M&A

Artificial intelligence (AI) continues to reshape healthcare delivery, particularly in diagnostics, imaging, and care coordination. For established healthcare platforms seeking to integrate innovative capabilities, effective transactions are not always single-step acquisitions. Phased relationships, beginning with commercial alignment and structured with the potential for full-scale integration, can provide a disciplined path to innovation.

For technology and life sciences transactions counsel, this raises a critical question: How can parties structure an initial collaboration to accelerate deployment while preserving long-term strategic optionality?

Phase I: Exclusive Commercial Alignment With Strategic Investment

In the healthcare sector, initial alignment frequently takes the form of an exclusive or field-limited license coupled with a minority equity investment. This structure enables a healthcare platform to secure access to differentiated technology, influence product development, and evaluate performance in a live clinical setting while mitigating integration and regulatory risk.

The effectiveness of this model turns on careful coordination in drafting foundational agreements.

Exclusivity

Exclusivity must be defined with intent and precision. In healthcare technology transactions, scope may be tied to specialty, site of care, modality, patient population, geography, or some combination of the foregoing. Performance milestones often are incorporated to ensure continued development and commercialization progress. Overly broad exclusivity may constrain a developer’s growth and create valuation tension; overly narrow drafting may undermine the strategic value of the arrangement. The objective is to balance long-term alignment with operational flexibility. Of course, in an AI context, parties need to address whether exclusivity extends to future model iterations, retrained versions, or algorithmic enhancements; consideration must be given to the dynamic nature of machine learning systems.

Intellectual Property and Data Rights

Healthcare collaborations frequently involve a convergence of technology developers and data-rich platform organizations. Clear delineation of background intellectual property, derivative works, algorithm improvements, and data usage rights is essential. Platforms typically seek rights to deploy and refine technology across their networks and express concerns around the control and use of their data; developers seek to preserve core intellectual property ownership and the integrity of their models having been trained with partner data. Sophisticated collaborators increasingly distinguish between ownership of model weights, fine-tuned models, embeddings, and generated outputs. Platforms also may be concerned with limiting use of their input data to improve only customer-specific instances rather than also generalized models. These provisions must be drafted with careful attention to the Health Insurance Portability and Accountability Act of 1996, state privacy regimes, cybersecurity obligations, and evolving regulatory scrutiny of AI-enabled tools.

Several intellectual property questions are distinctive in the AI context. First, where a party’s product is a layer built on a third-party foundation model (commonly referred to as a “wrapper”), the scope of any exclusivity grant requires careful scrutiny. The underlying model weights may remain owned and broadly licensed by the third-party foundation model provider. What a wrapper may practically protect is the specific configuration, fine-tuning, and proprietary data contributed by the parties; however, it likely cannot fence off the foundational capabilities beneath. Exclusivity in this context protects differentiation, not the underlying foundation model.

Second, ownership of AI-generated output remains legally unsettled, and third-party platform terms of use continue to shift in ways that increase that uncertainty. Current copyright doctrine in most jurisdictions requires human authorship; outputs produced autonomously by a model may provide no copyright protection at all. In practice, many organizations treat proprietary prompts, fine-tuning approaches, retrieval architectures, and workflow integrations as confidential know-how rather than relying on copyright protections in the outputs themselves. This approach can be effective, but trade secret protection is contingent on maintaining secrecy and on contractual controls that prevent disclosure. Strategic agreements governing AI development should address both the allocation of any rights that do arise as well as the confidentiality obligations, access controls, and use and disclosure restrictions necessary to sustain appropriate trade secret protection.

Third, background intellectual property carries additional complexity when applied to AI development. A developer’s model may incorporate vast quantities of third-party content, potentially including works subject to copyright claims or contested licensing. Training data provenance and any unlicensed works used in the development or subsequent retraining of a model represent material and ongoing diligence considerations. Parties collaborating on the development or deployment of a model should conduct appropriate diligence into training data lineage and should seek representations, warranties, and indemnities addressing third-party intellectual property infringement claims flowing from the model’s underlying composition.

Investment and Governance

A minority equity investment can accompany the commercial arrangement, aligning incentives and providing capital for continued development. Effectively structured governance rights, such as board observation rights, information rights, and other protective provisions, can provide strategic visibility without creating unintended control or regulatory implications. Coordination between the commercial agreement and the investment documents is critical, particularly with respect to transfer restrictions and change-of-control provisions. Moreover, AI governance may extend to oversight of model validation, change management processes, and any regulatory filings associated with algorithm modifications.

At this stage, sophisticated parties also frequently incorporate structural mechanisms that preserve a potential path to acquisition while maintaining flexibility for both parties.

Phase II: Commercialization Proving Grounds

The initial commercial phase often functions as live diligence. The healthcare platform gains insight into clinical adoption, workflow integration, model performance, regulatory positioning, and scalability. This operational visibility informs valuation and integration planning should the relationship mature. This phase can also serve as a period to assess real-world performance drift, explainability, robustness across diverse cohorts, and the sufficiency of monitoring systems required for ongoing compliance.

To preserve optionality for a transition toward a future acquisition, parties often incorporate structural tools with respect to equity, such as rights of first refusal or first offer, exclusive negotiation periods, call options, prealigned valuation frameworks, or some combination of the foregoing. Drag-along and tag-along rights associated with the equity may also be calibrated with a future acquisition scenario in mind. These mechanisms should be drafted with attention to enforceability and regulatory constraints. Early coordination among corporate, regulatory, and competition counsel can materially affect downstream optionality.

Phase III: Acquisition and Integration

If the collaboration demonstrates sustained strategic value, a full acquisition may enable a deeper operational integration and broader commercialization as well as enhance the platform’s market differentiation.

At this stage, issues addressed during the initial licensing phase assume heightened importance. Clear chain of title for intellectual property, documented rights to data and improvements, regulatory compliance history, and alignment across commercial agreements are central to confirmatory diligence. Particular scrutiny is given to training data lineage, model documentation, audit trails demonstrating controlled updates, and explainability materials required for U.S. Food and Drug Administration or equivalent regulatory submissions. Retention and incentive arrangements for founders, developers, and technical personnel often become critical to preserving innovation postclosing.

