When an insured is pursuing a representation and warranty insurance (“RWI”) claim, a critical consideration is whether diminution in value damages (“DIV Damages”) can be asserted as Loss covered by the RWI policy.^[1] This article, being published in four parts, discusses Delaware mergers and acquisitions (“M&A”) damages law regarding DIV Damages and describes how an insured can pursue them as part of an RWI claim.

This is Part IV of this article; it discusses the limitations on, and other matters regarding, a DIV Damages award as part of an RWI claim. Part I of this article addressed (i) the principal differences between DIV Damages calculated using a multiple of EBITDA methodology (“MOE Methodology”) and DIV Damages calculated using a discounted cash flow methodology (“DCF Methodology”), and (ii) the evolution of cases involving DIV Damages calculated using an MOE Methodology under Delaware M&A damages law.^[2] Part II of this article addressed the evolution of cases involving DIV Damages calculated using a DCF Methodology under Delaware M&A damages law. Part III of this article discussed the requirements for a DIV Damages award as part of an RWI claim.

Each part of this article contains practice tips for attorneys for insureds seeking recovery of DIV Damages as part of an RWI claim.

Limitations on DIV Damages With Respect to an RWI Claim

Delaware M&A contract damages law imposes four limitations on the recoverability of DIV Damages: (1) foreseeability; (2) certainty; (3) avoidability; and (4) no windfall.^[3]

1. Foreseeability

Foreseeability deals with the concept of consequential damages, for which recovery is limited under principles that hearken back to the 1854 English common law contract case of Hadley v. Baxendale.^[4] Consequential damages may be one of the most misunderstood terms in the common law, including U.S. common law.^[5] That said, a number of cases have held that DIV Damages are typically general (direct) damages, not consequential (indirect) damages, and therefore not subject to the special foreseeability requirements applicable to the recovery of consequential (indirect) damages.^[6]

2. Certainty

Certainty is the most important limitation on DIV Damages under Delaware M&A contract damages law.

a. Two Levels of Certainty

There are two levels of certainty in the proof of damages under Delaware M&A contract damages law:

• proof that the nonbreaching party suffered damages as the result of the R&W Breach in question; and
• the determination of the amount of damages suffered.^[7]

The law requires reasonable certainty that the nonbreaching party suffered damages and, to a lesser degree, of the amount of damages suffered.^[8] Once the fact that damages were suffered has been established, the determination of the amount of damages (often also referred to as the “quantum of damages”) suffered requires only “a basis to make a responsible estimate of [such] damages.”^[9] Mathematical certainty of the quantum of damages is not required.

All of the foregoing said, courts will not award DIV Damages that are based on mere speculation or conjecture—that is, are too uncertain.^[10]

b. Wrongdoer Rule

Uncertainties in determining the amount of damages suffered “are generally resolved against the wrongdoer.”^[11] In this context, “wrongdoer” simply means the breaching party; no level of culpability or misconduct is required.^[12]

Although there does not appear to be any case law on this subject, a valid argument can be made that the RWI carrier, which effectively stands in the shoes of the breaching party for purposes of recovery under an RWI policy, should be subject to this same “wrongdoer rule.” This would have the effect of the insured’s being in the same position against the RWI carrier as it would be in pursuing a claim against the seller that had committed the R&W Breach in question.

The wrongdoer rule is not a universal solvent requiring all uncertainty regarding the quantum of damages to be resolved in favor of the nonbreaching party, but only uncertainty arising from the R&W Breach of the breaching party.^[13]

c. Need for Effect Post-Acquisition

With respect to proof that the insured suffered a diminution in value of the target business as a result of the R&W Breach in question, consideration should be given to whether the shortfall in EBITDA or in projected cash flows actually would have occurred after the Acquisition even if the R&W Breach in question had never occurred. In a lost customer case, for example, this consideration would include any evidence, known at the time of breach, that the customer would likely have been lost, or reduced its purchases of products or services from the target business, in the near term after the Acquisition anyway.^[14]

3. Avoidability

The issue of avoidability^[15] can arise with respect to DIV Damages in at least three ways:

a. Avoided Costs

The avoided costs principle requires that DIV Damages take into account costs that can be avoided which are associated with earning lost revenues.^[16] This is relevant in calculations such as determining the deemed effect of the loss of a customer on Measurement Period EBITDA or on projected cash flows for the target business.

b. Mitigation by Reducing Loss

Mitigation requires that the target or the insured take or avoid actions after the Acquisition to reduce the amount of loss that would otherwise be suffered. Because DIV Damages are calculated based on the parties’ expectations ex ante (“before the event”),^[17] and because the R&W Breach is deemed to have occurred when the representations and warranties were made (as of signing of the Acquisition Agreement, as of closing of the Acquisition, or both), these types of mitigation activities can only be taken after the Acquisition to reduce the amount of loss deemed to be applicable to the Measurement Period (such as by trying to reduce the amount of expenses incurred after the Acquisition that relate back to the Measurement Period in the case of DIV Damages calculated using an MOE Methodology).

c. Mitigation by Replacing Lost Business, Subject to the Lost Volume Seller Principle

Mitigation also requires that the target or the insured take actions after the Acquisition to replace revenues that would otherwise have been lost. However, a contract damages principle known as the “lost volume seller” may come into play. In simple terms, unless the target is capacity-constrained, sales of products or services to new customers or additional sales to existing customers are treated as additive to those suffered as a result of the R&W Breach, and therefore they are not considered replacement for the lost revenues.^[18] For example, if the target has lost a customer and can add a new customer after the Acquisition, and it would have been able to provide products or services to both the lost customer and the new customer, then the target and the buyer are entitled to both, and the addition of the new customer does not replace the old customer.

As to either type of mitigation, only reasonable efforts to try to mitigate are required, and the costs of those efforts incurred by the target or the insured are typically covered Loss.^[19]

4. No Windfall

Although identified as a separate and independent limitation under Delaware M&A contract damages law, the “no windfall” limitation is often treated in the case law as an additional reason not to award, or to limit the amount of, damages by reason of one of the proof requirements described in Part III of this article or one of the other limitations described above.^[20]

Other Considerations in Pursuing DIV Damages With Respect to an RWI Policy Claim

In addition to the requirements and limitations described in this article, a number of other considerations can come into play in pursuing DIV Damages with respect to an RWI Claim, including the following:

1. Check the RWI Policy and the Acquisition Agreement First

It may seem obvious, but any evaluation of whether an insured is entitled to recover DIV Damages under an RWI policy should start with an examination of the RWI policy and the Acquisition Agreement in question. Each should be examined to determine that it does not operate to prohibit recovery of DIV Damages under the RWI policy and, preferably, that one or both of them affirmatively permit recovery of DIV Damages. Although affirmative coverage is preferable, silence on the issue is acceptable under applicable Delaware M&A contract damages law.^[21]

2. Can an RWI Claimant Recover Both DIV Damages and Out-of-Pocket Damages?

Generally speaking, the answer is yes, a claimant can recover both DIV Damages and out-of-pocket damages resulting from the same R&W Breach.^[22] For example, in the case of DIV Damages calculated using an MOE Methodology, if the target or the seller failed to pay or take into account an expense that it should have paid or taken into account during the Measurement Period and such failure is the subject of an R&W Breach, and the target or the buyer is required to bear that expense after the Acquisition as a recurring loss, then the insured should be able to claim both the out-of-pocket damages suffered by virtue of the target’s or the buyer’s having to pay that expense and the DIV Damages resulting from the deemed reduction in Measurement Period EBITDA caused by treating that expense as if it had been incurred during the Measurement Period.

At least two countervailing arguments can be made that the claimant would thereby be entitled to a:

• Double Recovery: A double recovery in respect of the same R&W Breach—for example, recovering both DIV Damages and a purported working capital shortfall required to earn the lost revenue represented by the DIV Damages—may not be permitted.^[23]
• Recovery in Excess of Purchase Price: Recoveries of loss in respect of the same R&W Breach that would be calculated so as to exceed the purchase price paid for the target business by the buyer may or may not be permitted.^[24]

3. Should Post-Acquisition Actions or Omissions by the Target or the Insured Be Taken Into Account in Evaluating DIV Damages?

Generally speaking, the answer is no, post-Acquisition actions or omissions by the target or the insured should not be taken into account in evaluating DIV Damages. As noted above, DIV Damages are generally evaluated based solely on the parties’ expectations ex ante,^[25] and thus post-Acquisition actions or omissions would not be within those expectations.^[26]

That said, there are exceptions to this general rule, principally:

• post-Acquisition mitigation, as discussed above;^[27]
• post-Acquisition events that go to the no windfall limitation;^[28]
• post-Acquisition actions or omissions that serve to confirm (rather than prove) a determination involved in evaluating DIV Damages, such as whether a diminution in Measurement Period EBITDA is recurring in nature, what the parties’ reasonable expectations were ex ante,^[29] or whether the target or the insured has acted consistently with the insured’s position that the target business suffered a diminution in value as a result of the R&W Breach in question.^[30]

4. Does a Seller or an RWI Carrier Have to Put Forward a Competing Calculation of DIV Damages?

Generally speaking, the answer is no, a seller or an RWI carrier does not have to put forward a calculation of DIV Damages that competes with the calculation put forward by the buyer/insured. Under M&A damages law, the burden is on the buyer/insured to establish its damages. That said, Delaware M&A damages law cases have often unfavorably noted that the seller did not put forward a competing calculation of damages in adopting the buyer’s calculation.^[31]

The question of whether or not to put forward a competing calculation of DIV Damages is a real dilemma for a seller or an RWI carrier:

• Risk of Putting Forward: On the one hand, putting forward a competing calculation runs the risk of being interpreted as having accepted the other side’s position that R&W Breach and Loss have been proven, and more importantly that DIV Damages are merited, in at least the amount set forth in the competing calculation, no matter how strongly and articulately the competing calculation is put forward as an argument in the alternative.
• Risk of Not Putting Forward: On the other hand, not putting forward a competing calculation runs the risk of the seller’s or RWI carrier’s missing its best chance to challenge the other side’s calculation, and more importantly, opening itself up to the other side’s taking advantage of the absence of a competing valuation, based on the type of adverse findings set forth in the case law described above.

Conclusion

Because of the potential magnitude of DIV Damages, an evaluation of whether or not an RWI claimant is entitled to recover DIV Damages as a result of an R&W Breach and, if so, the amount of such DIV Damages, can be the most critical aspect of an RWI claim. This is so even if the claimant is ultimately unsuccessful, in part or in whole, in pursuing the DIV Damages since it still “raises the stakes” for the RWI carrier.

That said, a weak or poorly supported claim for DIV Damages can be detrimental to an insured’s RWI claim if it reduces the insured’s credibility with the carrier with respect to the rest of the RWI claim. As a result, a firm understanding of the relevant M&A damages law, and the tactics and strategy, involved in pursuing DIV Damages can be critical to the success of the insured with respect to its overall RWI claim.

Practice Tips for Attorneys for Insureds

In the RWI policy claim assertion phase, consider the following actions:

• Present a claim for DIV Damages with credible and convincing evidence of the shortfall in Measurement Period EBITDA and the validity of the multiple, or of the loss of projected cash flows, as the case may be, and have the forensic accounting firm or valuation firm participate in that presentation.
• Propose a meeting, actual or virtual, with the RWI carrier and its advisors to walk through the evidence supporting the DIV Damages claim, particularly any spreadsheets included in the presentation.
• Continue to have the target and the insured avoid any action or omission calling into question any material element of the DIV Damages.^[32]

This article is the fourth in the RWI Practice Insights series by John T. Capetta.

1. The author of this article thanks his colleagues Mark Gregory and Aria Antonopoulos, and his guide as to all things private equity and valuation related, Doug Karp of private equity advisory firm Pacific Partners, for their contributions to this article and to this series of articles.

