims, the plaintiff attempted to reframe his challenge as an “as-applied” one, but the court found no ripe controversy since no stockholder had expressed an intent to nominate directors. The decision signals that bylaw litigation must be grounded in a real, concrete controversy and that generic concerns about defensive board behavior are insufficient without an active proxy contest or nomination dispute.

Many Delaware-incorporated companies include provisions in their corporate charters or bylaws requiring that stockholder lawsuits be brought in Delaware’s Court of Chancery — a court that decides cases before a judge, with no jury. This creates a tension with California law, which strongly guarantees the right to a jury trial and has a broad “long arm” statute that can pull disputes into California courts even when a company has chosen a different forum. A minority stockholder who was a California resident sued EpicentRX (a Delaware corporation) in California court. The lower courts refused to enforce the Delaware forum selection clause, reasoning that sending the case to Delaware would effectively strip the plaintiff of her California jury trial rights. The California Supreme Court reversed, holding that a forum selection clause is not unenforceable simply because it requires parties to litigate in a jurisdiction that does not provide the same jury trial right as California. The court reasoned that California’s strong public policy favoring jury trials applies to proceedings in California courts, not to courts in other states. It further reasoned that a forum selection clause determines where a dispute is litigated, not how, so it does not constitute a prohibited waiver of jury trial rights. The decision aligns California with the majority of states that enforce Delaware forum selection clauses, reinforcing the ability of Delaware-incorporated companies to channel stockholder disputes to Delaware’s specialized corporate court.

The Delaware Court of Chancery recently provided a powerful reminder of the Court’s equitable purpose, and how it will not countenance bad faith or duplicity. In Ghatty v. Mudili et al., three board members of a five-member board voted at a special board meeting to remove the remaining two directors from their officer positions, and later sued under 8 Del. C. § 225 to seek confirmation that the two directors had been validly removed from their officer roles. The Defendants challenged their removal on a number of grounds. The Court of Chancery considered one argument dispositive: that the meeting notice was inherently deficient because the meeting agenda omitted the removal action effectuated at the meeting, and indeed misleadingly suggested that one Defendant’s officer role would be expanded. The Court condemned the notice as “duplicity,” voided the vote, and held that the Defendants remained officers of the Company.

The Meeting Notice

The stated purpose of the meeting was to discuss how to bring “better governance and transparency” to the Company, and the agenda included the following items:

• Review of requests for financial statements, bank records, and supporting documentation;
• Discussion of alleged unauthorized transactions or approvals;
• Proposal for new signatory protocols and centralized finance email;
• Proposed recognition and role expansion for one of the Defendants; and
• Any additional matters raised by board members or shareholders in good faith.

Following the notice, there were additional communications amongst the directors detailing the items for discussion at the meeting. Notably, the removal of the Defendants as officers was never mentioned. In fact, although one Plaintiff director raised certain “potential areas of concern,” he specifically said that the meeting notice was not “an accusation of wrongdoing against any individual,” but was instead “a formal invitation to clarify and remedy any potential governance shortfalls,” and he invited the directors to “submit any ‘contrary evidence’ and ‘additional agenda items’ ahead of the meeting.” He also mentioned one Defendant’s “notable contributions,” and proposed that he be appointed Chief Revenue Officer and given enhanced compensation.

Before the board meeting, however, there was a “falling out” between that director and the Defendants. The latter then said that they would be unable to attend the meeting due to their “tight schedules.” The meeting went forward as planned, with only the three Plaintiff directors in attendance. Later resolutions state that, at the meeting, the three Plaintiff directors removed the Defendants as officers of the Company.

The Court found that the meeting notice technically complied with the Company’s bylaws, but nevertheless voided the vote taken at the meeting because the notice was not equitable. Instead, the Court considered it a “bait and switch that concealed the Plaintiffs’ intention to remove [the Defendants] as officers.” In holding that the Defendants remained officers of the Company, the Court stressed that “[e]quity will not abide such duplicity toward fellow directors.” The Court also rejected the argument that notice was not required where the targeted directors lacked the power to block the action, stressing that “[f]air notice fosters a genuine deliberative process – a purpose that was subverted here.”