If lifecycle planning is embedded in the original agreements, the acquisition process typically becomes more efficient. Change-of-control consequences are understood, equity positions are aligned, and commercial rights do not require fundamental restructuring. The transaction can therefore focus on valuation, integration strategy, and long-term growth.

Deliberate Deal Architecture

As technology-enabled innovation continues to transform healthcare delivery, staged collaborations are likely to remain a defining feature of strategic transactions. A phased approach, beginning with commercial alignment and investment while preserving a clear path to integration, allows organizations to validate technology in practice before committing to full-scale acquisition.

For technology and life sciences transactions counsel, the task is not merely to document a license or negotiate a purchase agreement. It is to architect a relationship that accommodates immediate commercialization and future strategic flexibility within a highly regulated environment. Thoughtful lifecycle structuring at the outset can materially shape the trajectory, and ultimate success, of the deal. As AI becomes more deeply embedded in clinical workflows, deal architecture increasingly must anticipate issues such as ongoing model governance, regulatory obligations tied to adaptive algorithms, and safeguards around the responsible use of patient-derived data — all core components of strategic value and risk.

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.

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.

One of the most common legal missteps among emerging companies involves the classification of the people doing the work. In the earliest days of a startup, founders often bring on talented individuals as “consultants” or “independent contractors,” compensating them primarily or exclusively with equity. This arrangement feels natural when cash is scarce and everyone is pitching in to build something from the ground up. But what begins as a practical solution can quickly become a significant legal liability if the company does not revisit these classifications as it matures and secures funding.

This article provides a high-level overview of the risks associated with worker misclassification, the key legal frameworks that govern these determinations, and the steps founders should take to clean up classification issues before they become costly problems.

The Common Pattern: Early “Consultants” Who Are Really Employees

It is extremely common for pre-revenue startups to engage early team members as independent contractors or consultants. The logic is straightforward: The company cannot yet afford salaries, payroll taxes, or benefits, so it issues equity in exchange for labor. On paper, the individual signs a consulting agreement, invoices the company (or doesn’t), and is treated as a 1099 worker for tax purposes.

The problem is that many of these individuals are, as a matter of law, employees regardless of what the agreement says. Classification is not a matter of mutual agreement between the parties. It is determined by the nature of the working relationship under applicable federal and state law. If the engagement looks and feels like employment, then government agencies and courts are likely to treat it as such.

When these individuals are never reclassified, the company accumulates exposure over time. That exposure includes unpaid wages, overtime, employment taxes, penalties, and potential liability under both federal and state law. These issues often surface at the worst possible moment: during due diligence for a funding round, an acquisition, or in response to a complaint filed by a disgruntled former worker.

Why Reclassification Should Be a Priority After Funding

Securing any meaningful financing event should serve as a trigger for the company to revisit every worker classification. There are several reasons for this.

First, the original justification for the consulting arrangement, namely the inability to pay cash compensation, has likely changed. Once the company has capital, it has the resources to bring workers onto payroll and provide the protections required by law. Continuing to classify a worker as an independent contractor when the company now has the means to pay wages and withhold taxes weakens any argument that the arrangement was legitimate.

Second, investors and their counsel will scrutinize the company’s employment practices during due diligence. Misclassification issues are a well-known red flag. Unresolved classification problems can delay or even derail a financing, reduce the company’s valuation, or result in specific indemnification obligations imposed on the founders.

Third, as the company grows, the risks multiply. More workers mean more potential claimants. Longer periods of misclassification mean larger back-pay and tax liabilities. And the shift from a small, informal team to a structured organization makes it increasingly difficult to argue that any given worker was genuinely operating as an independent business.

The bottom line is that reclassification is not merely a housekeeping exercise. It is a critical step in putting the company on sound legal footing for its next phase of growth.

Federal Law: The Key Frameworks

At the federal level, worker classification is governed by several overlapping tests, depending on the statute at issue.

The Fair Labor Standards Act

‍The FLSA uses an “economic reality” test to determine whether a worker is an employee or an independent contractor. The inquiry focuses on whether the worker is economically dependent on the company or is in business for themselves. Factors include the degree of control the company exercises over the work, the worker’s opportunity for profit or loss, the worker’s investment in equipment or materials, the permanence of the relationship, the degree of skill required, and the extent to which the work is an integral part of the company’s business. The Department of Labor has historically taken a broad view of employment under this test, and the consequences of misclassification include liability for unpaid minimum wages and overtime, liquidated damages, and attorneys’ fees.

The Internal Revenue Code

‍The IRS applies a common-law test that examines the degree of control and independence in the relationship. The IRS groups relevant factors into three categories: behavioral control (whether the company directs how the work is done), financial control (whether the company controls the business aspects of the worker’s role, such as how the worker is paid and whether expenses are reimbursed), and the type of relationship (including written contracts, benefits, and the permanence of the engagement). Misclassification under the tax code can result in liability for unpaid employment taxes, penalties, and interest. In some cases, officers of the company may face personal liability under the trust fund recovery penalty.

Exempt vs. Non-Exempt Classification

‍Once a worker is properly classified as an employee, the company must also determine whether the employee is exempt or non-exempt under the FLSA. Exempt employees are not entitled to overtime pay, but they must meet specific salary and duties tests. The most commonly applicable exemptions for startups are the executive, administrative, professional, and computer employee exemptions. Each requires that the employee be paid on a salary basis at or above a specified threshold and that the employee’s primary duties satisfy specific criteria. Founders should not assume that simply paying a salary or giving someone a managerial title is sufficient. The analysis turns on the actual duties performed, not the job title.

State Law: Where the Rules Get Stricter

Many states impose classification standards that are more restrictive than federal law, and compliance with federal standards alone does not guarantee compliance at the state level.