   This article focuses on buyer-side RWI policies and U.S. law (principally Delaware case law). For purposes of this article:

   • DIV Damages are a form of expectation damages in which the amount of the damages is the difference between (i) the value of the target business as represented to the buyer, almost always the purchase price paid for the target business by the buyer, and (ii) the value of the target business after giving effect to the diminution in the target business resulting from a breach of the Acquisition Agreement representations and warranties (“R&W Breach”) or from fraudulent misrepresentation or deceit regarding the target business.
   • Although there are other methods to calculate DIV Damages, this article focuses on those calculated by using either (i) in the case of a multiple of EBITDA methodology (“MOE Methodology”), (a) an actual or deemed shortfall in the EBITDA of the target business for a specified measurement period (“Measurement Period EBITDA”) caused by the R&W Breach or the fraudulent misrepresentation or deceit, times (b) the multiple applied by the insured to the Measurement Period EBITDA in determining the purchase price to pay for the target business; or (ii) in the case of a discounted cash flow methodology (“DCF Methodology”), the loss of future cash flows and of terminal value over a specified period caused by the R&W Breach or the fraudulent misrepresentation or deceit, discounted to present value by the application of a discount factor.
   • The period of time for which the historical EBITDA is measured in an MOE Methodology and the period of time for which the projections used in a DCF Methodology are included are each referred to in this article as the Measurement Period.
   • As used in this article:
     • the term Loss has the definition set forth in the RWI policy;
     • the term Acquisition Agreement includes stock purchase agreements, merger agreements, asset purchase agreements, and other types of business combination agreements by which a buyer acquires a target business from a seller;
     • the term Acquisition refers to the business combination contemplated by the Acquisition Agreement;
     • the term the buyer and the term the insured are often used interchangeably;
     • the term target and the term target business are used interchangeably;
     • the term R&W Breach also includes a claim under an RWI policy with respect to a tax indemnification provision in the Acquisition Agreement; and
     • the phrase without required disclosure by the seller refers to a failure by the seller to make a disclosure to the buyer even though required to do so by a representation and warranty in the Acquisition Agreement.
   • “Expectation damages” are also sometimes referred to by courts as expectancy damages.

   ↑

2. Although relevant M&A damages law regarding DIV Damages may apply with respect to fraudulent misrepresentation or deceit (each a tort) regarding the target business as well as an R&W Breach (a breach of contract), DIV Damages with respect to an RWI claim can only be asserted for an R&W Breach and therefore will always be subject to M&A contract damages law. However, note in this regard the argument described in Footnote 3 of Part III of this article with respect to an R&W Breach in the form of a claim under the tax indemnity provision in an Acquisition Agreement. ↑

3. The Restatement (Second) of Contracts identifies foreseeability, certainty, and avoidability as limitations on contract damages, but not a “no windfall” limitation. However, Section 351(3) of the Restatement sets forth the following as a type of additional limitation: “A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.” Restatement (Second) of Contracts § 351(3) (A.L.I. 2024). “Delaware courts have often looked to the Restatement (Second) of Contracts as persuasive authority for interpreting basic contract principles . . . .” Thompson St. Cap. Partners IV, L.P. v. Sonova U.S. Hearing Instruments, LLC, No. 166, 2024, 2025 WL 1213667 (Del. Apr. 28, 2025). However, it does not appear that any Delaware case has cited to Section 351(3) as a basis for limiting M&A contract damages. ↑

4. (1854) 156 Eng. Rep. 145; 9 Ex. 341. ↑

5. The preeminent commentator in the United States with respect to M&A contract law generally, and to the confusion surrounding the meaning of the term “consequential damages” specifically, is Glenn D. West, a retired M&A and private equity partner at Weil, Gotshal & Manges. West has written a series of articles on the meaning of that term and the often-unintended consequences of waiving its applicability in an Acquisition Agreement. See, e.g., the following articles authored or co-authored by West:

   • Glenn D. West & Sara G. Duran, Reassessing the “Consequences” of Consequential Damage Waivers in Acquisition Agreements, 63 Bus. Law. 777 (May 2008);
   • Glenn D. West, Consequential Damages Redux: An Updated Study of the Ubiquitous and Problematic “Excluded Losses” Provision in Private Company Acquisition Agreements, 70 Bus. Law. 971 (Fall 2015);
   • Glenn D. West, Diminution in Value Damages & Waivers of Lost Profits, Weil’s Glob. Priv. Equity Watch (Oct. 20, 2015);
   • Glenn D. West, Do You Really Know What “Consequential Damages” Means?, Weil’s Glob. Priv. Equity Watch (May 18, 2020);
   • Glenn D. West, Excluded Loss Provisions and the Danger of Contractually Slaying Mythical Dragons, Weil’s Glob. Priv. Equity Watch (Dec. 13, 2021);
   • Glenn D. West, Lost Profits May or May Not Be Consequential Damages, Weil’s Glob. Priv. Equity Watch (July 11, 2023);
   • Glenn D. West, Another Consequential Damages Redux: A Response to “Consequential Damages Clauses: Alien Vomit or Intelligent Design?”, 102 Wash. U. L. Rev. 633 (2024).

   For an M&A lawyer, West’s articles are the gold standard and essential to practicing M&A law knowledgeably. ↑

6. See, e.g., Taylor Precision Prods., Inc. v. Larimer Grp., Inc., No. 15-CV-04428, 2023 WL 6785802, at *4 (S.D.N.Y. Oct. 13, 2023); Powers v. Stanley Black & Decker, Inc., 137 F. Supp. 3d 358, 386 (S.D.N.Y. 2015). Although there appears not to have been a case under Delaware M&A contract damages law explicitly holding that DIV Damages are direct damages, as opposed to consequential damages, all of the Delaware M&A contract damages law cases involving DIV Damages discussed in this article seem to assume that they are direct damages (i.e., damages that may fairly and reasonably be considered arising naturally from the R&W Breach in question). See, e.g., Cobalt Operating, LLC v. James Crystal Enters., LLC, No. 714, 2007 WL 2142926, at *29 (Del. Ch. July 20, 2007), aff’d, 945 A.2d 594 (Del. 2008) (unpublished table decision). ↑

7. SIGA Techs., Inc. v. Pharmathene, Inc., 132 A.3d 1108,1130–31 (Del. 2015). Although SIGA is not a DIV Damages case, it is a Delaware Supreme Court case that speaks authoritatively on certain principles of Delaware contract damages law, such as certainty, the wrongdoer rule, and the use of post-breach information. ↑

8. Id. at 1131. ↑

9. In re Dura Medic Holdings, Inc. Consol. Litig., 333 A.3d 227, 262 (Del. Ch. 2025) (“The law does not require certainty in the award of damages where a wrong has been proven and injury established. Responsible estimates that lack m[a]thematical certainty are permissible so long as the court has a basis to make a responsible estimate of damages.”) (footnotes and internal quotation marks omitted); NetApp, Inc. v. Cinelli, No. 2020-1000, 2023 WL 4925910, at *24 (Del. Ch. Aug. 2, 2023). ↑

10. See NetApp, 2023 WL 4925910, at *24; Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, No. 7906, 2020 WL 948513, at *20 and *23 (Del. Ch. Feb. 27, 2020). See also Taylor, 2023 WL 6785802, at *5. In each of the foregoing cited cases, the court rejected a buyer’s claim for DIV Damages based, at least in part, on a lack of certainty:

    • NetApp: In NetApp, after setting forth the principles of Delaware M&A contract damages law regarding certainty, Vice Chancellor Will went on to state: “Nonetheless, the court cannot award damages based on speculation or conjecture. An award of expectation damages presupposes that the plaintiff can prove damages with reasonable certainty.” NetApp, 2023 WL 4925910, at *24 (footnotes and internal quotation marks omitted). Vice Chancellor Will then went on to reject the buyer’s claim for loss of synergistic value as being speculative. Id. at *24–26. A few notes regarding NetApp and Vice Chancellor Will’s rejection of the buyer’s claim for DIV Damages in the form of loss of synergistic value:
      • Lack of Proximate Cause as Well: As discussed in Part III of this article, Vice Chancellor Will also found that the buyer’s claim for loss of synergistic value lacked the requisite proximate causal relationship with the R&W Breach and fraud asserted by the buyer. Those two findings—lack of certainty and lack of proximate cause—were interrelated in NetApp, and often are interrelated when a claim for DIV Damages is rejected.
      • Nomenclature: The standard that Vice Chancellor Will applied in NetApp and that the Delaware courts generally apply in rejecting a claim for DIV Damages is “speculation or conjecture,” meaning “too uncertain.” While it is tempting to write or say “too speculative or conjectural,” that is not the standard used for the certainty limitation.
    • Great Hill: In Great Hill, as discussed in Footnote 24 of Part III of this article, Vice Chancellor Glasscock rejected the buyer’s claim for DIV Damages primarily on the basis that there was a lack of proximate cause between the DIV Damages asserted and the R&W Breach and fraud that the buyer had been able to establish at trial regarding the threatened termination of the relationship between payment processor PayPal and the target company Plimus.
      • Lack of Certainty as Well: In addition to the lack of proximate cause, Vice Chancellor Glasscock described a lack of certainty regarding the buyer’s assertion of DIV Damages.
      • Intertwining: Unlike NetApp, in which Vice Chancellor Will set out in separate sections the lack of proximate cause and the lack of certainty, in Great Hill Vice Chancellor Glasscock intertwined the lack of proximate cause and the lack of certainty in one section.
      • Use of One Quarter of EBITDA as the Measurement Period: On a side note regarding certainty, in Great Hill, Vice Chancellor Glasscock also drew attention to the issue of whether the buyer’s reliance on a multiple of just one quarter of EBITDA was nonspeculative. See Great Hill, 2020 WL 948513, at *21 n.266 (“This assumes that it is non-speculative to base the damages for the loss of the PayPal relationship on a multiple of Q4 2011 EBITDA. I do not reach the question of whether such a snapshot approach to damages is reliable here.”).
    • Taylor: In Taylor, applying New York M&A damages law, Judge Carter of the United States District Court for the Southern District of New York rejected the second of the buyer’s two claims for DIV Damages based on a lack of certainty.
      • Allowed First Claim for DIV Damages: The first claim for DIV Damages was with respect to an undisclosed fall-off in the sale of stock-keeping units (“SKUs”) to two of the target business’s largest customers, Target and Walmart.
      • Disallowed Second Claim for DIV Damages: The second claim for DIV Damages tried to leverage that fall-off in sales of SKUs to two customers into a claim for an overall fall-off in the target business.
      • Disallowed Use of Reduced Multiple: The Taylor case appears to be unique with respect to the buyer’s calculation of its second claim for DIV Damages, which was based on a proposed reduction of the multiple that the buyer had applied to the portion of the target business other than to Target and Walmart.
      • Lack of Responsible Estimate: In rejecting that second claim for DIV Damages, Judge Carter stated as follows regarding certainty: “While the law does not require damages to be calculated with mathematical precision, they must be capable of measurement based on known reliable factors without undue speculation. . . . While the Court acknowledges that it is ’reasonably certain’ that Plaintiff would have lowered its growth expectation for the Business had it known of the lost SKUs, Plaintiff has not provided a ‘stable foundation for a reasonable estimate’ of such damages as required by New York law.” Taylor, 2023 WL 6785802, at *5.