Lessons Learned

Ghatty offers some important lessons about the value of good governance when taking board action:

• Directors are entitled to a “fair and non-misleading notice of the agenda for a special meeting,” even if the notice technically complies with the bylaws. When drafting agendas, consider whether the agenda adequately describes the discussion points and decision items for the meeting.
• Holding Regular Meetings. This meeting was the Company’s first in-person board meeting in three years. This fact was relevant to the determination of whether the meeting was a “regular” or “special” meeting. That distinction can be significant, particularly in instances where the company’s bylaws have different notice requirements for regular versus special board meetings.
• Clear Bylaws. The Court began its analysis by turning to the Company’s bylaws. In support of their argument that the meeting notice was deficient, the Defendants cited to a stockholder meeting provision in the bylaws that required a specific statement of the meeting’s purpose. Because the bylaws lacked an analog requirement for board meetings, the Court found that the notice was technically sufficient, and had to rely instead on its equitable power to reach its result. Consider whether there are unintentional gaps or inconsistencies in your company’s bylaws that can be clarified or corrected to provide more certainty and consistency across governance items. Also remember that bylaws set the rules for the game, but, as seen in Ghatty, can’t protect against bad faith.
• Records and Meeting Minutes. The Court referenced the fact that there were no contemporaneous minutes or evidence of the meeting, only a resolution dated a couple of weeks later stating that, at the meeting, “appropriate resolutions were adopted, changing certain officer and signatory roles within the Company.” Although the Court did not rely on this fact in its holding, it is a helpful reminder of the importance of appropriately and timely documenting actions taken at a meeting.

In a Bloomberg Law article, Sidley lawyers Greg Lantier, Liv Herriot, and Raneem Eter examine recent federal court decisions clarifying lawyers’ obligations when using generative artificial intelligence (AI) in litigation. The article analyzes how courts are applying Federal Rule of Civil Procedure 11 to AI-assisted filings, emphasizing lawyers’ duties to verify citations, supervise AI-generated work product, and ensure the accuracy of court filings. The authors also outline practical governance measures law firms and legal teams can adopt to reduce AI-related litigation risks and strengthen accountability.

Courts are writing their own rules about generative AI, and in patent cases those rules differ sharply from judge to judge. This survey, current as of September 8, 2026, catalogs the generative-AI requirements in the venues where most patent infringement suits land: the Eastern and Western Districts of Texas, the Northern and Central Districts of California, the Northern District of Illinois, the District of New Jersey, and the District of Delaware and the U.S. International Trade Commission, where no AI-specific rules were identified. Only the Eastern District of Texas has a court-wide rule, making every litigant responsible for verifying AI-assisted filings. Elsewhere the obligations come from individual judges’ standing orders and vary widely, from restating the existing duty to verify what you sign to requiring a separate certificate naming the AI tool, confirmation that a human checked every citation, records of the prompts used, or disclosure of AI use in billing. Penalties include US$500 per violation and having the filing struck.

On April 29, 2026, the Delaware Supreme Court upheld the dismissal of consolidated stockholder challenges to advance notice bylaws that The AES Corporation and Owens Corning each adopted in 2023. Advance notice bylaws are the internal rules setting out how far in advance, and with what disclosures, a stockholder must tell a company it intends to nominate directors or bring business before a meeting. The stockholders attacked the provisions in the abstract, without anyone having actually attempted a nomination and been turned away.

The court held that this was not enough to proceed. Delaware courts will review these provisions when there is a concrete, live dispute about how a bylaw is being applied, not when the alleged harm depends on future events that have not occurred. The decision continues a consistent line of recent bylaw rulings and means such provisions generally will not be tested in court until a real nomination dispute arises.

On March 25, 2025, Delaware Governor Matt Meyer signed significant amendments to the Delaware General Corporation Law that provide greater predictability and clarity for conflicted transactions. The amendments create statutory safe harbors under Section 144 that preclude equitable relief and damage claims when transactions involving controlling stockholders or control groups are approved through either a properly functioning special committee of at least two disinterested directors or an informed, uncoerced vote of disinterested stockholders (with both mechanisms required only for controller go-private transactions). The amendments also define key terms including “controlling stockholder” (with a one-third voting control floor), “control group,” and “disinterested director,” extend duty-of-care exculpation to controlling stockholders, and narrow stockholder books-and-records inspection rights under Section 220 to core materials while adding heightened requirements for accessing additional records. The amendments apply to acts and transactions regardless of when they occurred, but do not apply to legal proceedings or demands commenced on or before February 17, 2025.

On February 27, 2026, in a unanimous 37-page opinion, the Delaware Supreme Court upheld the constitutionality of significant changes to the Delaware General Corporation Law (DGCL) enacted in March 2025 via Senate Bill 21 (SB 21). This decision permits Delaware corporations and their advisers to confidently rely on these amendments for transactions with interested fiduciaries (including controlling stockholders), thereby increasing transaction planning flexibility and certainty while decreasing litigation risk under Delaware law.