California’s ABC Test

‍California applies a particularly stringent standard under its ABC test, codified by Assembly Bill 5. Under this test, a worker is presumed to be an employee unless the hiring entity demonstrates that the worker (A) is free from the company’s control and direction in performing the work, (B) performs work that is outside the usual course of the company’s business, and (C) is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. Prong B is often the most difficult to satisfy for startups, because early workers are typically performing tasks that are central to the company’s core business. California law also provides for significant penalties for misclassification, including penalties under the Private Attorneys General Act, which allows employees to bring representative actions on behalf of the state.

Other Notable State Frameworks

‍Several other states have adopted or are moving toward ABC-style tests, including Massachusetts, New Jersey, and Illinois. New York applies a similar multi-factor test and has aggressive enforcement mechanisms. States vary considerably in their approaches, and companies with remote workers in multiple states must ensure compliance in each jurisdiction where a worker is located, not merely where the company is headquartered. Founders should be particularly attentive to any state in which the company has workers, as the applicable test is generally determined by the worker’s location.

Cleaning Up Past Misclassification

For companies that have already been operating with misclassified workers, there are several steps to consider when undertaking a remediation effort.

The first step is to conduct an honest internal audit. Identify every individual who has been engaged as a contractor or consultant and evaluate each engagement under the applicable federal and state tests. Determine which individuals are likely misclassified and assess the duration and scope of the exposure.

The second step is to consult with experienced employment counsel. Remediation strategies vary depending on the jurisdiction, the number of affected workers, the duration of misclassification, and the company’s financial position. In some cases, the IRS Voluntary Classification Settlement Program may be available, which allows companies to prospectively reclassify workers with limited look-back liability in exchange for a modest payment. Similar programs or settlement frameworks may exist at the state level.

The third step is to transition misclassified workers to employee status going forward. This includes placing them on payroll, withholding applicable taxes, providing required benefits, and ensuring compliance with wage and hour laws, including proper exempt or non-exempt classification.

The fourth step is to address the equity arrangements already in place. Early equity grants made to individuals who should have been classified as employees may have been structured as contractor grants, which have different tax treatment than employee equity awards. Companies should work with both employment counsel and tax advisors to evaluate whether corrective filings or revised equity documentation are necessary, particularly with respect to Section 409A of the Internal Revenue Code, which governs deferred compensation and imposes significant penalties for noncompliance.

Finally, companies should implement classification policies and procedures that will prevent these issues from recurring as the company continues to hire. A brief intake process for every new engagement, whether employee or contractor, can go a long way toward ensuring that the correct classification is applied from the outset.

For companies considering an IPO, relationships with investment bankers should often begin well before the company formally mandates its IPO syndicate. Early banker relationships can provide valuable market perspective while there is still time to act on it — helping companies understand how public investors may view the business, pressure-test the equity story, and identify issues that may matter when an IPO becomes more immediate. As the IPO becomes more concrete, the relationship should evolve from market intelligence and relationship-building toward positioning, syndicate selection, and execution. The takeaway: engage with bankers early; formally mandate them later when the company is ready to pursue an IPO.

The Stages of Banker Engagement

Companies often think about engaging bankers as a discrete step in the IPO process — running a “bake-off,” selecting the syndicate and moving toward an organizational meeting. But the most productive banker relationships often begin much earlier. The purpose of those relationships, however, should change as the company moves closer to a potential IPO.

Relationship-Building (as early as 24–36 months out)

For many high-growth companies, banker relationships begin years before a potential IPO. At this stage, there is no mandate to award and no syndicate to construct. The objective is to develop relationships with a thoughtful group of bankers and to leverage their perspective to understand how the public markets are likely to view the company.

Bankers can be a valuable source of market intelligence during the pre-mandate period. They can provide periodic market and valuation perspectives, invite management to industry conferences, make introductions to potential investors, and help management understand how the public markets are likely to frame the business. These interactions also give bankers an opportunity to develop their understanding of the company well before they are competing for a formal role. Just as importantly, the company can use this period to assess various banks over a long horizon, rather than solely in the compressed setting of a formal pitch process.

This early dialogue can be particularly useful because the feedback comes while there is still time to act on it. Bankers may identify a disconnect between the companies that management views as peers and the comparables public investors are likely to use, a KPI that investors will expect but the company does not yet track rigorously, or an aspect of the business model that may require additional explanation or proof. Receiving this feedback early is important because some issues require time, not simply better messaging. For example, it requires time to build the systems that produce key metrics reliably, quarter after quarter, such that at the IPO the company can present multiple years of history against the very measures investors will use to value it. More broadly, early feedback can help management identify a weakness in the equity story — or in the business itself — while management still has time to address it. The goal is not to let bankers author the company’s strategy or equity story, but to use their perspectives to distinguish a messaging issue from a business issue early enough to address either. Companies should also develop relationships across several banks: each bank’s perspective naturally reflects its own franchise, coverage, and views of the market and triangulating among them can provide better intelligence than relying on any single relationship.

Testing the Story (roughly 12–24 months out)

As an IPO becomes a more realistic near- or medium-term objective, banker interactions should become purposeful and market-facing. Bankers can help companies deepen relationships with research analysts and begin appropriate investor education, including through bank-sponsored conferences, non-deal meetings, and, where relevant, late-stage or crossover financings. This engagement is best intensified once a company has genuine visibility into a potential IPO horizon, rather than merely the aspiration to go public. The objective is not simply earlier or greater exposure, but appropriately timed engagement once the company is ready to benefit from — and make a strong first impression in — those interactions.

One of the most consequential relationships is with research analysts. The investment banking team’s role is concentrated in the offering itself; the research analysts who cover the company will remain part of its public-market life for years afterward — publishing estimates, framing quarterly results, and interpreting the company’s strategy and performance for institutional investors. Their sector standing and understanding of the company can meaningfully influence how the company is understood in the public markets following the IPO. Prior to mandating the banks, conversations with research analysts can be genuinely two-way, including by analysts sharing perspectives on the sector. Once banks are formally mandated and an offering process is underway, analyst-independence rules effectively make these interactions one-directional. Nevertheless, even in the pre-mandate period, these conversations should be structured with care and should not extend to valuation or to any bank’s pursuit of an underwriting role, both to preserve analyst independence and to avoid complicating the process later.