    ↑

11. See, e.g., SIGA, 132 A.3d 1108, at 1131; Dura Medic, 333 A.3d 227, at 262–63; Taylor, 2023 WL 6785802, at *4. Cf. NetApp, 2023 WL 4925910, at *25 (“Resolving uncertainty against [the seller by virtue of the wrongdoer rule] does not relieve [the buyer] of its burden to present expectation damages that are not speculative.”) (footnote omitted). Note that NetApp involved a buyer trying to obtain the difference between a synergistic value for the target business and the value without such synergies, based on a DCF Damages methodology, rather than the difference between the purchase price it paid for the target business and the value of the target business after taking into account a shortfall in Measurement Period EBITDA, based on a multiple of EBITDA methodology. In NetApp, because the buyer was trying to recover a loss of synergistic value, DIV Damages based on a multiple of EBITDA methodology would not have achieved that result (i.e., because the Measurement Period EBITDA would not have taken post-Acquisition synergies into account). Although the principal focus of the damages analysis in NetApp was on the Chancery Court’s rejection of synergistic damages, the Court did award DIV Damages (but using a multiple of revenues rather than of EBITDA) to the buyer in a much smaller amount. Id. at *29. ↑

12. Cf. SIGA, 132 A.3d 1108, at 1131 (“SIGA is correct that the trial court did not have unbridled authority to dress up punitive damages as expectation damages by importing the willfulness of the breach into the damage award. And it is not every contract case where the court should assess the bona fides of the breaching party. But in a case about expectation damages caused by breach of a Type II agreement, where the wrongdoer caused uncertainty about the final economics of the transaction by its failure to negotiate in good faith, willfulness is a relevant factor in deciding the quantum of proof required to establish the damages amount.”) (footnote omitted). For a discussion of the “no fault” nature of M&A contract damages generally, and exceptions thereto with respect to certain types of covenant breaches, see Theresa Arnold, Amanda Dixon, Madison Whelan Sherrill, Hadar Tanne, & Mitu Gilati, The Cost of Guilty Breach: Willful Breach in M&A Contracts, 62 B.C. L. Rev. I-32 (2021). In a sense, the “upgrading” of a contractual R&W Breach to the tort of fraud, with the resulting exposure to punitive damages and other enhanced remedies, can be viewed as a way to “punish” a breaching party for an R&W Breach accompanied by “fault.”

    In Surf’s Up Legacy Partners, LLC v. Virgin Fest, LLC, No. N19C-11-092, 2024 WL 1596021 (Del. Super. Ct. Apr. 12, 2024), Delaware Superior Court Judge Wallace made reference to the possibility of a plaintiff’s recovering punitive damages based on a contractual breach, even in the absence of the commission of a tort such as fraud. Id. at *23 n.287 (“Punitive damages may be appropriate for egregious cases of willful and malicious breach of contract. [T]his Court has phrased the test for punitive damages in breach of contract cases in various ways . . . [t]he import of these cases suggests that punitive damages may not be awarded for breach of contract unless the intentional breach is similar in character to an intentional tort. . . . Virgin Fest has failed to prove malice or willfulness in those actions—or that such actions effectively equate to torts.”) (citations and internal quotation marks omitted). The Surf’s Up case appears to be an outlier among the DIV Damages cases under Delaware law with respect even to the possibility of punitive damages for an R&W Breach, and the cases cited by Judge Wallace in Footnote 287 of Surf’s Up were all Delaware Superior Court cases (not Delaware Chancery Court cases, arguably having greater precedential value, or Delaware Supreme Court cases). Whether “contractual breach punitive damages” would be recoverable under an RWI policy is beyond the scope of this article, and in the first instance would be an issue under the RWI policy’s definition of “Loss” and the wording of any exclusion applicable to punitive damages. ↑

13. See, e.g., SIGA, 132 A.3d 1108, 1132 (“Where uncertainty could not be traced to SIGA’s breach, the Court of Chancery did not resolve the uncertainty against SIGA. . . . The court did not apply the wrongdoer rule to resolve all uncertainty against SIGA, where SIGA’s breach was not the cause of the lack of information.”) (footnote omitted); NetApp, 2023 WL 4925310, at *25 (“[T]he pervasive uncertainty in the Combined Projections is not a result of [the target company’s] misrepresentations; it is due to NetApp making optimistic predictions about the unknown. Whether NetApp would deliver on its prognostications depended on how NetApp operated the combined entity—a matter squarely in NetApp’s hands.”) (footnote omitted); Great Hill, 2020 WL 948513, at *23 (“The uncertainty of damages here, if attributable to any party, is attributable to the Plaintiffs. They could have, but did not, provide a non-speculative way to quantify damages from the loss of PayPal.”) (footnote omitted). ↑

14. Another justification for not awarding DIV Damages to an insured with respect to a customer that would have been lost, or that would have reduced its purchases of products or services from the target business regardless of the R&W Breach, is the lack of proximate cause between the R&W Breach and the Loss. ↑

15. Two notes regarding avoidability:

    • Avoided Costs as Element of Calculation: Avoided costs as a reduction to DIV Damages is arguably more an element of the calculation of the amount of DIV Damages than it is an example of the avoidability limitation on contract damages.
    • Consequence of Failure to Mitigate as Element of Calculation: Although mitigation is often referred to as a “duty,” it is actually simply an element of the calculation of recoverable damages. In other words, the only adverse consequence arising from a failure to comply with the “duty to mitigate” is a reduction of recoverable damages, not a separate liability in respect of the failure.

    ↑

16. See the discussion of the concept of “avoided costs” in the “Loss” subsection of Part III of this article. ↑

17. Duncan v. Theratx, Inc., 775 A.2d 1019, 1022 (Del. 2001). ↑

18. See, e.g., Neri v. Retail Marine Corp., 30 N.Y.2d 393 (N.Y. 1972); Dura Medic, 333 A.3d 227, at 260 (“The [Buyers] could not ‘mitigate’ the damages from the lost customers by obtaining new customers. The Buyers could only mitigate their losses from the two customers by cutting expenses or somehow convincing the customers to come back.”). See also Restatement (Second) of Contracts § 347, cmt. f (A.L.I. 2024). ↑

19. See, e.g., Dura Medic, 333 A.3d 227, at 260 (“The Sellers bore the burden of proving that the Buyers failed to mitigate damages by not using reasonable efforts to reacquire [the lost customers]. The Sellers failed to meet their burden.”) (footnotes omitted), and at 260 n.58 (“A non-breaching party need not hazard undue risk, burden, or humiliation in mitigating costs and damages. Mitigation is subject to a rule of reasonableness . . . .”) (quoting W. Willow-Bay Ct., LLC v. Robino-Bay Ct. Plaza, LLC, 2009 WL 458779, at *8 (Del. Ch. Feb. 23, 2009)). Although there are Delaware contract damages law cases that address recovery of costs expended by a nonbreaching party in attempting to mitigate damages, see, e.g., Wise v. Western Union Telegraph Co., 181 A. 302, 305 (Del. Super. Ct. 1935); Katz v. Exclusive Auto Leasing, Inc., 282 A.2d 866, 868 (Del. Super. Ct. 1971), the RWI policy itself will often provide for recovery of reasonable costs incurred in attempting to mitigate losses by treating such costs as covered Loss under the RWI policy, in some cases even if the efforts to mitigate are unsuccessful. ↑

20. See, e.g., NetApp, Inc. v. Cinelli, No. 2020-1000, 2023 WL 4925910, at *23 (Del. Ch. Aug. 2, 2023) (the court determined that the buyer’s synergistic valuation of the target business was speculative and not sufficiently certain, and was not limited to losses that were proximately caused by the R&W Breach, and also found that the buyer’s damages expert’s “conclusion would deliver a windfall to [the buyer].”), and at *27 (“awarding [the buyer] damages in excess of the purchase price would amount to a windfall”) (citing Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 146 (Del. 2009) (“breach of contract damages should not provide a ‘windfall’ to the plaintiff”)). ↑

21. See Interim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513, 549 (Del. Super. Ct. 2005) (“The Court first considers whether the plaintiffs’ expectancy damages claim is legally viable in the context of this highly negotiated contract between two sophisticated parties. Clearly, the Agreement does not expressly contemplate expectancy damages; they are nowhere mentioned or even insinuated in the contract. The sole remedy for breach identified in the Agreement is indemnification . . . . Here, although the Agreement does not specifically provide for expectancy damages, it also does not specifically exclude them. Accordingly, if other remedies (including expectancy damages) are factually viable, then they are legally viable as well.”) (footnote omitted).

    Even though, as discussed in Part I of this article, DIV Damages are not actually “multiplier damages,” it is still better to avoid an argument that the term “multiplier damages” precludes DIV Damages, particularly those calculated using an MOE Methodology.

    RWI policies have evolved in many ways since they were first introduced in the United States more than two decades ago. One of those ways is that some general exclusions have been omitted and some made more insured-friendly. In the early days, some RWI carriers included in their RWI policies an exclusion with respect to multiple of EBITDA damages and the like. (For a discussion of how such exclusions may have arisen from D&O policy exclusions regarding the multiple portion of multiplied damage awards, such as in the case of antitrust treble damage awards, see Michael Gill & Frank Mascari, Confusion Reigns: Applying the Multiplied Damages Exception in Representations and Warranties Insurance Policies, Bloomberg L. (Jan. 24, 2016).) Over time, RWI carriers were persuaded to give up such an exclusion and let their RWI policies be silent on the issue, thus following applicable law instead, such as the Cobalt line of cases. As a result, modern RWI policies should not contain such an exclusion. ↑

22. See, e.g., Cobalt Operating, LLC v. James Crystal Enters., LLC, No. 714, 2007 WL 2142926, at *30 (Del. Ch. July 20, 2007), aff’d, 945 A.2d 594 (Del. 2008) (unpublished table decision) (buyer awarded indemnification for free airtime credits provided to advertisers after the Acquisition, in addition to DIV Damages, in respect of the R&W Breach and fraud by the seller). Section 347 of the Restatement (Second) of Contracts explicitly recognizes this by providing that: “Subject to the limitations stated in §350-53, the injured party has a right to damages based on his expectation interest as measured by (a) the loss in the value to him of the other party’s performance caused by its failure or deficiency, plus (b) any other loss, including incidental or consequential loss, caused by the breach, less (c) any cost or other loss that he has avoided by not having to perform.” Restatement (Second) of Contracts § 347 (A.L.I. 2024). See Vici Racing, LLC v. T-Mobile USA, Inc., 763 F.3d 273, 293 (3d Cir. 2014) (paraphrasing § 347 of the Restatement (Second) of Contracts). ↑

23. But cf. In re Bracket Holding Corp. Litigation, No. N15C-02-233, 2020 WL 764148, at *3–4 (Del. Ch. Feb. 7, 2020) (“Defendants claim that the damages awarded are an impermissible double recovery based on the alleged inflated purchase price and shortfall in working capital, reflecting that the jury double count[ed] working capital. . . . However, . . . the jury . . . would have been free to . . . calculate the damages to include the amount [the buyer] overpaid for the [target] plus the shortfall in the working capital.”), rev’d on other grounds, Express Scripts, Inc. v. Bracket Holdings Corp., 248 A.3d 824 (Del. 2021). ↑

24. For example, if a target had lost all of its customers prior to the Acquisition without required disclosure by the seller, the DIV Damages would equal the entire purchase price. To then compensate the buyer as well for out-of-pocket damages it suffered after the Acquisition in connection with the same R&W Breach would entitle the buyer to damages greater than the purchase price it had paid.

    Cf. NetApp, 2023 WL 4925910, at *26–27 (in addition to being speculative and not all being the proximate result of the R&W Breach and fraud in question, “awarding NetApp [synergistic] damages [of $37.7 million] in excess of the purchase price [of $35.0 million] would amount to a windfall.”). ↑

25. See text at note 17 above. ↑

26. See SIGA Techs., Inc. v. Pharmathene, Inc., 132 A.3d 1108, 1133–34 (Del. 2015) (“The Court of Chancery recognized that post-breach evidence could be used in order to aid in its determination of the proper expectations as of the date of the breach, but relied on such evidence sparingly. According to the court, it also limited the use of such evidence to the parties’ expectations, and in all other respects determined that the post-breach evidence was irrelevant to measure expectation damages at the time of the breach. We find after reviewing the record that the Court of Chancery properly limited the use of post-breach evidence to confirm its conclusions as to the parties’ reasonable expectations at the time of breach, or used the evidence to adjust the damages award in SIGA’s favor.”) (footnotes and internal quotation marks omitted). See also, e.g., Taylor Precision Prods., Inc. v. Larimer Grp., Inc., 2018 WL 4278286, at *33 (S.D.N.Y. Mar. 26, 2018) (“Because contract damages are measured at the time of the breach[,] inquiry into the performance of [the acquired] assets and market conditions in the months following the acquisition is improper, as evidence subsequent to the breach may neither offset not enhance [buyer’s] general damages.”) (citations and internal quotation marks omitted). ↑

27. See the subsection above titled “Avoidability” in the section titled “Limitations on Damages.” For a discussion of avoided costs and of the types of mitigation activities a jilted buyer was found by the court to have taken after a failed Acquisition, see WaveDivision Holdings, LLC v. Millennium Digital Media Systems, L.L.C., No. 2993, 2010 WL 3706624, at *24 (Del. Ch. Sep. 17, 2010). ↑

28. See, e.g., NetApp, 2023 WL 4925910, at *27 (“Just four months after closing, NetApp decided to end-of-life [target company] Cloud Jumper’s VDI product. NetApp never attempted new sales of Cloud Jumper software, even though the product performed as expected. It retained Cloud Jumper’s existing customers, intellectual property, and personnel. The Cloud Jumper engineering team was moved to develop a new VDI product within Spot—another (significantly larger) company acquired by NetApp. In such circumstances, awarding NetApp damages in excess of the purchase price would amount to a windfall.”) (footnotes omitted).