Background of SB 21

As previously discussed in this Sidley Update, SB 21 provided greater statutory clarity in a number of important areas that had been the subject of common law development. It amended Section 144 to, among other things, create new statutory safe harbors for transactions with interested fiduciaries, including controlling stockholders. Although these safe harbors are akin to previously existing common law standards, they reflect important changes thereto that decrease transaction planning risk beyond those prior tests. These include (i) offering safe harbor protection in all interested-fiduciary transactions (except for going private transactions) by the use of either disinterested committee/director approval or a majority-of-the-minority vote (not both), (ii) incorporating a definition of “controlling stockholder,” and (iii) codifying standards for director independence and disinterestedness. SB 21 also amended Section 220 to clarify the scope of books and records inspections. These changes applied retroactively to all acts or transactions whether occurring before, on, or after enactment, subject only to a carveout for litigation commenced or demands made before February 17, 2025 (when SB 21 was announced). The constitutionality of the Section 144 amendments, and their retroactivity, was promptly challenged.

Constitutional Questions and Answers

In Rutledge v. Clearway Energy Group LLC, No. 248, 2025 (Del. Feb. 27, 2026), the Delaware Supreme Court considered two constitutional challenges to Section 144, focused on its safe harbor provisions and retroactive application. It rejected both.

1. First, the Delaware Supreme Court held that Section 144’s safe harbors, which preclude equitable relief and eliminate damages claims against fiduciaries, do not improperly limit the Court of Chancery’s equity jurisdiction.

Highlighting the Delaware General Assembly’s long-respected and regularly employed legislative power to amend the DGCL, including in response to common law developments, the Delaware Supreme Court held that the Court of Chancery was not improperly divested of its equitable jurisdiction via SB 21’s amendments to Section 144. The Supreme Court reasoned that the Court of Chancery remains empowered to adjudicate fiduciary duty claims and to determine whether the prerequisites for the safe harbor protections in Section 144 are achieved. Although two remedies previously available to the Court of Chancery — equitable relief and awards of monetary damages against directors, officers, controllers, or control groups — are now unavailable where the Section 144 safe harbor prerequisites have been met, the Court of Chancery retains jurisdiction over fiduciary duty claims. The Supreme Court viewed SB 21 as “a legitimate exercise of the General Assembly’s authority to enact substantive law that, in its legislative judgment, serves the interests of the citizens of our State.”

2. Second, the Delaware Supreme Court held that the retroactive application of SB 21 to transactions occurring prior to its enactment does not violate due process by eliminating vested fiduciary claims.

The Delaware Supreme Court held that SB 21’s retroactive application does not extinguish vested rights of action in a manner violative of constitutional due process rights. The Delaware Supreme Court questioned the premise that Rutledge had a vested property right prior to SB 21’s enactment because his interest was more in the form of an “anticipated continuance of” existing law. But it concluded that even assuming he had such a right, the Delaware General Assembly clearly intended that the statute apply retroactively and “exercise[d] its legislative authority in conformity with the dictates of due process” by crafting a statute reasonably related to a legitimate objective. As a result, SB 21 does not strip away vested claims in violation of due process and will apply equally to all acts and transactions on or before February 17, 2025, unless already then subject to an action, proceeding, or demand.

Key Takeaways for Boards and Dealmakers

Safe Harbor Certainty

First and foremost, Clearway preserves SB 21’s empowerment of disinterested decisionmakers to protect investors in transactions with interested fiduciaries. Corporations engaging in transactions with fiduciaries may confidently rely on the safe harbor frameworks in Section 144, which will continue to increase predictability and flexibility in corporate dealmaking while reducing litigation risk. Significantly, transaction planners can be confident that any act or transaction involving an interested director, officer, controller, or control group (other than a going private transaction) may be cleansed by either a special committee approval or by a majority-of-the-minority stockholder approval. Although Clearway settles SB 21’s constitutionality, all corporate law statutory frameworks necessarily reflect some degree of unpredictability when first enacted that will be reduced over time through case law development.

Compliance and Documentation

Parties and practitioners should take into account these amendments and design transactions to fit within Section 144’s safe harbor protections to avoid potential application of the “entire fairness” standard of review. Corporations and their counsel should continue to deploy best practices to monitor and carefully document compliance with the contours of the safe harbors. Some key areas for monitoring and documentation include:

• analysis of the disinterestedness of decisionmakers;
• disclosure of all material facts to disinterested directors;
• processes supporting a “good faith” approval of any such transaction by disinterested directors “without gross negligence”; and
• disclosure of material facts in connection with any disinterested stockholder approval of a transaction.

Reincorporation Considerations

Underpinning the Delaware Supreme Court’s constitutional analysis was a deep deference to the Delaware General Assembly’s ability to amend (often swiftly) Delaware’s corporate law statutes. The decision therefore bolsters one of the reasons many corporations have chosen to incorporate in Delaware: a fast-acting and responsive legislative branch. The substance of SB 21 is likewise an important consideration in any reincorporation discussion, because the Section 144 amendments provide a roadmap for transaction planners to follow that reduces unpredictability and overall litigation risk, although we anticipate that litigation challenges will be brought to develop the contours of the statute’s application.