In addition, bankers can help build investor familiarity before a formal IPO process begins. Once the process is underway, investor communications become significantly more regulated — and as a practical matter, the quiet-period and “gun-jumping” constraints of the federal securities laws generally begin to attach around the time underwriters are formally mandated, well before any public filing — and investor education is compressed into a limited series of interactions, including testing-the-waters meetings and the roadshow. Investors who already understand the company, its business model, and the key drivers of its financial performance are better positioned to use those interactions to evaluate the equity story and valuation, rather than learning the business for the first time. Bank-sponsored conferences, organized investor meetings, and other appropriate investor-education opportunities allow management to build that familiarity while also giving management an earlier view into the questions public investors actually ask before formal testing-the-waters meetings and the roadshow.

Earlier engagement, however, should not be confused with casual engagement. A premature meeting can be counterproductive: first impressions can be difficult to reverse, and investors and analysts do not simply forget information or expectations communicated in earlier interactions. Companies should think about consistency across private financing materials, investor communications, testing-the-waters materials, and ultimately the registration statement, rather than treating each interaction as a standalone conversation. Information shared in private financings or other pre-IPO interactions can also create legal and practical issues later in the process — for example, projections or other material nonpublic information provided to an investor can complicate that investor's participation in a subsequent IPO if the information remains material nonpublic information. These interactions also consume management attention that may be better spent building the business if an IPO remains too remote. Early outreach should therefore be deliberate, appropriately structured, and coordinated with securities counsel.

The Mandate and IPO Execution (roughly 8–12 months out)

The formal mandate marks the transition from pre-IPO engagement to execution of the IPO itself. As an IPO becomes an execution priority, companies typically conduct a competitive “bake-off” and formally mandate their lead bookrunners. The organizational meeting then kicks off the IPO-specific workstreams, including preparation of the registration statement, valuation and positioning, testing-the-waters and investor education, analyst preparation, roadshow planning, and, ultimately, pricing, allocation, and distribution.

From that point, the banks become part of the core working group and are actively involved in the IPO-specific workstreams. They are closely involved in drafting the registration statement — particularly the business and marketing sections that carry the equity story — and in translating that story into the framework investors will use to evaluate the offering. They lead investor education: identifying the institutions best positioned to anchor the order book, arranging testing-the-waters meetings, and synthesizing investor feedback into refinements of positioning and, ultimately, valuation. And they drive the offering's rhythm — advising on when to convert the confidential submission to a public filing, when to launch the roadshow against the market backdrop and the competing IPO calendar, and how to sequence analyst preparation alongside the offering itself. As a result, banks are typically one of the first groups of advisors formally engaged for an IPO process.

Bank selection should reflect more than proposed valuation or league-table position. Companies should consider the strength and availability of the specific team that will staff the transaction, relevant sector experience, distribution capabilities, and — importantly — the research analysts. Syndicate size and composition should also be deliberate. A broader syndicate can expand distribution and prospective research coverage, but additional banks add coordination and dilute economics and attention across the group. Companies typically select the lead bookrunners at the mandate and add other bookrunners and co-managers later, allowing the core working group to remain relatively small during the early stages of execution.

For private companies backed by venture capital investors, acquisition is frequently the most likely path to liquidity. Founders are often laser-focused on product development, market expansion, and fundraising, without devoting the same early-stage discipline to ensuring the company is well-positioned for a future exit via a merger or acquisition.

M&A preparedness is not a late-stage exercise, but an operational strategy to position your company as an attractive, high-value target to potential acquirors.

Corporate Governance

Some of the most common obstacles to efficient M&A processes stem from issues related to corporate governance. Complex capitalization tables, unclear chain of equity ownership, and unresolved governance issues can create transaction delay and, depending on the structure of the transaction, loss of leverage.

Companies should consider focusing on three key areas of corporate governance to be prepared for future M&A processes: capitalization table discipline, stockholder rights, and board and stockholder alignment.

Capitalization Table Discipline

Maintain clear documentation of all equity issuances with proper board and stockholder approvals; confirm board minutes are complete, approved by the board, and signed; verify that 83(b) elections have been timely filed with respect to restricted stock grants to founders and early employees; and ensure 409A valuations are updated following major events that may impact valuation (such as a financing) and, absent such events, at least annually.

Stockholder Rights

Ensure all stockholders have signed the relevant stockholder agreements and that the company’s management team understands the protective provisions embedded within such agreements; similarly, ensure that the company’s management team is familiar with relevant provisions of any investor side-letters (think drag-along mechanics, rights of first refusal, and co-sale rights).

Board and Stockholder Alignment

Understand what approvals are required to approve a sale or merger of the company and whether any investor has blocking rights.

Contracting Discipline

Material contracts, such as key vendor and customer agreements, collaboration agreements, and licensing arrangements, are some of the first diligence requests in an M&A process. These contracts often contain assignment or change-of-control provisions that can require third-party consent, accelerate payment obligations, or trigger termination rights or other contractual rights that could significantly impact the trajectory of a deal. Accordingly, it is important for companies to maintain clear records of all material contracts, ensuring that all contracts are fully executed and include all attachments, exhibits, amendments, and restatements. Companies should track whether any material contracts have upcoming renewals or expiration dates. Additionally, tracking key provisions in such material contracts that may be triggered by an M&A (such as third-party consent requirements) will help streamline the M&A diligence and consent process.