    A situation that highlights the use of post-Acquisition evidence in support of the no windfall limitation is a termination threat by a major customer or supplier of the target business without required disclosure by the seller, which otherwise might have resulted in a DIV Damages claim, but for the fact that the customer or supplier did not terminate, or even adversely change the pricing of, its relationship with the target business post-Acquisition. Without the use of such post-Acquisition evidence, the buyer of the target business could arguably make out a claim for DIV Damages on the basis that if it had known of the termination threat pre-Acquisition, it would have reduced its purchase price for the target business accordingly, if the basis for such a claim were only the buyer’s reasonable expectations ex ante. ↑

29. SIGA, 132 A.3d 1108, at 1133 (“the [C]ourt [of Chancery] could consider post-breach evidence when determining the reasonable expectations of the parties before or at the time of the breach.”) (footnote omitted). See, e.g., S.C. Johnson & Son, Inc. v. DowBrands, Inc., 294 F. Supp.2d 568, 588 (D. Del. 2003) (“[T]he Court finds the fact that SCJ did not make any sales of DowBrands’ products in Latin America from the date of closing until the end of its fiscal year which was five months later and that they sold less than $1 million in bags and wraps in Latin America seventeen months after closing persuasive.”), rev’d on other grounds, 111 F. Appx. 100 (3d Cir. 2004). ↑

30. See, e.g., Great Hill, 2020 WL 948513, at *23 n.284 (“Because I find that the Plaintiffs have failed to meet their burden with regard to the damages methodology, I do not reach the Defendants’ contentions that Plimus’s downturn was not as severe as suggested by Great Hill and that explanations exist for any downturn other than the allegations lodged by Great Hill. Indeed, Great Hill’s own annual report for 2011 noted that Plimus’s Q4 2011 EBITDA declined primarily due to 25 incremental hires necessary to support Plimus’[s] anticipated growth.”) (internal quotation marks omitted). ↑

31. See, e.g., Cobalt Operating, LLC v. James Crystal Enters., LLC, No. 714, 2007 WL 2142926, at *29 (Del. Ch. July 20, 2007), aff’d, 945 A.2d 594 (Del. 2008) (unpublished table decision) (the seller ”Crystal did not provide its own valuation evidence”); Surf’s Up Legacy Partners, LLC v. Virgin Fest, LLC, No. N19C-11-092, 2024 WL 1596021, at *23 (Del. Super. Ct. Apr. 12, 2024) (the seller “has failed to provide any valuation of [the target business]—besides the transaction price—that could warrant providing less than what the indemnification cap maximally allows.”). ↑

32. For those who have read this far and still may be wondering, the first part of the title of this article is taken from an old Woody Allen joke, which goes as follows: “Some guy hit my fender the other day, and I said unto him, ‘Be fruitful and multiply.’ But not in those words.” ↑

Three nearly simultaneous actions of the Federal Trade Commission (“FTC”) in September confirmed its intentions with respect to employee noncompetes. In the first two related actions, the FTC indicated it will not defend its 2024 rule banning virtually all worker noncompetes and will instead focus on efforts to rein in the use of “unfair and anticompetitive” noncompetes. The FTC’s third action notified the public of its intent to accomplish its goals, at least in part, through a wide-ranging request for the public to identify employers using noncompetes, followed by targeted enforcement actions.

Specifically, on September 4, 2025, the FTC voted 3–1 along party lines to approve a complaint against the largest pet crematorium in the U.S. and a settlement of that action that bans the company from using noncompete clauses in many of its employment agreements. The complaint alleges that, in 2019, the pet cremation company and its subsidiary adopted a policy requiring noncompete agreements for all newly hired employees, which typically barred the employees from working in the pet cremation industry anywhere in the U.S. for one year after their departure. According to the FTC’s complaint, the only employees not subject to noncompetes are those working in California, which has a statutory prohibition on such restrictions.

The complaint emphasized the fact that the noncompetes were imposed on employees regardless of (1) their responsibilities, compensation levels, or skills, and (2) even in the absence of a nearby operational facility. The FTC also pointed out that, in one instance, employees were required to enter into noncompetes only to have the facility at which they worked closed and their employment terminated within weeks. Commissioner Rebecca Slaughter, who was briefly reseated pursuant to a court order, dissented: “one-off enforcement is no substitute for the FTC’s meaningful, marketwide noncompete rule that will protect workers across the country.”

The settlement with the FTC bars noncompete agreements except in limited circumstances. Specifically excluded from the noncompete prohibition are those entered into by directors, officers, or senior employees, in conjunction with the grant of equity or equity interests. Further, the settlement does not prohibit noncompete agreements in conjunction with the sale of a business, provided that individuals subject to restriction have a pre-existing equity interest in the business being sold. Notably, the settlement also bars employee agreements restricting employees from soliciting customers, except those current or prospective customers with whom the employee had “direct contact or personally provided service” in the last twelve months.

The FTC’s second action, also on September 4, was to issue a Request for Information Regarding Employer Noncompete Agreements in an effort to identify “which specific employers continue to impose noncompete agreements.” The request is not aimed at studying the use of worker restrictions and does not seek information from employers wanting to justify their use of noncompetes; instead, it is focused solely on gathering information about employers that are currently using noncompete agreements. For example, it seeks the employer names, job functions, and salaries of those workers covered, scope of restrictions (e.g., geography, duration), enforcement practices, harm to employee mobility (e.g., moving and legal costs, lost higher wages, etc.), lost opportunity to start new businesses, harm to rival employers, and loss of innovation. The request specifically calls for information about instances where noncompetes have harmed health care workers. Among the most interesting is a request for the names of employers that use nonsolicitation or nonrecruitment agreements limiting former workers from working with former customers or former employees.

The third action, filed the following day, was the FTC’s unopposed motions to dismiss both its Fifth and Eleventh Circuit appeals of the two district court decisions holding that the agency’s rule banning worker noncompetes exceeded the FTC’s authority.^[1] By dismissing these appeals, the agency has acceded to the vacatur of the final Non-Compete Clause Rule. The vote to abandon the defense of the rule was 3–1 along party lines. Commissioner Slaughter dissented on the basis that the rule received overwhelming support in the form of 25,000 supportive comments out of the approximately 26,000 total comments received. She was also critical of the majority’s decision to simply drop the defense of the rule instead of allowing for a public notice and comment period:

The law does not permit the agency to void this popular rule under cover of darkness by simply withdrawing from litigations. The law requires that we hear from the American people. In absence of that legally required process, the action the Commission takes today should not hamper the agency in the future.

Whether or not the FTC followed the correct process, this administration will not defend the 2024 noncompete ban. This means the Northern District of Texas decision, which universally vacated the FTC’s noncompete rule, and the Middle District of Florida decision, which preliminarily enjoined the FTC’s enforcement of its rule against the named plaintiff there, as well as the conflicting Eastern District of Pennsylvania decision, which refused to enjoin the FTC rule, all remain on the books without appellate court review.

Although the FTC acknowledges that noncompetes can serve “valid purposes in some circumstances,” it is also concerned with the impact on workers of the often knee-jerk reliance on the clauses. These FTC actions and the agency leadership’s statements make clear that the agency intends to discourage the blanket use of worker noncompetes, hopes to use the public to relatively quickly identify such employers, and intends to take action against “the worst offenders [to] restore fairness to the American labor market.” The FTC could issue cease-and-desist letters, or it could go so far as to launch burdensome investigations and pursue administrative or federal court lawsuits under the FTC Act. However, the FTC has been consistent in its stance that noncompetes in the context of sale of business agreements are subjected to substantially less scrutiny.

Employers considering the use or continued use of noncompetes should evaluate all potentially applicable state laws. These state laws have changed rapidly and may include minimum compensation thresholds, notice periods, garden leave requirements, maximum time limitations, and other similar requirements. In addition, to mitigate FTC Act risks, firms should, at a minimum:

• document the justifications for their noncompetes;
• limit their use to employees with job responsibilities relevant to those justifications;
• narrow the restrictions in terms of geography, timeframe, and types of later employment;
• consider the use of less restrictive options, such as nondisclosure and nonsolicitation agreements and, where possible, use less restrictive alternatives; and
• where less restrictive alternatives are not sufficient, document why they are not adequate.

Firms should also be aware that the Department of Justice and the FTC remain concerned with agreements among companies not to solicit or poach each other’s employees. Companies using no-poach agreements should consider the same factors above.

1. Ryan, LLC v. FTC, No. 24-10951 (5th Cir.); Properties of the Villages v. FTC, No. 24-13102 (11th Cir.). ↑

The past several months have brought a head-spinning number of recent regulatory and legal developments, both in terms of new obligations and duties, many still well-established in law, that may no longer be enforced. Consequently, audit committees are confronted with shifting corporate compliance and ethics priorities while new risks to financial reporting, including cyber and artificial intelligence, continue to be identified.

The burden on audit committees continues to grow. Just over thirty-five years ago, the Treadway Commission recommended that “all public companies should be required by SEC rule to establish audit committees composed solely by independent directors,” a recommendation that the U.S. Securities and Exchange Commission (“SEC”) rejected at the time.^[1] The SEC, however, has made the operation of audit committees a principal focus since then. Recent actions from the SEC’s Enforcement Division emphasize audit committees’ obligations, and potential liability, in new contexts, including the integration of acquired financial reporting functions after a merger.^[2] Pronouncements by the then-acting SEC chair and acting director of enforcement show that the SEC intends to continue the recent enforcement agenda, at least as far as that agenda pursues accounting and financial reporting fraud.^[3]

Perhaps more significantly, and notwithstanding the actual and contemplated regulatory and legal changes that appear in the daily news, audit committees’ obligations to report significant audit matters to outside auditors remain in place, and those external auditors may compel investigation and, potentially, public disclosure. Further, audit committees must also remain diligent about their increasing responsibilities under state law, even in Delaware, which recently has revisited its corporate laws, but not in a way that alters the responsibilities of audit committees.

Against this backdrop, audit committees must find support where they can while meeting their mounting obligations under applicable listing standards and federal and state law. As the subject matter within the audit committees’ purview continues to move beyond financial reporting and the operation of internal controls to other areas of risk, such as cybersecurity, audit committees’ need for expert advice will grow correspondingly. In this article, we outline what is driving this growth in the responsibilities of audit committees, as well as some practical solutions that audit committee members may consider as they meet those responsibilities.

The Evolution of the Responsibilities of Audit Committees

In 1987, the Treadway Commission recommended the establishment of audit committees as a best practice for public companies.^[4] However, public companies were not immediately required to establish audit committees. This did not occur until more than a decade after the Treadway Report, with the SEC’s approval in 1999 of standards requiring fully independent audit committees with at least three members for companies listed on the NYSE and Nasdaq.