The Delaware Court of Chancery threw out all twelve claims a group of Jenzabar stockholders brought against the company’s founder, his former spouse, and the board. The stockholders complained about two things: that the company had paid the founder’s appeal bond and legal fees in an earlier case where he was found to have taken a corporate opportunity worth US$81 million, and that a decade of generous stock and bonus awards had let the founder and his ex-wife grow their ownership from 18% to 91% while diluting everyone else. The court held that dilution claims like these belong to the company, not to individual stockholders, so they had to be brought as derivative claims on the company’s behalf.

The rest of the case failed on timing. The claims about the appeal bond and legal fees were filed too early, because the indemnification agreement required an independent lawyer to decide whether the founder was entitled to be reimbursed, and that process was still underway. The compensation claims were filed too late, since the events happened between 2012 and 2015 and Delaware applies a three-year clock. The practical lesson for founders and counsel is that indemnification and advancement are different promises with different timing, and that if your equity grants ever draw scrutiny, the clock starts running when stockholders have enough information to ask questions.

In Fortis Advisors v. Krafton, the Delaware Court of Chancery awarded a striking equitable remedy: it ordered the reinstatement of a CEO who was wrongfully terminated using a strategy developed with ChatGPT, and extended the earnout period by the full duration of his improper exclusion. The buyer had used AI to strategize avoidance of a US$250 million earnout, but because that advice was generated outside the attorney-client relationship, it was not privileged and became damning evidence at trial. The decision puts buyers on notice that depriving seller-managers of bargained-for post-closing operational control may result in not just damages, but equitable remedies that restore control and reset the earnout clock.

The Department of Justice announced a US$21.5 million settlement with five Deloitte entities to resolve allegations under the False Claims Act, the federal statute that penalizes companies for submitting false claims for government money. Notably, the DOJ alleged that the companies’ employment practices violated Title VII and the standard equal opportunity clause found in federal contracts, and that billing the government while out of compliance amounted to a false claim. The case is the second settlement secured under DOJ’s Civil Rights Fraud Initiative, a cross-agency enforcement push that pairs the False Claims Act with other tools such as the Equal Credit Opportunity Act. For startups, the relevant exposure is real: companies that sell to federal agencies and their subcontractors are bound by the equal opportunity clause, Title VII, and the compliance obligations that come with them.

Two February 2026 federal court decisions addressed how existing privilege and work product doctrines apply to generative AI, with one court (in United States v. Heppner) denying privilege and work product protection where an executive used an AI platform without adequate confidentiality safeguards and without counsel’s direction, and another (in Warner v. Gilbarco) holding that a pro se litigant’s AI-assisted analysis via a public AI platform was protected work product. These decisions signal that courts may apply existing doctrines to new technology in the legal context. Key considerations include whether the AI platform’s terms and privacy policies preserve confidentiality, the extent of attorney involvement in the AI-assisted work, and whether the materials were prepared in anticipation of litigation. Organizations should inventory AI tools and review their confidentiality terms, establish guardrails against AI use for legal analysis, and consider updating litigation hold protocols to account for AI-generated materials such as prompts and outputs.

Courts are now addressing how protective orders should govern the use of generative AI in discovery. Two federal decisions — Morgan v. V2X, Inc. and Jeffries v. Harcros Chemicals, Inc. — distinguish between “open” public AI tools that may retain and train on user data and more secure “closed” systems, and contemplate contractual safeguards before confidential discovery materials can be submitted to AI platforms. Practical takeaways may include addressing AI use explicitly at the outset of discovery and drafting concrete operational safeguards rather than referencing specific tools. Emerging issues that parties may anticipate include pro se litigants’ access to AI, AI’s influence on user behavior, and the conceptualization of AI within existing privilege and confidentiality frameworks.

The U.S. Copyright Office’s Part III report on AI and copyright signals that companies cannot assume generative AI training is automatically allowed under “fair use.” The report says copyright issues may arise at several stages: when developers collect and copy protected material for training the model, when a model memorizes protected material in its internal “weights,” and when AI outputs closely resemble copyrighted material. It emphasizes that fair use must be judged case by case, looking at why the original work was used, whether the use is commercial or transformative, how much of the original work was copied, whether guardrails prevent copying in outputs, and whether the AI system harms existing or potential markets for the original work. The report also points to licensing and possible policy reforms as ways to address uncertainty, but overall it takes a cautious approach that is more favorable to copyright owners than to unrestricted generative AI training.