Intellectual property is another value-driver for life sciences companies and technology companies, making it vital for companies to have documentation that clearly delineates intellectual property ownership. Companies should verify that all employees and contractors have signed Proprietary Information and Inventions Assignment Agreements (PIIAAs), review consulting agreements to confirm that intellectual property created by consultants/contractors has been validly assigned to the company, and obtain confirmatory assignments from founders and early contributors, if needed, and at the appropriate time. For companies with affiliated entities, confirm that the company’s core intellectual property assets sit within the target entity and not within any affiliated entities.

Being proactive can save time and expense during the M&A diligence process.

Regulatory Compliance

Depending on industry and geography, regulatory risk can become a gating diligence issue. Companies should identify areas of risk and preemptively resolve any outstanding compliance risks (e.g., data integrity, marketing, industry-specific licensing, etc.). In particular, life sciences companies should consider pursuing regulatory planning with the assistance of healthcare and/or FDA counsel (as needed) to ensure, among other things, that regulatory filings, communications, and approvals are complete and accessible.

Deal Team Preparation

Once the company has decided to start a sale process, identify at the outset who will be part of the core deal team, which will typically consist of a select number of employees and outside advisors. Members of executive management and other key internal personnel with specialized knowledge about the company’s corporate governance, labor and employment practices, employee benefits structure, assets (IP, real estate, etc.), litigation exposure, and regulatory compliance are typically included within the core deal team. Further, at the appropriate time, companies should engage outside advisors, such as outside legal counsel, financial/tax advisors, and investment bankers, all of whom can help quarterback the transaction and efficiently drive the deal process.

After the deal team is in place, consider implementing deal confidentiality procedures to maintain the integrity of the sale process:

• assign code names to the project and company participants;
• limit working group size and access; and
• consider antitrust issues and the use of “clean team” agreements and data rooms.

Data Room Readiness

Prepared companies treat diligence readiness as an ongoing process and not an exercise triggered by a letter of intent or term sheet. First, select a virtual data room that provides strong security and activity tracking. Second, build the company’s data room with organizational discipline, using logical folder structures (corporate, IP, finance, regulatory, benefits, etc.) and uploading documents in a searchable, digital format with consistent document naming conventions. Lastly, in connection with building the data room, flag with the guidance of deal counsel any confidentiality concerns and access restrictions that need to be put in place. For example, are there any documents that need to be redacted or anonymized? Does the transaction present antitrust sensitivity requiring documents to be shared through a “clean room”?

In all, a well-maintained and categorically organized data room significantly accelerates a sale process and signals sophistication to potential acquirors.

The most successful exits rarely begin when a banker is engaged. Ideally, they begin years earlier with strategic and operational foresight. Companies that understand the value of M&A preparedness can preserve negotiation leverage and act more decisively when M&A opportunities arise. After all, engineering an exit is more than closing a deal — it is positioning the company so that the right deal finds you.

Whether a company is gearing up for an acquisition, a growth equity financing, or an IPO, a due diligence review will be an inevitable part of that transaction, and that review will test not only the current business but also the integrity of a company’s historical records. Readiness for that review is critical, as once a diligence process begins, gaps in corporate approvals, equity records, contract management, intellectual property ownership, and regulatory compliance can quickly become leverage for purchase price adjustments, closing conditions, and/or special indemnities. At best, diligence gaps can consume management attention at a time when a company has little bandwidth to spare. At worst, they can detract from a company’s credibility and can have a meaningful impact on deal speed and certainty. Most issues are fixable, but the available solutions often narrow after a deal is already on the table. This article provides an overview of actionable steps leadership at mid- to late-stage private companies can take to make transaction readiness an ongoing discipline rather than a pre-signing scramble.

Set Up and Maintain a Virtual Data Room

Rather than waiting until a letter of intent is signed, companies should stand up and maintain a virtual data room (VDR) early, using records they already keep locally, and treat it as a living repository of critical corporate documents. Management teams that prepare to address anticipated diligence focus areas and maintain organized virtual records early are better positioned when a process launches than teams that start flat-footed. Companies can get a head start by asking outside counsel for a standard due diligence request list, which serves as an organizational and gap-identification tool, as well as an organized table of contents for their VDR. This ensures that documents are comprehensive and indexed by categories prospective investors and acquirers will expect.

The VDR should contain current, fully executed, and dated documents together with all amendments, statements of work, and side letters. Superseded and terminated agreements should be archived, not deleted or mixed with operative versions. One small but time-saving step in setting up a VDR is using a consistent and intuitive naming convention as documents are uploaded, which will help not only management but also third-party reviewers quickly navigate the VDR’s contents. Once a diligence process begins, access should be staged and subject to tiered permissions, with additional controls for competitively sensitive information, compensation data, and litigation files; privileged materials should be withheld or handled through a process designed to preserve privilege. Particularly when a potential buyer is a competitor, or when the underlying material is subject to confidentiality restrictions that do not permit sharing with a potential acquirer or investor, counsel should advise prior to upload and contemplate redactions, clean-team arrangements, and restrictions on downloading or printing. When in doubt, leave it out; it is easier to pause early and evaluate permissions and other protections than to pull back a document after it has been shared.

A word of caution: prospective investors now run AI review tools that can scan an entire data room in minutes, and while that process can generate false positives, it can also magnify every internal inconsistency across the VDR, including in the cap table, contracts, and other materials. As a best practice, keeping the VDR updated quarterly helps identify issues early and positions the company and management to earn credibility from the moment that transaction diligence begins.

Maintain a Corporate Record Book and Organizational Documents

M&A buyers and growth equity investors will expect clean and current corporate governance records. This means prospective investors will review: current versions of the certificate of incorporation (including all amendments) and bylaws; board and stockholder minutes; and fully executed, dated written consents. An improperly compiled consent with a missing signature page or date can cost the company meaningful time and resources to track down or, worse, require corrective action to cure. Every material corporate action should tie out to a corresponding board and/or stockholder approval, including equity issuances, option grants, director and officer elections, and subsidiary formations.