These standards were codified in 2002 through the enactment of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”).^[5] In addition to the rules promulgated by the SEC pursuant to Sarbanes-Oxley, in 2003 the SEC approved new corporate governance rules for NYSE- and Nasdaq-listed companies, further solidifying the audit committee requirements. Following the 2008 financial crisis, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) focused on enhancing corporate governance—in part through audit committees.^[6] Dodd-Frank, among other things, increased financial incentives and protections for whistleblowers^[7] and expanded the SEC’s enforcement capabilities, including by empowering the SEC to initiate enforcement actions against entities and individuals that “knowingly or recklessly provide substantial assistance to another in violation of [the securities laws].”^[8] Together, Sarbanes-Oxley and Dodd-Frank advanced the role of audit committees from simply a recommended “best practice” for corporate oversight^[9] to a primary company mechanism for maintaining sound corporate governance.

The increase in audit committee obligations has only accelerated, particularly as regulators have sought to identify corporate functions into which responsibilities could be placed. Whereas the role of the audit committee initially was to oversee the financial reporting function, the audit committee’s mandate looks a lot different today, with oversight of financial reporting and auditing now only one component of an audit committee’s many responsibilities, which can often include other areas such as cybersecurity, data privacy, and environmental, social, and governance (“ESG”) reporting.^[10] Indeed, approximately half of audit committees now rank cybersecurity as their number-one area of focus.^[11] In 2019, then–SEC Chairman Jay Clayton observed that “the scope of an audit committee’s work is broad and includes a variety of important responsibilities,”^[12] including being instrumental in setting the tone at the top for financial reporting, monitoring compliance with auditor independence rules, collaborating with internal stakeholders with respect to the implementation of generally accepted accounting principles (“GAAP”) standards, overseeing internal control over financial reporting, and maintaining adequate communications with external auditors.^[13]

At the same time, the SEC has continuously affirmed the requirements of outside auditor independence and the audit committee’s obligation to ensure that independence,^[14] which, among other things, has elevated the responsibilities of audit committees and outside auditors while also creating tension where outside auditors must balance client relationships with independence.

To be sure, audit committee members have their own interests to consider. The SEC long has described audit committees as gatekeepers for investor protection and regularly emphasizes this role in its enforcement actions. In one enforcement action, which the SEC described as “a cautionary tale of what happens when an audit committee chair fails to perform his gatekeeping function,” the SEC delisted a company’s shares when the audit committee failed to investigate suspected financial fraud.^[15] Regulators have also levied penalties against individual members of the audit committee. For example, in In re Shirley Kiang, the SEC brought an enforcement action where a company’s audit committee chair signed a public filing certifying that the purported acting chief financial officer (“CFO”) was the actual acting CFO despite a contrary admission by the company’s chairman and chief executive officer (“CEO”).^[16] The SEC ordered the audit committee chair to cease and desist from causing any additional violations and permanently prohibited the audit committee chair from signing any additional public filings required by Sarbanes-Oxley.^[17] In another enforcement action, the SEC charged a company’s audit committee chair, in addition to the CFO and CEO, with violations of antifraud and other securities law for failing to act appropriately when he learned about the CEO’s scheme to concoct phony revenue numbers—and sought officer-and-director bars, injunctions, disgorgement, civil penalties, and other relief.^[18]

The critical role of audit committees and their mounting responsibilities have endured notwithstanding changes in administration. On January 21, 2025 Mark T. Uyeda was named then-acting chairman of the SEC, taking over for former Chair Gary Gensler.^[19] Uyeda, who was first sworn in as a commissioner on June 30, 2022, previously stressed the importance of audit committees in helping companies lower the likelihood of accounting violations and resulting enforcement actions.^[20] Specifically, Uyeda noted—although years earlier—that audit committees have a duty to (1) actively oversee and understand the accounting policies, estimates, and judgments made by management in their preparation of the financial statements, including a responsibility to determine whether internal controls are effective; (2) appoint, compensate, and oversee the company’s auditor, including a responsibility to determine whether the external auditor is “independent under the myriad of rules that govern independence”; and (3) contribute to “a culture of cooperation between management and the auditor, while still ensuring that differing views on important issues are raised to the [audit] committee.”^[21] Companies that fail to abide by the then-acting commissioner’s recommendations will likely be subject to enforcement actions.^[22] As of April 21, 2025, Paul S. Atkins was sworn in as chairman of the SEC.^[23] These duties will likely remain in place as Chairman Atkins seeks to ensure the U.S. remains a safe and secure place to invest. Accordingly, the burden on audit committees not only remains intact but may continue to grow.

Sources of Ongoing and Escalating Pressure on Audit Committees

Obligations Imposed on Auditors by the Securities Exchange Act of 1934 and Auditing Standards

Audit committees must comply with a complex regulatory regime imposed by regulators and the listing standards. For example, the NYSE and Nasdaq require audit committees to have at least three members who are independent and financially literate.^[24] While audit committees are not required to include a financial expert under SEC regulations, they are required to disclose why they do not have one if a financial expert does not serve on the committee.^[25] Audit committees are responsible for overseeing external and internal auditors and addressing disputes between management and auditors.^[26] They must also include a report with the company’s proxy statement stating whether the audit committee (i) discussed the company’s financial statements with management, (ii) reviewed with auditors all matters necessary for discussion under Public Company Accounting Oversight Board (“PCAOB”) AU 380, and (iii) received disclosures regarding the auditors’ independence under PCAOB Ethics and Independence Rule 3526.^[27]

Existing auditing standards also impose substantial obligations on auditors, particularly after an auditor identifies an illegal act. Under Auditing Standard (“AS”) 2405, Illegal Acts by Clients, the auditor must evaluate the impact of the illegal act on sums presented in the financial statements, such as loss contingencies, and consider the adequacy of disclosures related to the illegal act. Apart from financial statement impact, the auditor must determine whether the illegal act affects the audit itself by impairing the reliability of representations made by management. In addition to requiring the auditor to assess the consequences of an illegal act on the financial statements and audit under AS 2405, section 10A also requires the auditor to assess management’s response to the illegal act. If the auditor concludes that appropriate remedial action has not been taken to address an illegal act materially impacting the financial statements, and the auditor issues a nonstandard opinion or withdraws as a result thereof, the auditor must report those conclusions to the client’s board of directors. The client’s board of directors then has one business day to report the auditor’s findings to the SEC.

While less common, section 10A of the Securities Exchange Act of 1934 (“Exchange Act”) requires the auditor to determine the likelihood that an illegal act has, in fact, occurred and to assess the potential effect of the act on the client’s financial statements when an auditor believes an illegal act may have occurred.^[28] Section 10A sets a high bar for a violation, but its application is expansive. It defines illegal act broadly as “an act or omission that violates any law, or any rule or regulation having the force of law.”^[29] The section’s requirements also are triggered regardless of the materiality of the possible illegal act. Section 10A imposes reporting requirements on the auditor—specifically, to inform management of the possible illegal act and to ensure that the audit committee or board of directors or both are “adequately informed” of it.^[30] These reporting requirements are triggered unless the act is “clearly inconsequential.”^[31]

In sum, the auditor ultimately has four obligations with respect to possible illegal acts under PCAOB standards and Section 10A: (1) to determine whether an illegal act occurred; (2) to understand the quantitative and qualitative effect of the illegal act on the client’s financial statements and on the audit itself; (3) to determine whether management has taken sufficient remedial action to address the illegal act; and (4) to make required reporting to the client’s management, board of directors, and audit committee. Failure to strictly comply with these obligations can subject auditors to severe penalties, and it is the audit committee’s job to oversee these determinations and to ensure that auditors maintain adequate independence to make these determinations.

Increased Pressure on Audit Committees Through Rulemaking and Enforcement

Audit committee obligations continue to be informed by those placed on their outside auditors. And, as outside auditors face greater scrutiny and tighter regulations, their demands of audit committees inevitably grow.

In 2024, in response to reports by the PCAOB of a troubling increase in deficiency rates found in its recent inspections, the SEC’s chief accountant, Paul Munter, released a statement emphasizing the importance of auditors and audit committees for the proper functioning of our capital markets and calling on auditors and audit committees to enhance their focus on audit quality.^[32] Since then, the SEC has approved updated PCAOB Quality Control Standards, which raised the existing requirements for audits.^[33] The purpose of the update was to improve audit quality, but the update inevitably increased pressure on auditors to meet, and indirectly on audit committees to monitor auditor compliance with, the heightened quality standards.

Additionally, in August 2024, the SEC approved two PCAOB proposals updating and amending a variety of rules. The new AS 1000, General Responsibilities of the Auditor in Conducting an Audit, consolidates and modernizes general principles and responsibilities for auditors conducting an audit.^[34] Moreover, amendments to AS 1105, Audit Evidence, and AS 2301, The Auditor’s Response to the Risks of Material Misstatement, address the use of technology-assisted data analysis in audit procedures—clarifying the auditor’s responsibilities when using analytical tools to conduct an audit.^[35] The SEC also approved the PCAOB’s amendments to Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations, which governs liability of a person at a public accounting firm who contributes to the firm’s violation of the laws, rules, and standards enforced by the PCAOB. Notably, the amended Rule 3502 lowered the standard for an associated person’s contributory liability from recklessness to negligence.^[36]

Failure to comply with these constantly evolving standards may result in severe consequences for auditors. In 2013, the SEC charged three auditors for violating federal securities law.^[37] The investigation was designated “Operation Broken Gate,” highlighting the SEC’s position that auditors are gatekeepers to the financial markets.^[38] The three auditors were charged with myriad violations of the Exchange Act and the SEC’s Rules of Practice, which resulted in the auditors being suspended from practicing as accountants.^[39] The SEC has continued to enforce its rules as the regulatory regime has become more complex. In May 2024, the SEC charged BF Borgers CPA PC and its owner with violations of the PCAOB’s standards in more than 1,500 audits over more than twenty years.^[40] As a result, BF Borgers and its founders were forced to pay civil penalties and prohibited from appearing before the SEC as accountants.^[41]

This regulatory attention is directed at auditing firms of all sizes, including the very largest. In June 2023, the SEC charged Marcum LLP with firm-wide quality control deficiencies, resulting in a $10 million fine and censure. SEC leadership was unsparing in connecting its observations about Marcum’s alleged quality control deficiencies to the firm’s financial interests:

“Public company auditors occupy positions of trust that are critical to protecting investors and our capital markets more broadly,” said SEC Chair Gary Gensler. “Marcum neglected its essential gatekeeper function in service to its own growth. Marcum took on more than 600 new SPAC clients for a nearly six-fold increase in just one year, churning out audits at an unsustainable pace causing widespread quality control and audit standard violations that put its clients and the investing public at risk.”

“Throughout the SPAC boom of the last several years, Marcum prioritized increased revenue over audit quality: its aggressive pursuit of business growth far outpaced any commensurate development of an already weak system of quality controls,” said Gurbir S. Grewal, Director of the Division of Enforcement. “From 2020 through 2021, the market saw more than 860 SPACs complete IPOs and Marcum audited nearly half of them, without adequate consideration for its ability to serve as gatekeepers.”^[42]

The PCAOB’s Evolving Standards

As if existing pressures were not enough, the PCAOB has considered additional auditing standards while existing Quality Control Standards continue to evolve.^[43] The PCAOB has a heightened interest in policing fraud at public companies and has opted to shift that burden to auditors.

One recent example of shifting standards from the PCAOB is the adoption of QC 1000, A Firm’s System of Quality Control, and its delayed implementation. QC 1000 was adopted on May 13, 2024.^[44] The new Quality Control Standard will require all auditors to design, implement, and operate a quality control system within the standard’s framework.^[45] Each audit firm will be required to evaluate the effectiveness of its quality control system by September 30 and report the results of that evaluation on Form QC to the PCAOB by November 30.^[46] The firm’s principal executive officer will bear the ultimate responsibility for the quality control system.^[47] However, firms must also designate separate individuals who will also be responsible for: (a) the system as a whole, (b) compliance with the ethics and independence requirements, (c) the monitoring and remediation process, and (d) other components of the quality control system if appropriate.^[48]

QC 1000 was scheduled to become effective on December 15, 2025. Less than six months before the scheduled effective date, on August 28, 2025, the PCOAB postponed QC 1000’s implementation to December 15, 2026.^[49] Indeed, the Center for Audit Quality (“CAQ”) requested that implementation be delayed, citing concern that its member firms would be unable to comply by December 2025.^[50] While firms now have another year to prepare for the implementation of QC 1000, it still represents a significant change to the existing landscape with increased costs for auditors.^[51] These costs and some of QC 1000’s additional requirements will inevitably creep upward, placing additional responsibilities on audit committees.