In a US$250 million acquisition, the buyer refused to pay one stockholder his merger proceeds unless he first signed a joinder agreement that included a sweeping release of any claims he might have against the companies. After trial, the Delaware court held that withholding payment on that condition breached the company’s charter. A stockholder cannot be forced to give up legal claims just to collect money he is already owed, unless he receives something extra in exchange for that release. The company eventually conceded the point.

The Delaware Supreme Court recently affirmed that, with respect to limited liability companies (LLCs), courts will not fill gaps with implied duties that parties chose not to include in the LLC’s operating agreement. In Khan et al. v. Warburg Pincus, LLC, the Court found that minority LLC members could not use the implied covenant of good faith and fair dealing to challenge the outcome where the LLC agreement expressly waived fiduciary duties, authorized self-interested conduct by the majority investor, and provided a specific amendment mechanism for differential consideration. The Court refused to import corporate-style fairness and disclosure obligations where parties had negotiated a detailed contractual governance scheme, reinforcing Delaware’s highly contractarian approach to LLCs.

Federal prosecutors in Manhattan and the Commodity Futures Trading Commission charged a Google software engineer on May 27, 2026, with using confidential internal search data to make money on Polymarket, a platform where people trade contracts tied to whether a specified event will occur. It was the second such case in weeks, following one involving a service member accused of trading on classified information, and it pushed insider trading style theories well beyond stocks and bonds into event contracts.

The charges raise unsettled questions about whether confidential business information is protected in these markets the way it is in securities markets, and how far the CFTC’s enforcement authority reaches. For companies, the immediate concern is that standard insider trading and confidentiality policies were written with company stock in mind and may say nothing about employees trading on outside prediction platforms using nonpublic internal data. Regulators applying familiar fraud theories to a new market is the development to watch.

As prediction markets expand beyond elections and sports to cover corporate, regulatory, and geopolitical events, employees, directors, and other insiders who know something nonpublic may be able to profit from that knowledge without ever touching a share of stock. The government’s position, reflected in the first insider trading case brought over these markets, is that existing insider trading and antifraud principles already apply to event contracts. That leaves a gap for most companies given that standard insider trading policies, confidentiality agreements, and codes of conduct are typically drafted around trading in the company’s own securities and may not reach these platforms at all.

To avoid legal, reputational, and compliance exposure, organizations – whether public or private – should address prediction markets before an incident rather than after, including by: prohibiting misuse of confidential business information, naming prediction markets explicitly in the company’s relevant policies, extending confidentiality obligations to information that could move an event contract, training people on the risk, and adding monitoring and reporting controls.

Ordinary Delaware law tells a board selling control to get the best price reasonably available; however, by statute, directors of a public benefit corporation must balance stockholders’ financial interests against the interests of other people affected by the business and the company’s stated public mission. In Drakes Landing Associates, L.P. v. Tilden Park Capital Management, L.P., the court held that the Revlon stockholder value maximization standard of conduct does not apply to these directors, though courts may still review their decision-making under an enhanced scrutiny standard. The case was dismissed on a separate ground: the directors were protected by a statutory safe harbor, given that their decision was found to be informed, disinterested, and not one that no sensible person would approve. Here, an independent special committee with its own lawyers and a banker ran a market check before approving emergency financing that heavily diluted existing holders.

Hong Kong’s securities regulator is taking a harder line on claims that documents are shielded by legal professional privilege. Speaking in late August 2026, the Securities and Futures Commission’s head of enforcement said the agency is prepared to push back against over-broad privilege claims, echoing a recent court ruling. In that case, a broker hired outside lawyers after concerns arose about the handling of confidential information around a block trade, and the resulting internal investigation report was given to the SFC under a limited waiver. When a hedge fund manager sought the report, interview notes, and underlying communications, the broker claimed privilege and lost. The court applied the dominant purpose test: a document is privileged only if it was created mainly to obtain legal advice or for litigation, and here the main purpose was satisfying regulatory reporting obligations. Involving a lawyer or labeling a document does not by itself create privilege, although genuine privilege survives a limited waiver.

Dodiya v. Franklin tested the limits of the safe harbors added in 2025 to Section 144 of the Delaware General Corporation Law. Those amendments can preclude equitable relief and eliminate damages claims in certain conflicted transactions that may involve insiders or a controlling stockholder by having it approved either by disinterested directors acting in good faith and without gross negligence, or by an informed vote of disinterested stockholders. In Dodiya v. Franklin, a company’s CEO leaked confidential valuation and process information to his father’s investment firm, which bought stock cheaply and then took the company private. The board continued to give the CEO access to deal materials and allowed him to attend a board meeting about the deal even after he recused himself, and despite the board’s knowledge of the leak.  Despite this, the proxy statement stated he had not participated in the sale process after his recusal. In August 2026, the Delaware Court of Chancery found that the board acted with “reckless indifference” and that it was reasonably conceivable that the merger proxy statement contained a material misstatement, making both safe harbors unavailable. The safe harbor protection is real, but its availability depends on the board’s process and the accuracy of its disclosures.