Companies should also at least annually confirm good standing in their state of incorporation and in every jurisdiction in which they are qualified to do business. Outside counsel can obtain verbal good standing confirmations from third-party service providers, often for a nominal or no cost to the company. Good standing lapses can trigger fees, taxes, and penalties and, in many states, can bar the company from bringing suit in local courts until the lapse is cured, although a lapse does not typically invalidate contracts executed while the company was not in good standing. For an additional layer of caution, companies can consider ordering lien and litigation searches from third-party service providers in the same set of jurisdictions.

Ensure Vigilant Capitalization Table Hygiene

The company should expect buyers or investors to request a current copy of the capitalization table and, in the case of an equity financing, a pro forma cap table reflecting the completed round. Most cap table hygiene issues exist well before a contemplated transaction and surface in the diligence process. Common hiccups include unsigned option grants, undocumented stock issuances, unrecorded convertible note draws, and inconsistencies between vesting schedules and employment terms. Cap table accuracy is key: a company’s representations about its capitalization are often treated as fundamental representations, giving buyers or investors the ability to claim breach even for minor discrepancies. Moreover, a messy cap table can be perceived as poor ownership discipline by the company or its management.

With assistance from outside counsel, the company should reconcile the cap table against the stock ledger and equity grant documentation, ensuring that every stock and option issuance is supported by board resolutions, grant agreements, evidence of payment of the exercise or purchase price, and, if applicable, an approved, unexpired equity incentive plan. Each option grant should also be supported by a current 409A valuation that supports the board’s determination of the fair market value of the underlying shares.

Importantly, companies should develop a clear understanding of how antidilution provisions operate and how change-of-control acceleration clauses (single-trigger and double-trigger) may affect the equity/distribution waterfall in a transaction. Modeling these scenarios in advance allows management to communicate the deal economics clearly to all stockholders and avoids last-minute surprises that can derail negotiations.

Understand Key Provisions in Material Contracts

Counsel for buyers and investors will expect the opportunity to review each contract that is material to the business. These typically include: contracts with key customers and suppliers above certain revenue or expense thresholds; license agreements; leases; employment and severance agreements with key personnel; and other contracts that are important to the business. These contracts often contain change-of-control consent triggers, rights of first refusal, out-licensing restrictions, most favored nation provisions, exclusivity, non-solicit, non-compete, and other restrictive covenants. In certain circumstances, a counterparty may have a notice, consent, or termination right in connection with a transaction. Accordingly, with the help of outside counsel, a company should be generally aware of which key agreements contain those provisions and should have a plan for obtaining consents or providing timely notice in advance of entering into a transaction process. Seeking consent late in the process can give leverage to the counterparty, which can increase overall costs and decrease deal certainty.

Confirm Intellectual Property Ownership and Assignment of IP

Depending on the company’s core business, clean IP title is often a significant driver of the diligence process. One consideration that comes up time and again is whether every founder, employee, and contractor who contributed to the company’s IP portfolio has executed an invention assignment agreement that assigns all intellectual property rights to the company. It isn’t uncommon for advisors and early contributors in early-stage companies, often compensated in equity, to miss the assignment paperwork altogether, or to execute, but not date, the assignment. Any gaps in assignment should be addressed ahead of the buyer or investor diligence process, which can be done with the help of outside IP counsel. Companies should also routinely conduct an audit of open-source software usage to confirm compliance with applicable license terms.

Maintain Compliance with Industry-Specific Regulatory Requirements

Companies operating in regulated industries, such as healthcare, financial services, energy, and government contracting, should confirm that all material licenses, permits, and registrations are current and in good standing. Identifying regulatory approvals or notices that would be required in connection with a change-of-control or assignment of a license can avoid an additional layer of investor diligence caused when gaps are identified later in the deal negotiation process. Regulatory non-compliance discovered during diligence can significantly delay closing or reduce deal certainty.

Despite cautious optimism following an upturn in biotech M&A in mid-2025, development-stage biotech companies continue to face significant financial headwinds including increased layoffs, higher borrowing costs, healthcare pricing reforms, and ongoing market correction following the pandemic-era investment boom. Companies should take proactive steps to build financial resilience: routinely identifying clinical and regulatory inflection points that could threaten liquidity; maintaining robust contingency plans that account for insolvency regimes in all relevant jurisdictions; engaging in fact-finding during periods of financial health to identify potential cash shortfalls; evaluating hypothetical liquidation scenarios early to understand timing and resource requirements; running structured strategic alternative processes (including asset sales, mergers, or licensing deals) well before reaching a crisis point; and budgeting for the time and cost of navigating financial distress, including the reality that dissolution processes can take three or more years to complete.

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.

Incentive stock options (ISOs) have long been a favored form of equity compensation for companies, particularly startups, to attract, incentivize, and retain employees. When properly structured, ISOs offer two key federal tax benefits: (i) ISOs are not taxed as income when granted by the company or exercised by the employee, and (ii) subject to applicable holding periods, any gain on stock acquired from the exercise of an ISO is taxed at a more favorable capital gains rate (however, the spread at exercise may be subject to the alternative minimum tax (AMT)).

But the regulatory framework that gives ISOs potentially advantageous tax treatment comes at the price of their flexibility once granted. What companies may view as a “minor” change to the terms of an ISO may be treated as a “modification” under the tax regulations, which can have significant, unanticipated consequences and, in some cases, cause the ISO to lose its preferential tax treatment altogether, and in the worst-case scenario, become subject to Section 409A and the 20% additional tax thereunder. In such instances, the option no longer qualifies as an ISO and is thereafter treated as a nonqualified stock option (NSO) for tax purposes, meaning that it is taxable upon exercise and any resulting stock is not eligible for favorable capital gains treatment.

Loss of ISO treatment may be frustrating to both companies and their employees, and therefore, it is important to understand the implications of an option amendment before implementation.