Obligations Imposed on Audit Committees by Delaware Law

In addition to federal laws and regulations and applicable listing standards, audit committees face additional pressure from Delaware law. Despite the prevalence of federal law, the fiduciary duty analysis of an audit committee’s conduct remains an issue of state law controlled by the state of incorporation.

As has widely been reported, Delaware, via Senate Bill 21 (“SB 21”), recently enacted amendments to its corporate law that protect conflicted directors in various contexts by improving predictability of certain areas of Delaware corporate law and minimizing exposure to potential litigation.^[52] SB 21 also limits the scope of “books and records” actions pursuant to section 220 of the Delaware General Corporation Law. More specifically, shareholders may request only formal corporate documents and board materials, not director, officer, and manager communications such as emails and texts.^[53] At the outset, and perhaps obviously, changes to Delaware corporate law or other state corporate law do not directly impact auditors’ obligations, and thus what audit committees must do as a practical matter remains unchanged. It is far from clear, however, how recent changes to Delaware law will affect audit committee obligations when evaluating conflict transactions.

Despite changes to Delaware law pursuant to SB 21, many obligations of directors remain intact. Under In re Caremark International Inc. Derivative Litigation,^[54] which remains good law, simply forming an audit committee and hiring an auditor are not enough for directors to avoid liability. A Caremark claim is based on a director’s failure to oversee the company’s operation, which results in a breach of the duty of loyalty.^[55] An audit committee that meets sporadically, devotes inadequate time to its work, or notices accounting irregularities and chooses to ignore them will not have fulfilled its obligations pursuant to Delaware law.^[56] If circumstances require an audit committee to meet more frequently to identify and address red flags, then directors fail to satisfy their fiduciary duties by only meeting when prompted by federal securities laws.^[57]

As Caremark litigation has become more prevalent, the doctrine has become a potent tool for plaintiffs. Traditionally, Caremark claims rarely survived a motion to dismiss, which may have caused audit committees to place a lower priority on Caremark. But the potential for liability under Delaware law was brought back into focus by Marchand v. Barnhill in 2019, which demonstrated the case-by-case analysis applied by Delaware courts.^[58] In Marchand, the Delaware Supreme Court held that Caremark “require[s] that a board make a good faith effort to put in place a reasonable system of monitoring and reporting about the corporation’s central compliance risks.”^[59] Delaware courts remain skeptical of Caremark claims and have reiterated that “how directors choose to craft a monitoring system . . . is a discretionary matter” and that the laws good faith requirements do not necessarily “require a system to the plaintiffs’ liking.”^[60] Nevertheless, plaintiffs have begun to apply Caremark in more creative ways, and the Delaware courts, to a certain extent, have entertained these arguments. For example, the Delaware Court of Chancery indicated that an audit committee’s failure to adequately identify internal cybersecurity risks and notify directors could subject directors to Caremark liability.^[61]

Although audit committees may initially focus on their obligations pursuant to federal law, they should not overlook the risk of liability pursuant to Delaware law (or other applicable state law). It is imperative that audit committees monitor, identify, and address red flags. Given the ever-expanding role of audit committees, it is likely that the number of potential red flags within the audit committee’s purview will continue to grow.

Conclusion

These dynamics—pressure from the SEC, national securities exchanges, and accounting authorities; recent rulemaking and enforcement; proposed amendments from the PCAOB; and Delaware law—have created a maze of laws and regulations for auditors to navigate. As audit committees’ core financial and audit oversight responsibilities are increasing in nature and complexity to meet changing regulations and accounting standards, audit committees are also facing “scope creep,” with new responsibilities falling to the audit committee.^[62] Audit committees do not appear to be at risk of diminished responsibility under changing regulatory priorities. As a result, the current dynamic regulatory and legal environment provides no reprieve to audit committees.

Because of the shifting legal landscape, audit committees should consider thoroughly reviewing their existing procedures and reporting systems. This may require a reallocation of responsibilities to better balance directors’ workload and oversight functions. Boards should be cognizant of the growing workload for members of audit committees as their responsibilities, likewise, have increased. Boards should also be aware of the resources necessary to support those growing responsibilities.

We encourage audit committees to regularly engage with management, legal counsel, and outside auditors in order to ensure that they have an adequate understanding of the evolving and growing issues within their purview.

1. Nat’l Comm’n on Fraudulent Fin. Reporting, Report of the National Commission on Fraudulent Financial Reporting 40 (Oct. 1987) [hereinafter Treadway Report]. ↑

2. See Press Release, U.S. Sec. & Exch. Comm’n, SEC Charges Animal Feed Company and Top Executives in China and U.S. with Accounting Fraud (Mar. 11, 2014). ↑

3. See infra section “Sources of Ongoing and Escalating Pressure on Audit Committees.” ↑

4. See Treadway Report, supra note 1, at 40. ↑

5. H.R. 3763, 107th Cong. (2002). ↑

6. H.R. 4173, 111th Cong. (2010). ↑

7. See 15 U.S.C. §§ 78u-6(h). ↑

8. H.R. 4173, 111th Cong. §§ 929M–O (2010). ↑

9. See Treadway Report, supra note 1, at 40. ↑

10. See Deloitte & Ctr. for Audit Quality, Audit Committee Practices Report: Common Threads Across Audit Committees (4th ed. Feb. 2025). ↑

11. Id. at 7. ↑

12. Jay Clayton, Sagar Teotia & William H. Hinman, Statement on Role of Audit Committees in Financial Reporting and Key Reminders Regarding Oversight Responsibilities, SEC.gov (Dec. 30, 2019). ↑

13. Id. ↑

14. Paul Munter, The Importance of High Quality Independent Audits and Effective Audit Committee Oversight to High Quality Financial Reporting to Investors, SEC.gov (Oct. 26, 2021). ↑

15. Press Release, U.S. Sec. & Exch. Comm’n, supra note 2. ↑

16. Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order at 2, In re Shirley Kiang, No. 3-15816 (Mar. 27, 2014). ↑

17. Id. at 4–5. ↑

18. See Press Release, U.S. Sec. & Exch. Comm’n, SEC Charges Former Chairman and CEO of Tech Co. Kubient with Fraud and Lying to Auditors (Sept. 16, 2024). ↑

19. Press Release, U.S. Sec. & Exch. Comm’n, Mark T. Uyeda Named Acting Chairman of the SEC (Feb. 28, 2025). ↑

20. Mark T. Uyeda, U.S. Sec. & Exch. Comm’n Comm’r, Remarks at ICAEW Event—World-Class Regulation: Building Trust and Transparency in International Markets (May 12, 2023). ↑

21. Id. ↑

22. Id. (Uyeda stated that “the SEC should continue to focus on pursuing . . . individual bad actors and levying appropriate remedies against them.”). ↑

23. See Press Release, U.S. Sec. & Exch. Comm’n, Paul S. Atkins Sworn in as SEC Chairman (Apr. 21, 2025). ↑

24. Governance Insights Ctr., PwC, Audit Committee Responsibilities 5 (2025). ↑

25. Audit Committee Requirements, Deloitte (2025). ↑

26. See Governance Insights Ctr., supra note 25, at 3. ↑

27. See id. ↑

28. Exchange Act § 10A, 15 U.S.C. § 78j-1. ↑

29. Id. § 10A(f). ↑

30. Id. § 10A(b)(1)(B). ↑

31. Id. ↑

32. See Press Release, U.S. Sec. & Exch. Comm’n, Fostering a Healthy “Tone at the Top” at Audit Firms (May 15, 2024). ↑

33. See Press Release, Better Mkts., SEC’s New Rule on Auditing Standards Will Provide Greater Protection for Investors, but Agency Must Go Further (Sept. 9, 2024) (arguing that the PCAOB’s Quality Control Standards should be further tightened to ensure accuracy and transparency in audits). ↑

34. Press Release, U.S. Sec. & Exch. Comm’n, SEC Approves New and Updated PCAOB Audit Standards and an Amendment to the PCAOB’s Contributory Liability Rule (Aug. 20, 2024). ↑

35. See id. ↑

36. Id. ↑

37. See Press Release, U.S. Sec. & Exch. Comm’n, SEC Charges Three Auditors in Continuing Crackdown on Violations or Failures by Gatekeepers (Oct. 3, 2023). ↑

38. Id. ↑

39. See id. ↑

40. See Press Release, U.S. Sec. & Exch. Comm’n, SEC Charges Audit Firm BF Borgers and Its Owner with Massive Fraud Affecting More Than 1,500 SEC Filings (May 3, 2024). ↑

41. See id. ↑

42. Press Release, U.S. Sec. & Exch. Comm’n, SEC Charges Audit Firm Marcum LLP for Widespread Quality Control Deficiencies (June 21, 2023). ↑

43. The PCAOB had previously recommended amendments to AS 2405, Illegal Acts by Clients, including replacing “illegal acts” with “noncompliance with laws and regulations” and explicitly including fraud within the definition of noncompliance with laws and regulations. See Noncompliance with Laws and Regulations, PCAOB.org (June 6, 2023). This change would have expanded the potential wrongdoing that auditors are required to review and report, but the project was abandoned in 2025. ↑

44. See PCAOB, Release No. 2024-005, A Firm’s System of Quality Control and Other Amendments to PCAOB Standards, Rules, and Forms (May 13, 2024). ↑

45. Id. at 76. ↑

46. Id. at 76, 258–59. ↑

47. Id. at 82. ↑

48. Id. ↑

49. See Press Release, PCAOB, PCAOB Postpones Effective Date of QC 1000 and Related Standards, Rules, and Forms (Aug. 28, 2025). ↑

50. Letter from Dennis J. McGowan, CAQ, to George Botic, Acting Chair of PCAOB, Re: PCAOB Standard A Firm’s System of Quality Control and Other Amendments to PCAOB Standards Rules, and Forms (SEC Release No. 34-100968), at 2 (July 23, 2025) (“Despite these significant efforts, a number of our member firms remain concerned about their ability to confidently comply with QC 1000 by the effective date. We also continue to see that certain concerns raised by firms and the CAQ during the standard-setting process have manifested as real implementation challenges for several of our member firms.”) ↑

51. See id. ↑

52. S. 21, 153d Gen. Assemb. (Del. 2025). ↑

53. Id. ↑

54. 698 A.2d 959 (Del. Ch. 1996). ↑

55. See Marchand v. Barnhill, 212 A.3d 805, 820 (Del. 2019). ↑

56. See Guttman v. Huang, 823 A.2d 492, 507 (Del. Ch. 2003). ↑

57. See Hughes v. Xiaoming Hu, 2020 WL 1987029, at *14 (Del. Ch. Apr. 27, 2020). ↑

58. Marchand, 212 A.3d 805. ↑

59. Id. at 824. ↑

60. In re Plug Power Inc. S’holder Derivative Litig., No. 2022-0569, 2025 WL 1277166, at *14 (Del. Ch. May 2, 2025) (dismissing Caremark claims based on audit committee’s response to SEC comment letters). ↑

61. Firemen’s Ret. Sys. of St. Louis v. Sorenson, 2021 WL 4593777 (Del. Ch. Oct. 5, 2021). ↑

62. See CAQ, Audit Committee Composition Changing Amid Expanded Scope and Emerging Risks, According to New Report from Deloitte and the Center for Audit Quality (CAQ) (Jan. 13, 2023); CAQ, Audit Committees Being Challenged by Increased Complexity, ‘Scope Creep,’ According to New Report from CAQ and Deloitte (Jan. 25, 2022). ↑

What Exactly Is This Private Target Deal Points Study, Anyway?

The Private Target Deal Points Study is a publication of the Market Trends Subcommittee of the Business Law Section’s M&A Committee. It examines the prevalence of certain provisions in publicly available, private target M&A transactions during a specified time period. The Private Target Deal Points Study is the preeminent study of M&A transactions, widely utilized by practitioners, investment bankers, corporate development teams, and other advisors.