Texas overhauled its business organizations code last year through Senate Bill 29, part of a broader effort to make the state a more attractive home for companies looking beyond Delaware. One of the changes lets certain corporations, including publicly traded ones and other opt-in companies with more than 500 shareholders, adopt a bylaw requiring a shareholder to hold at least 3% of the company’s stock before bringing a lawsuit on the company’s behalf against its own directors or officers.

A federal court has now applied that provision, dismissing a derivative case against Southwest Airlines’ board because the plaintiff held far too little stock to clear the company’s 3% bylaw. The court also rejected the argument that a pre-suit demand letter sent before the new rules took effect counted as starting the proceeding. For companies weighing where to incorporate, the case is an early signal that Texas courts are giving the state’s new corporate litigation protections real effect.

Although AI-related patent filings have surged dramatically over the past two decades, patent litigation involving AI technologies has not yet kept pace, a trend the article suggests may mirror the delayed wave of smartphone patent litigation that followed the technology’s commercial growth. In this piece for Bloomberg Law, Sidley partner Alexis Cohen argues that AI companies should begin preparing now for increased future litigation by evaluating and strengthening their intellectual property protections, including patents and trade secrets, while also improving documentation, ownership records, employee agreements, and internal processes.

Reproduced with permission. Published May 21, 2026. Copyright 2026 Bloomberg Industry Group 800-372-1033. For further use, please visit: Bloomberg Industry Group copyright and usage guidelines.

A stockholder of a Delaware e-commerce company sent a formal demand to inspect company books and records while the company was being acquired. The company objected, claiming the demand was too broad and lacked a proper purpose, but offered to negotiate a narrower production. The stockholder did not respond. The merger closed a week later, cancelling the stockholder’s shares, and the stockholder filed suit to enforce her demand 12 days after that. The Delaware court dismissed the case: under the state’s books-and-records statute, often called Section 220, you must actually be a stockholder on the day you file the lawsuit, not merely on the day you send the demand. Once the merger wiped out her shares, she no longer qualified.

The court also refused to excuse the delay on fairness grounds, noting the company had never agreed to produce anything nor promised a schedule, so nothing it did invited her to wait. The court left open, without deciding, whether a fairness exception could ever apply, and cautioned companies that stringing a stockholder along before closing could weaken that defense.

Attorney-client privilege is a cornerstone of effective legal risk management, but its application is nuanced — especially for in-house counsel. The privilege protects confidential communications between an attorney and a client made for the purpose of obtaining or providing legal advice. However, courts scrutinize claims of privilege, particularly when in-house counsel are involved or when communications comprise of both legal and business advice. The law governing privilege can vary significantly by jurisdiction; thus, it is important to seek the advice of counsel prior to any communications.

Key Considerations for In-House Counsel:

To maximize protection and avoid inadvertent waiver, legal teams and senior executives should keep the following in mind:

In-house counsel face extra scrutiny

Courts recognize that in-house counsel often wear multiple hats. Privilege will apply only where the primary purpose of the communication was to obtain or provide legal — not business — advice.

Privilege applies only to legal — not business — advice

Privilege attaches only to communications where the predominant purpose is legal advice, such as internal investigations to assess whether employees breached a contractual obligation, reviewing marketing materials for compliance with applicable law, or drafting and analyzing contractual language. Clearly distinguish legal analysis from business discussions, particularly in writing.

Confidentiality underpins privilege

Limit distribution of privileged communications to those who “need to know” and avoid including third parties unless necessary and protected by a recognized exception. This is especially important to keep in mind when discussing privileged information while working remotely. There are no exceptions for spouses, family, roommates, or neighbors.

Common-Interest Exception

For example, in California, generally the common-interest exception extends the privilege to communications between parties and their counsel relating to potential civil litigation provided that:

• The parties have some common litigation interest (a purely personal or business-oriented interest is insufficient); and
• The communications are made to further that shared legal interest.

This exception may also apply where parties maintain separate counsel but coordinate through a joint defense or litigation strategy.

Where it applies, the common-interest exception typically only protects communications involving counsel.

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Do not assume privilege exists

Even if you believe a communication is privileged, write with the expectation that it could be reviewed by a court. Privilege does not necessarily extend automatically to subsidiaries or affiliates. Ensure formal retention and clear documentation when representing multiple entities or working with advisors. Additionally, the law governing privilege can vary significantly by jurisdiction; thus, it is important to seek the advice of counsel prior to any communications.

Labels help but don’t control

Mark emails or memos as “Attorney-Client Privileged” and “Confidential,” but remember: substance, not form, determines privilege. Where possible, clearly reference the legal advice sought or provided.