Summary of ISO Requirements

In order for an option to qualify as an ISO under Internal Revenue Code § 422, it must satisfy all statutory requirements, including the following, on the date of its original grant:

• Option must be granted to an employee of the company (or its parent or subsidiary)
• Option must be granted under the company’s written equity plan
• Exercise price must be at least equal to the fair market value of the underlying shares (and for employees who are >10% stockholders of the company, the exercise price must be at least 110% of fair market value)
• The term of the option is no longer than 10 years (or no longer than five years for >10% stockholders)
• No more than US$100,000 of shares (based on the fair market value as of the date of grant) may first become exercisable in any calendar year

To the extent an option fails to meet the statutory requirements, or is in excess of the US$100,000 annual limitation, it is treated as an NSO for tax purposes.

Modifications of ISOs

Under applicable tax rules, a “modification” of an outstanding option is generally treated like a newly granted option as of the modification date. “Modification” is broadly defined to include any change that provides additional benefit to the optionholder, regardless of whether the optionholder actually benefits from such changes.

When an option is “modified,” it must re-satisfy all ISO requirements based on and as of the modification date to continue to be treated as an ISO. To the extent that ISO requirements are not met as of the modification date, the option is thereafter an NSO for tax purposes. In most cases, ISO status that is lost due to a modification cannot be restored.

Common Modifications and Their Impact

Companies may contemplate any number of changes to their outstanding options. Most often, companies propose amendments to (i) grant early exercise rights, (ii) accelerate vesting, (iii) extend exercise periods, or (iv) change exercise price.

Grants of Early Exercise Rights

To make option awards more competitive or attractive for its employees, a company may consider granting early exercise rights, which allow employees to exercise outstanding but unvested options, subject to a right of repurchase. Early exercise allows employees to own shares earlier and accordingly start their capital gains holding periods earlier.

While early exercise rights that are added to an option after its original grant date would seem to be a modification because they appear to provide an additional benefit to the optionholder, the ISO regulations specifically provide that this is not a modification of an ISO and can be added without jeopardizing the ISO status.

Acceleration of Vesting

In connection with acquisitions, layoffs, changes in control, or other special scenarios, companies may consider adding single-trigger or double-trigger acceleration terms to outstanding options to allow employees to vest in unvested options upon the occurrence of such events.

As a general matter, accelerating vesting does not itself constitute a modification for ISO purposes. However, acceleration might cause more shares to “first become exercisable” in a single calendar year, potentially causing all or a portion of the option to exceed the US$100,000 ISO limit for that year. Any excess over the limit is treated as an NSO.

Extensions of Exercise Periods

Most employee options are originally granted with a three-month post-termination exercise period (with certain extended periods provided for death or disability and shorter periods for a termination for cause). When an employee departs, a company may consider extending the exercise periods of the employee’s options to allow them additional time to decide whether to exercise them for shares.

Two separate ISO issues arise with respect to extensions: (i) extending the post‑termination exercise window is generally treated as a modification, causing re‑testing of ISO status as of the extension date, and (ii) regardless of any extension, an exercise that occurs more than three months after employment ends (excluding disability or death) cannot receive ISO tax treatment. In other words, if the ISO is in-the-money when the exercise period is extended, it will become an NSO, and even if the option remains an ISO, if it remains outstanding and exercisable after the three-month post‑employment period, it becomes an NSO at the end of such three-month post-employment period.

Adding Exercise Method (such as Promissory Note)

Adding an additional method of exercising an option, such as allowing exercise with a full-recourse promissory note, is typically expected to be treated as a modification, even though this may have been permissible to include when the ISO was granted. If the ISO is in-the-money or otherwise cannot requalify as an ISO at the date of this modification, it would be expected to become an NSO.

Changes to Exercise Price

If the price of a company’s stock decreases over time, a company may consider repricing any underwater options to restore their retentive purpose. Options are “underwater” if the exercise price per share is greater than the current fair market value of the share, meaning that an employee would inherently lose value by exercising their option. To fix this, a company may want to amend underwater options to reduce their exercise price to the current fair market value.

A reduction in exercise price is among the clearest examples of a modification and results in a deemed new grant of the option. Because ISOs must have an exercise price at least equal to the fair market value on the grant date, a repricing to lower that value will generally cause the option to fail the ISO test; however, repriced ISOs generally should be able to re-satisfy all ISO requirements based on and as of the modification date and typically will continue to be treated as an ISO (although if there are changes that make requalification not possible, such as no longer being an employee, the ISO will lose its ISO status in the repricing). Note that repricing can effectively double count prior ISOs, as the repriced grant is treated as a new ISO, such that the award could exceed the US$100,000 limitation when including the prior ISOs as new awards.

Consider the AMT

As a final thought, if the ISO holder would otherwise be subject to the AMT, the loss of ISO status may be less detrimental than for someone not subject to AMT. Losing ISO status would subject the holder to ordinary income tax rates, which may not be dramatically different than the AMT rates (26% or 28%, based on 2026 rates). Additionally, the vast majority of ISOs are not exercised and held for the required ISO holding periods and become NSOs in any event. Accordingly, the loss of ISO status is less impactful than it would otherwise be, although the tax benefits of an ISO when utilized to get long-term capital gain are measurably better where possible.

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.

IP will be a core focus for a biotech company and its investors through its entire lifecycle. While the company’s IP strategy can and should evolve over time, there are certain steps that an early-stage company can take at the outset to establish a strong foundation. This article identifies several key principles that, in addition to an intelligently crafted IP portfolio, will help set an emerging company up for future success.

Document Ownership

Too many deals — licenses, acquisitions, or otherwise — stumble due to questions about ownership of a company’s core inventions. Fortunately, a few simple documents can avoid most issues. Founders and other employees should have straightforward agreements assigning (using “present tense” assignment language) relevant inventions to the company. Companies should also understand whether key personnel have parallel or prior obligations to academic institutions, and be able to clearly explain those obligations, and ensure that CROs, consultants, and other service providers also appropriately assign IP generated for the company.

Document these arrangements when relationships begin — not several years later when an investor or potential acquirer asks for the paperwork and it may be logistically difficult or expensive to reconstruct a chain of title for IP.