What Time Period Will Be Covered by the Study?

The 2025 iteration of the Private Target Deal Points Study will analyze publicly available definitive acquisition agreements for transactions executed and/or completed either during calendar year 2024 or during the first quarter of calendar year 2025.

What Industries Will Be Covered by the Study?

The deals in the Private Target Deal Points Study reflect the broad array of industries of the deals that were conducted in our time period. In this year’s study, the technology, healthcare/pharma/biotech, and industrial goods & services / manufacturing sectors were the largest sectors, together making up approximately 41 percent of the deals.

What Is the Size of the Transactions of the Study?

The transactions analyzed in the Private Target Deal Points Study were in the “middle market,” with purchase prices ranging between $25 million and $900 million; purchase prices for most deals in the data pool were $200 million or below.

Where Are You in the Process of Releasing the Study?

Almost all of our ten issue groups have turned in their data, and we are processing and analyzing it, running quality control checks, and finalizing the slides.

Can You Share Any Sneak Preview Data?

We shared a couple of sneak preview data points with attendees at the meeting of the Market Trends Subcommittee at the ABA’s M&A Committee meeting in September and encourage you to sign up for the M&A Committee and its various subcommittees if you haven’t already—at the following link: Join the BLS M&A Committee.

We can give you a peek ahead (understand, however, that our process is still ongoing and thus these data points may not be final):

• Number of deals referencing RWI has come back up
  • The sneak peek: Representations and warranties insurance (“RWI”) has been a huge game changer in M&A deals. We measure whether a deal in our study pool utilized RWI by the closest proxy we can access: whether the purchase agreement references RWI. (Of course, RWI may have been obtained without such a reference in the purchase agreement.) The 2023 version of the Private Target Deal Points Study showed RWI references dropping to 55 percent (down from nearly two-thirds of deals referencing RWI in the 2021 version of the Study). In 2025, we are back to nearly two-thirds (64 percent) of all deals in the Study pool referencing RWI.

  

• Sellers benefiting from fewer closing conditions related to legal proceedings
  • The sneak peek: Stand-alone conditions to closing related to legal proceedings challenging the transaction dropped down from 46 percent in the 2023 version of the Study to 35 percent in this iteration of the Study. In that subset of deals where this condition was included, it is now more likely to be limited to governmental proceedings only (as opposed to any legal proceedings).

  

Please keep an eye out for our study and for an In the Know webinar to be scheduled, during which the chairs and issue group leaders will provide analysis and key takeaways from the results of the 2025 Private Target M&A Deal Points Study.

A junior-level staff member reports that she is being bullied by a supervisor. A mid-level staff member appears to be using the nonprofit organization’s credit card for occasional personal purchases. A senior-level staffer reports alleged financial improprieties relating to a federal grant. The CEO reports that the board chair is acting too familiar, with personal comments and affectionate touches. In each of these circumstances, a nonprofit may be called upon to conduct an internal investigation. This article provides practical tips for conducting defensible and effective internal investigations.

1. The Preliminary Assessment

Before an investigation commences, the organization must swiftly assess the nature of the allegations to ascertain whether there are any immediate threats to physical safety or business operations that can and should be managed. For example, if an employee reports a credible threat of workplace violence, of course, the first step is to notify local law enforcement and implement any other interim measures reasonably calculated to protect employee safety. The organization also should assess immediate threats to the organization itself. For example, if it is alleged that an employee is using the employer’s credit card for personal purchases, the organization may want to put a temporary hold on the employee’s account or monitor the account more closely while the investigation is pending. In other circumstances, where there are concerns about evidence preservation, the organization may direct IT to capture a forensic snapshot of a computer.

Other preliminary considerations concern the nature of the allegations and the party best suited to conduct the investigation. Regarding the nature of the allegations, one should ask, “If the allegations are true exactly as they are presented, do they amount to a violation of the law or organizational policy?” Not all allegations warrant a timely and costly investigation. Imagine, for example, that the organization has a policy prohibiting open-toed shoes in the workplace. An employee reports that her supervisor “bullied” her by admonishing her for wearing flip-flops to work. Even though the organization likely has an anti-bullying policy, it is not reasonable to conclude that a supervisor’s effort to enforce a workplace dress code by itself amounts to bullying. Carefully making these preliminary assessments can protect the organization from unnecessary expenditure of time and resources. Be careful, though, not to summarily dismiss actionable claims simply because they do not incorporate expected buzzwords. A report that an employee is being treated dissimilarly from other employees from different racial backgrounds must be investigated, whether or not the complainant expressly labels the differential treatment as “discrimination.”

Moreover, the organization must evaluate who is best suited to conduct an investigation, which requires thoughtful analysis of potential legal, reputational, financial, operational, and ethical risks facing the organization. Human resources staff may be well suited to address more routine workplace matters. Other matters may require an external investigator. For example, assume a party alleges that the chief human resources officer harbors bias against her. Depending on the facts, it may be prudent for an organization to engage an external, independent investigator to extinguish any claims about compromised neutrality. Alternatively, if sensitive allegations are raised involving the CEO and the board chair, or if the allegations implicate legal or other high-profile matters, it may be prudent to engage external legal counsel to conduct a privileged investigation.

Finally, note that not all internal investigations need to be “independent” ones (although some do call for such independence). Be sure to carefully consider the role of attorney-client privilege (although not all internal investigations are designed to be or remain privileged), and be sure to involve legal counsel at the outset of and throughout all internal investigations (if legal counsel is not conducting the investigation). For instance, if a forensic audit needs to be conducted as part of an investigation, presuming it is a privileged investigation, the nonprofit will want legal counsel to retain the forensic audit firm so that the audit firm’s work product is protected by privilege.

2. Identifying Governing Laws and Organizational Policies

Once the organization decides to proceed with an investigation, the lead investigator must determine which laws and organizational policies govern. For example, if an employee alleges that they are being sexually harassed by a supervisor, Title VII of the Civil Rights Act of 1964 (depending on the size of the organization), state laws, and organizational policies are likely implicated. Notably and importantly, allegations may evolve over time; as such, the investigator must be able to identify when other policies or laws are triggered. Of course, as is true for all operations, the organization must follow policies to a tee. Failure to do so will usually create legal exposure for the entity.

3. Planning the Investigation Strategy

Next, the lead investigator must thoughtfully craft an investigation strategy. What steps does the organization’s policy require? In what order? What is the scope of the investigation? What is being investigated? What is not being investigated? What information must be acquired to substantiate or refute a policy violation? Who may have personal knowledge of the facts underlying the allegations? What might each person be able to tell the investigator? Who else may have valuable information? What tangible evidence might exist that will help the investigator acquire needed information (e.g., account statements, video footage, text messages, emails)? Which witness should be interviewed first? Last? When should each witness be notified? A thoughtful strategy is key to a successful investigation.

4. Conducting Interviews

There is an art and a science to conducting investigative interviews that involves everything from building rapport, to funneling information, to deescalating emotions. While a full treatment of interview methodology is not possible here, a brief comment on the art of the question may prove valuable. Certainly, an investigator will prepare by broadly identifying key topics and questions. Even so, the most defensible investigation will derive from organic conversation, which almost never follows a prepared script. The best investigators ask open-ended questions, listen, and pull threads, taking cues from the interviewees regarding how the conversation will proceed. For example, imagine a sexual harassment investigation. The organization’s policy prohibits “severe or pervasive” sex-based misconduct, and the investigator must engage the interviewee in a neutral manner to make a finding of fact as to whether the described conduct was “severe or pervasive.” Often, investigators’ first instinct is to parrot the policy, asking, “Would you describe the conduct as ‘severe or pervasive?’” That is not a good strategy. The more defensible approach is to ask neutral, open-ended questions such as the following: “What did he say next?” “Tell me more.” “How often did that happen?” Asking open-ended questions and letting the interviewee guide the conversation enables the investigator to elicit unprimed information and better carry out their role as a neutral fact-finder.

From time to time, an investigator may encounter an uncooperative complainant, respondent, or witness. As matter of law, and with some exceptions, employers can require that employees participate in internal investigations, though again, this kind of action should be undertaken only upon advice of legal counsel. (Generally, volunteer leaders such as officers and directors cannot be compelled to participate in such investigations.) When an investigation must proceed without a complainant, respondent, or others, the investigator should clarify that findings of fact will be made without the benefit of the uncooperative party’s input. That admonishment sometimes prompts the uncooperative party to participate, when they initially would not.

5. Gathering and Evaluating Evidence

During interviews, interviewees may refer to emails, text messages, social media posts, photographs, and other evidence to support their representations. Make note of this tangible evidence and ask the interviewee to send documents and information after the interview concludes.

6. Making Findings of Fact

With all evidence acquired, the investigator must ask themselves, “What facts are not in dispute?” Mark those down, as they are as germane to the investigation as disputed facts. Next, identify disputed facts. Of the disputed facts, which facts are corroborated? Does an email or video footage verify a particular version of a story? Did multiple witnesses share the same recollection? If an information gap persists, is there any way the gap can be closed, either through an additional interview or through acquiring additional tangible evidence?

On occasion, but rarely, an investigator may be required to make a finding of fact based on a credibility assessment alone—that is, a determination regarding whose version of events is more likely to be true. Ideally, credibility assessments should be grounded in objective criteria. Did one individual’s story change over time while the other’s remained intact (of course, keeping in mind trauma-informed practices where appropriate)? What are the parties’ underlying motives—who had more to lose? Did you hear the same story from multiple disinterested parties and a different story from one individual? All of these questions and more can help an investigator make reasoned credibility findings.

Unless the law, or the organization’s employee handbook or governing policies, require a higher standard of proof, findings of fact should be based on a “preponderance of the evidence”—that is, “Is it more likely than not that [the event in question] did or did not occur?” For each finding of fact, the investigator should be able to produce clear and articulable grounds underlying the finding.

7. The Investigation Report

Finally, and importantly, findings of fact should be memorialized in a written investigation report. At a minimum, the report should include a recitation of the allegations, a description of the investigation methodology, a list of operative policies and procedures, a description of the evidentiary standard, a statement of undisputed facts, and factual findings (including the evidentiary grounds upon which the findings are based), and potentially recommendations as well, depending on the role of the investigator.

While the aforementioned tips generally reflect sound investigation practices, each circumstance is unique, especially in a remote-work environment, where multiple jurisdictions’ laws may graft onto the employer (as state employment laws generally apply based on the jurisdiction in which the employee principally works). Further, each fact pattern is unique. An investigation into a potential misappropriation of federal funds may trigger federal reporting obligations. Significant diversions of assets such as embezzlement and theft are required to be reported on the IRS Form 990. A sexual misconduct investigation involving a California employee may require a host of rights and protections not required in other jurisdictions. And, of course, when, how, and to what extent to keep the nonprofit’s volunteer leadership involved is always a key consideration; generally speaking, keeping at least the entity’s senior volunteer leaders informed (be it the board chair, executive committee, or full board of directors) is certainly prudent, but always with strict confidentiality reminders.

Finally, whether an organization decides to proceed with an in-house investigation, outsource the investigation to an independent third party, or engage an attorney (whether in-house or external), it is crucial that the investigator is knowledgeable about the law and best practices for each of many unique circumstances. In all cases, it is advisable to consult legal counsel throughout the process.

Holly Peterson is Counsel at Tenenbaum Law Group PLLC. She regularly conducts internal investigations for nonprofit organizations and educational institutions on complex employment and governance matters. Holly can be reached at [email protected].

If your clients use artificial intelligence (“AI”) tools for content creation, something that is incredibly likely given AI’s widespread adoption of late, two federal court decisions from June 2025—Kadrey v. Meta Platforms, Inc.^[1] and Bartz v. Anthropic PBC^[2]—just changed their liability exposure. Both rulings found that AI training constitutes fair use, but each emphasized that businesses using AI-generated content remain liable for any copyright infringement in the outputs that they create and publish.