Be explicit in requests for legal advice

Directly address in-house or outside counsel, specify the legal issue, and avoid copying attorneys merely to shield a document.

Separate legal from business content

When communications blend legal and business matters, separate them or document the legal purpose clearly.

By proactively managing privilege, in-house counsel and executives can strengthen the protection of sensitive communications, preserve confidentiality, and reduce litigation risk.

A federal judge in Manhattan ruled in May 2026 that the government could not blame ChatGPT for its own decision to terminate more than 1,400 federal grants that the tool had flagged as related to diversity, equity, and inclusion. Staff fed short grant descriptions into the model and asked whether each one related to DEI, then acted on the answers without reading the underlying applications, without defining what DEI meant, and without a single instance of a reviewer disagreeing with the tool. The Court treated the prompts and outputs as discoverable evidence, noting that a decision-maker who chooses a tool cannot escape responsibility by blaming it.

For any company building generative or agentic AI into core business functions, the practical points are about governance: who is allowed to write prompts, whether reviewers have the expertise and authority to override an output, and whether the process is documented. AI-generated records can later surface in litigation or regulatory review, accurate or not.

By the time a venture-backed company reaches its mid to late stages, its board is usually built out of overlapping interests. Directors are affiliated with the funds that led earlier rounds, a founder may hold a large voting block, and executives and investors alike see a steady stream of opportunities, some of which look a lot like the company’s own roadmap. Generally, Delaware corporate law treats these relationships not as misconduct but as a process question. Most recently, Delaware corporate law received meaningful codified updates to its conflicted transaction rules and the key in evaluating such transactions remains to ensure that process follows the most recent developments in the law.

Loyalty Sets the Baseline

Directors and officers of a Delaware corporation owe fiduciary duties of care and loyalty to the corporation. The duty of loyalty bars a fiduciary from using a position of trust to advance personal interests at the corporation’s expense, and it is the source of both bodies of law discussed here. A conflict of interest does not by itself make a transaction wrongful; what it changes is the standard of judicial review if the transaction is later challenged. A conflicted transaction that has not been properly cleansed risks review for entire fairness, the most demanding standard under Delaware law, while a transaction that satisfies the statutory safe harbors described below is insulated from fiduciary duty damages and equitable relief.

Conflicted Transactions Under Section 144

DGCL Section 144 gives boards a set of alternative cleansing paths. An act or transaction involving a conflicted director or officer qualifies for the safe harbor if any one of the following is true: the material facts of the interest and the transaction are disclosed or known to the board or a committee, and a majority of the disinterested directors approve it in good faith and without gross negligence; the transaction is approved or ratified by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders; or the transaction is fair to the corporation and its stockholders. However, if a majority of the board is conflicted, the director-approval route must run through a committee of at least two disinterested directors.

Controlling stockholder transactions have their own rules, and the statute defines who is a controller: a person who owns or controls a majority of the voting power, has the right to cause the election of a majority of the board, or holds at least one third of the voting power together with the power to exercise managerial authority over the corporation’s business and affairs. On a maturing cap table, that can describe a founder with high-vote stock or, in some circumstances, a lead investor, and stockholders acting together under an agreement or understanding can constitute a control group. A controlling stockholder transaction (other than a going private transaction) qualifies for the safe harbor if it is approved or recommended by a committee of at least two disinterested directors with express authority to negotiate and to reject the transaction, or if it is conditioned on and receives an informed, uncoerced majority-of-the-minority vote. Only a going private transaction requires both protections, a deliberate departure from prior case law, under which both were generally required for a controller transaction to earn business judgment review.

The statute also defines disinterestedness. A disinterested director is one who is not a party to the transaction and has no material interest in it or material relationship with a person who does, with materiality keyed to whether the director’s objectivity would reasonably be expected to be impaired. Directors of exchange-listed companies also receive a heightened presumption of disinterestedness if the board has determined they are independent under exchange rules, a provision that becomes relevant after an IPO.

The Corporate Opportunity Doctrine

The corporate opportunity doctrine answers a different loyalty question: when a business opportunity belongs to the corporation rather than to the fiduciary who learned of it. A director or officer of a Delaware corporation may not take an opportunity for personal benefit if the corporation is financially able to undertake it, the opportunity falls within the corporation’s line of business and would be of practical advantage to it, the corporation has an interest or reasonable expectancy in it, and taking it would place the fiduciary’s self-interest in conflict with the fiduciary’s duties. The Delaware Supreme Court has emphasized that the factors are weighed together and that no single factor is dispositive.