License for the Long-Term

When a company is in its very early stages, there can often be a lot of time pressure to secure any third-party IP rights, such as a foundational IP license from a university. It is also important, however, to keep in mind that licenses are long-term instruments and the same document may be scrutinized several years later in a due diligence process when the company’s situation is very different. While perfection can often be the enemy of good, foresight does not have to be the enemy of speed. Negotiating the material license or collaboration with an eye towards future-proofing in a few key areas can even increase the value of the agreement to the company.

Patent then Publish

Once out of stealth, scientific publications, conference presentations, and other disclosures can be integral to a young biotech company’s success. They can also have irreversible consequences for patent protection if not timed properly — i.e., a publication prior to patent filing can preclude the issuance of the patent.

Early training for employees and a simple process can go a long way in mitigating this risk. A one- or two-hour IP 101 training from counsel can be very effective, and can also roll out a straightforward process to ensure that both technical and other personnel know to check with patent counsel before submitting a manuscript for publication or disclosing proprietary information in a pitch without a confidentiality agreement in place.

The rule of thumb is simple: when potentially patentable technology is about to leave the building, determine whether to file a patent application first.

Joint Ownership Does Not Simplify

Negotiating a transformative IP agreement can sometimes take considerably longer than initially thought, and it can often be tempting to take the negotiation path of least resistance. When it comes to IP ownership, this path equates to “joint ownership” of inventions. On its face, joint ownership sounds like a great solution. It is fair, equitable, and does not require a complex analysis of each party’s contributions to the invention. It is jointly owned, no matter what. The problem lies in operationalizing the joint ownership.

The rules governing jointly owned IP vary by jurisdiction and can create complications around licensing, patent prosecution, enforcement, and commercialization. Joint ownership can also become particularly cumbersome in future transactions — e.g., an acquirer is a competitor of a joint owner. While it may take a little extra negotiation, there are many ways to allocate ownership of IP other than just inventorship that can suit both parties, including ownership based on relation to background IP, subject matter, or type of IP.

Data Is a Key Asset

A biotech’s most valuable assets increasingly extend beyond patents and traditional know-how. Preclinical results, clinical data, biomarker datasets, manufacturing data, and datasets used to develop or validate computational tools may all have substantial strategic value. Data rights and restrictions should be given the same level of focus as the development of an IP strategy. Particular attention should be paid to distinctions among raw data, processed data, derived data, and analytical outputs — and to privacy, consent, or contractual restrictions that may constrain future uses.

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.

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.

A greenshoe, which is also referred to as an overallotment option, is a provision in an underwriting agreement that allows the investment banks underwriting a public offering to sell more shares than originally planned to help stabilize the stock price after the offering. The term “greenshoe” comes from Green Shoe Manufacturing Company (now Stride Rite), which was the first company to use this mechanism.

Greenshoes are typically 15% of the potential base offering. If demand for an offering is much greater, a company would increase the base deal size. The window to exercise the greenshoe is almost always 30 days. Most typically, greenshoes are additional shares issued by the company but the greenshoe can be comprised of shares held by a selling stockholder.

A greenshoe can exist in both an “initial public offering” (IPO) and a follow-on public offering. Greenshoes are not used in “registered direct offerings” (RDOs) or deals referred to as “underwritten RDOs”.

Here is a simple example of a greenshoe:

• The company plans to sell 10 million shares of its common stock, which are referred to as the base shares, in its IPO.
• The greenshoe would be 1.5 million shares, or 15% of the base shares.
• If the underwriters elect to exercise the greenshoe, they may sell up to 11.5 million shares to investors, which is the sum of the base shares plus the greenshoe.

Why does a greenshoe exist?

The greenshoe helps:

• stabilize the stock price after a public offering;
• meet excess demand if investors want more shares; and
• protect underwriters from losses during the first trading days.

In practice, underwriters use the greenshoe to stabilize the stock price during the first 30 days after a public offering. The mechanics revolve around short-selling and covering that short position depending on where the price trades.

For example, using the example above of a 10 million share base offering, with a 1.5 million share greenshoe, and a public offering price of US$10.00:

• The underwriters will sell 11.5 million shares to investors, even though only 10 million shares are initially issued by the company to the underwriters.
• They do this by borrowing 1.5 million shares from the issuer or selling syndicate and creating a short position of 1.5 million shares.
• As a result, immediately after the offering, investors hold 11.5 million shares, only 10 million of which are actually issued, and the underwriters are short 1.5 million shares.

This short position is the key tool for stabilization. If the stock price falls below the offering price — for example, if the price falls to US$8.00 — the underwriters will buy shares in the open market at US$8.00 and use those shares to cover their 1.5 million shares short position. That open market-buying demand supports the stock price, and the underwriters profit (sold at US$10.00 and bought back at US$8.00). In this case, the greenshoe would not be exercised, the total shares issued in the offering is 10 million, and the company will have raised US$100 million in gross proceeds.

If the stock price rises above the offering price — for example, if it trades to US$15.00 — buying shares in the open market would be expensive for the underwriters. Instead, underwriters exercise the greenshoe and buy 1.5 million shares from the company at US$10.00. They then deliver those shares to cover their short position. In this case, the greenshoe is exercised, the total shares issued in the offering is 11.5 million, and the company will have raised US$115 million in gross proceeds.

Occasionally, the stock price is volatile and, during the greenshoe period, may trade above and below the offering price, which could result in a partial exercise of the greenshoe to cover the portion of the short position that resulted while the stock price was higher than the offering price. Generally, the greenshoe cannot be exercised in an amount that exceeds the net short position at the time of exercise.

In an article for Life Science Leader, partners Sally Wagner Partin, Sharon Flanagan, and Torrey Cope examine how artificial intelligence is reshaping life sciences M&A by changing the pace and economics of drug development. They explore how AI’s growing role in target identification, clinical development, and regulatory decision-making is influencing valuation, due diligence, milestone structures, transaction timing, and risk allocation, and outline key considerations for dealmakers as AI continues to transform the life sciences industry.

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.

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.