In the venture ecosystem, fund-affiliated directors see deal flow across an entire portfolio, and founders and executives routinely encounter ideas adjacent to the corporation’s business. A fiduciary who takes an opportunity that a court later decides belonged to the corporation faces disgorgement of the opportunity or its proceeds. However, a fiduciary who presents the opportunity to the board and obtains a rejection from disinterested directors gains the benefit of a safe harbor, mitigating the risk of an after-the-fact judicial determination that the opportunity was usurped. Presentation is not legally required, but it creates a clean contemporaneous record, and the rejection should be clearly documented in the minutes.

Advance Waivers Under Section 122(17)

Delaware also permits much of this to be resolved in advance. Section 122(17) of the DGCL authorizes a corporation to renounce, in its certificate of incorporation or by action of its board, any interest or expectancy in specified business opportunities or specified classes or categories of business opportunities, whether presented to the corporation or to one or more of its officers, directors, or stockholders. Waivers of this kind are common in venture capital investments, where a firm and its designees may hold positions and board seats across a sector, and it is recommended to build them into the certificate of incorporation at the time of investment (which is consistent with the NVCA model certificate of incorporation). Note that such a waiver addresses only the corporate opportunity doctrine, not confidentiality. Accordingly, funds holding positions in competing companies should maintain information screens and avoid seating the same designee on the boards of competitors.

That said, advance waivers may not be an absolute shield to all issues arising out of potential corporate opportunities. Although details are scant as of the time of writing, and we expect to publish more detailed analysis once information becomes available, in August of 2026 the U.S. Department of Justice has been investigating certain venture capital firms with partners serving on boards of competing companies, potentially raising antitrust concerns, separate from the corporate law concepts of corporate opportunity.

DO’S & DON’TS:

Board Process for Conflicted Transactions

DO: Surface conflicts early and choose the cleansing path before approval. Disclose all material facts about the fiduciary’s interest and involvement, obtain approval from a majority of the disinterested directors acting in good faith and without gross negligence, and use a committee of at least two board-determined disinterested directors whenever a majority of the board is conflicted.

DON’T: Treat a conflicted deal as either automatically prohibited or automatically safe because the terms feel like market. Without disinterested director approval, a qualifying disinterested stockholder vote, or provable fairness, the transaction and the fiduciaries remain exposed.

Controlling Stockholders and Investor Directors

DO: Test whether a founder, investor, or group acting together is a controlling stockholder or control group under Section 144(e) before structuring any related party transaction. For controller transactions, use a fully empowered committee of at least two disinterested directors or a conditioned majority-of-the-minority vote, and use both for a going private transaction.

DON’T: Assume control requires majority ownership; one third of the voting power plus managerial authority can suffice. And do not rely on a stockholder vote to cleanse a controller transaction unless the deal was conditioned on disinterested stockholder approval by its terms when submitted for the vote.

Corporate Opportunities

DO: Adopt a simple protocol: fiduciaries promptly disclose opportunities arguably within the corporation’s line of business, the board or its disinterested members decide whether the corporation will pursue them, and any rejection is documented in the minutes before the fiduciary proceeds.

DON’T: Let a director or officer pursue such an opportunity quietly, or with the corporation’s resources, personnel, or information. Informal assurances from management are not a substitute for board-level disclosure and a documented rejection.

Waivers and Information Hygiene

DO: Consider a Section 122(17) waiver in the certificate of incorporation tailored to fund-affiliated directors and stockholders, revisit its scope at each financing, and pair it with confidentiality screens where investors hold competing positions.

DON’T: Seat the same designee on the boards of competing portfolio companies or treat a waiver as permission to share the corporation’s confidential information.

A Delaware Court of Chancery post-trial opinion in Holzbaur v. Trolley Square Hospitality, LLC serves as a cautionary tale about imprecise LLC agreement drafting. The plaintiff believed he was a “cash contributing member” with irremovable status, but contradictory language in the agreement led the court to rely on extrinsic evidence (including emails, pre-formation conversations, and drafting history) to find he was actually a “sweat equity” member subject to removal at will. The case underscores that the flexibility of the LLC form carries drafting responsibility: internal inconsistencies open the door to costly litigation and invasive discovery, and ambiguities will be resolved based on the parties’ actual intent, not favorable contract language.

In Fortis Advisors, LLC v. Stillfront Midco AB, the Delaware Supreme Court strictly enforced an arbitration clause in a merger agreement, finding that a seller’s bad faith claims regarding earnout manipulation fell within the alternative dispute resolution (ADR) provision’s scope because they were fundamentally a dispute about the calculation of the earnout. The court looked at the substance of the claims, concluding that “why” the earnout calculation was wrong cannot be severed from an arbitration clause covering calculation disputes. The decision is a strong reminder to dealmakers to precisely delineate which disputes are reserved for courts versus arbitration, and to draft ADR provisions with enough specificity to avoid costly threshold litigation over arbitrability.