These cases focused on AI training specifically, but, in doing so, they also addressed output liability—highlighting risks that many businesses haven’t fully considered or prepared for. For example, a marketing firm using AI to draft client proposals faces the same copyright liability that it would for human-authored content that infringes, but it may not have policies addressing this exposure. Similarly, a law firm generating brief templates with AI faces potential copyright issues that don’t exist when using AI for case research. Understanding how these decisions analyze AI technology helps business lawyers better advise clients on managing copyright risks in all aspects of AI-generated content creation.

What the Courts Actually Decided

Both courts distinguished between AI training (how systems learn from data) and AI generation (when users prompt systems to create content). While training received fair use protection, the judges emphasized that businesses using AI tools remain liable for copyright infringement in the outputs that they create and use.

Judge Chhabria in Kadrey introduced a “market competition” theory that could dramatically expand copyright liability. Traditional copyright law requires that infringing works serve as substitutes for originals—someone reads the copy instead of buying the original. The Kadrey court suggested that AI-generated content might infringe simply by competing with copyrighted works, even without direct substitution. Under this theory, a consulting firm using AI to generate market research reports could face liability if those reports compete with copyrighted research, regardless of whether clients would have purchased the original reports.

Judge Alsup in Bartz took a different approach, fragmenting the analysis into separate questions about data acquisition and training. His decision suggests that how AI companies obtained their training data could affect fair use protection for end users. Companies using AI systems trained on unauthorized content might face greater liability than those using systems trained only on licensed materials—though most businesses have no visibility into their AI providers’ training data sources.

Immediate Business Risk Assessment

These decisions create different exposure levels depending on how clients use AI tools.

Content creation presents the highest risk under the new Kadrey framework. An advertising agency using AI to create campaign materials that resemble existing advertisements faces potential liability even if the AI outputs serve different purposes than the originals. A marketing firm generating social media content with AI tools must consider whether those outputs compete with copyrighted posts, graphics, or campaign materials.

Professional services face more complex analysis. A law firm using AI to draft contracts or briefs creates potential exposure if outputs closely resemble copyrighted legal materials, particularly specialized forms or distinctive arguments from legal publications. However, a firm using AI for case research or document review operates in safer transformative use territory because these applications serve different purposes than the original materials.

Healthcare organizations using AI for patient communications or educational materials must monitor whether outputs resemble copyrighted medical publications or patient education resources. Financial services firms generating investment analysis or client reports with AI face liability if those outputs compete with copyrighted financial research or proprietary investment strategies.

Operational applications like customer service chatbots or internal documentation generally present lower risks, but companies should still establish policies preventing deliberate reproduction of copyrighted materials.

Five Critical Questions Before Using AI for Content Creation

Business lawyers should walk clients through this assessment before implementing AI content generation:

1. Does the AI output compete in the same market as copyrighted works? If yes, document why the use serves different purposes and implement review procedures.
2. Can you identify the training sources for your AI system? If using commercial AI services with opaque training data, which will often be the case, strongly consider additional safeguards against reproducing copyrighted content.
3. Do you have policies preventing deliberate copying? Establish clear guidelines prohibiting employees from prompting AI systems to reproduce known copyrighted materials.
4. Can you demonstrate transformative purpose? Document how AI usage serves legitimate business functions distinct from consuming original copyrighted works.
5. Do you have review procedures for high-risk outputs? Implement screening for AI-generated content intended for publication, marketing, or external distribution.

Practical Compliance Framework

Companies should implement documentation showing good-faith efforts to prevent copyright infringement. This includes maintaining records of AI implementation purposes, establishing clear usage policies that prohibit deliberate reproduction of copyrighted content, and providing employee training on both AI capabilities and copyright limitations.

For higher-risk applications like content creation, establish review procedures before publication or distribution. A simple workflow requiring human review of AI-generated marketing materials, social media posts, or client communications can demonstrate reasonable efforts to prevent infringement while preserving operational benefits.

Employee training should emphasize that fair use protection isn’t automatic. Staff need to understand that prompting AI systems to create content “in the style of” specific copyrighted works or asking for materials that closely mimic known publications creates liability exposure. Clear examples help: asking ChatGPT to “write a blog post about cybersecurity” generally presents low risk, while asking it to “write a blog post like the recent Harvard Business Review article on cybersecurity” creates potential problems.

Companies should also address inherited liability from AI systems trained on questionable datasets. While legal standards remain unclear, businesses can demonstrate good faith by avoiding AI services known to have used unauthorized training materials and transitioning to providers with transparent data sourcing when feasible.

Documentation should include regular risk assessments evaluating AI applications across different business functions. Higher-risk uses like creative content generation require additional safeguards, while operational applications like data analysis face lower exposure.

Litigation Strategy Implications

These recent court decisions shift copyright litigation strategy significantly. Discovery will focus on internal policies, employee training, and evidence of intentional copying rather than just comparing AI outputs to copyrighted works. Companies that can show robust compliance frameworks and good-faith efforts to prevent infringement strengthen their defense position.

The Kadrey market competition theory creates new motion practice challenges. Even businesses demonstrating transformative purpose might face factual disputes about market competition that survive early dismissal motions. This makes settlement discussions more attractive, particularly when focused on prospective compliance measures rather than retrospective damages.

Defense strategies should emphasize documented transformative purposes and compliance with recognized governance frameworks. Companies maintaining clear records of legitimate business purposes for AI usage, comprehensive employee training, and procedures for addressing potential copyright issues will have stronger positions in any litigation.

Managing Uncertainty During Appeals

While these district court decisions will likely face appellate review, the two- to three-year timeline for resolution means that businesses must address current exposure. The cost of implementing reasonable AI governance policies remains modest compared to potential copyright litigation expenses, making cautious compliance a sound business decision regardless of how these legal theories ultimately develop.

Companies should monitor legal developments while implementing protective measures now. Basic documentation, employee training, and usage policies provide protection against various liability theories, not just the specific approaches in Kadrey and Bartz. These measures also demonstrate good faith in any future litigation, providing valuable leverage regardless of how appellate courts rule.

The key insight from these decisions is that businesses cannot simply assume that AI tool usage is protected. While AI training generally receives fair use protection, companies using AI-generated content must implement appropriate safeguards and compliance measures. Those establishing robust governance frameworks now—treating these decisions as important guidance while they work through the appellate process—will be best positioned regardless of how this legal landscape ultimately develops.

1. No. 23-cv-03417-VC, slip op. (N.D. Cal. June 25, 2025). ↑

2. No. 24-cv-05417-WHA, slip op. (N.D. Cal. June 23, 2025). ↑

This is the ninth installment in the Year in Governance Series from the In-House Subcommittee of the ABA Business Law Section’s Corporate Governance Committee. Each month, the series will share key tips on a different corporate governance topic. To get involved in the Corporate Governance Committee, please visit the committee’s webpage.

A message from Kathy Jaffari: “As Chair of the Corporate Governance Committee, I would like to extend my sincere appreciation to the authors for this publication. The Corporate Governance Committee has ongoing opportunities for writing and volunteering with various projects, whether it’s an article you want to publish or a CLE that you want to present. Our Committee is dedicated to helping you promote informative resources for corporate governance practitioners. You may contact me at [email protected] to get involved.”

The attorney‑client privilege—a cornerstone of sound governance—allows for candid legal advice, but it can be waived through common missteps, and small missteps can waive protection for the entire board of directors. These ten tips offer practical advice to preserve the privilege.

1. Master the fundamentals. Broadly, a communication is privileged if it seeks or provides legal advice and is maintained as confidential. It is the content of the communication that matters, not the label: copying in-house counsel on a purely business email chain and marking it “Privileged” does not make it so. Remember that the privilege belongs to the corporation, not individual directors—a distinction that becomes critical during investigations or when the interests of directors (individually or as a group) diverge from those of the company.
2. Wear multiple hats, but—preferably—not at the same time. In-house counsel who also have business roles routinely offer business, not legal, advice. That business advice is not protected by the attorney-client privilege. Sometimes counsel’s advice is “mixed” because the business and legal advice are intertwined. If litigation ensues, you will need to examine each communication to categorize it as business, or legal, or mixed advice. When the board is seeking legal advice from in-house counsel who has dual roles, it should be made clear—at the meeting and in the minutes—and the transition into seeking legal advice should be expressly memorialized. As for documents, separate the legal and business documents to the extent possible. If the documents have mixed content, try to separate and label the legal sections. This will make it easier to identify—and, later, protect—privileged information.
3. Protect the privilege when drafting minutes. Board meeting minutes should record that legal advice was received on a particular topic but need not summarize the substance of that advice. For executive sessions where legal matters are discussed with counsel present, keep a separate set of privileged minutes prepared by counsel. These privileged legal minutes should be maintained by counsel, follow retention policies, and be redacted before they are shared outside the privilege circle, such as with auditors. Recordings for board and committee meetings are strongly discouraged, but if audio or video recordings are created, they should be destroyed right away: the minutes are the sole official record, making it much easier to isolate and protect the privilege.
4. Manage digital communications. To maintain confidentiality, you must demonstrate an intent to maintain privacy. But many directors use employer-provided email accounts, personal email accounts, and other informal channels of communication that undermine any expectation of privacy and jeopardize privilege. Explicitly discourage substantive texting by directors, as text messages are discoverable in litigation. The ideal approach is for directors to use a secure board portal for all substantive communications. Another option is to issue company-hosted email accounts for directors and have them use only those accounts for all substantive communications. Alternatively, directors can also use a dedicated, secure personal account exclusively for board work. It may help to remind directors how litigation typically proceeds: that is, the collection and review of all emails and text messages and then a review for relevance. This reality check may help focus the directors’ minds on following these protocols.
5. Admit only necessary third parties. Third parties generally waive privilege unless their presence is necessary to provide or receive legal advice. For example, counsel advising about the propriety of insurance reserves may need an actuary present to explain the underlying analysis. When third parties are essential to effective communication, have counsel state why their presence is needed to obtain legal advice, and ensure counsel states this rationale on the record for inclusion in the minutes. To the extent possible, engage and direct the third parties through outside counsel. If the third party is not essential for the legal advice—e.g., bankers, public relations personnel, board observers, etc.—excuse them and memorialize that action in the minutes.
6. Treat AI tools as potential third parties. Boards should establish clear protocols for using new technologies, including artificial intelligence (“AI”). To begin, a board should use only enterprise-grade technology with verified confidentiality protections. Turn off auto-recording on collaboration platforms, and for executive sessions discussing legal matters, consider avoiding AI transcription entirely: handwritten notes still work just fine. If the company uses AI to summarize or analyze large volumes of materials (such as board books), ensure that the tools used have been vetted for confidentiality, cybersecurity, and the appropriate data-use restrictions.
7. Insulate Special Committee investigations. When a Special Committee is formed, that committee—not the full board—becomes the “client” for purposes of the investigation. It is helpful to have separate counsel for the Special Committee run the process, provide the relevant Upjohn warnings, and report substantive findings only to unconflicted directors. Any advisors (e.g., forensic accountants, bankers) engaged for the Special Committee should be retained by counsel for a defined legal purpose, with committee counsel controlling the distribution of drafts and materials. Resist sharing detailed findings with conflicted directors or the full board: such disclosure can waive the privilege. And be clear about this approach when the Special Committee is formed.
8. Navigate cross-border investigation challenges. Attorney-client privilege rules may be different internationally. For example, in European Union competition matters, communications with in‑house counsel are not privileged. You should therefore default to local outside counsel and keep sensitive cross‑border advice in counsel‑controlled channels. Before sending any board materials to regulators, coordinate with counsel and assume that the voluntary disclosure of privileged materials risks broader waiver in subsequent litigation. When cooperating, prioritize facts and nonprivileged documents, and avoid waivers unless there is a deliberate, board‑approved strategy.
9. Treat the privilege like it matters. Treat privilege as you would any other governance risk: educate new directors during onboarding and re-educate current directors. Train directors and key executives on the fundamentals: legal versus business boundaries, proper use of the board portal, and communication protocols. Use clear subject lines like “Privileged & Confidential—Request for Legal Advice re [topic],” but use the labels appropriately. Also, consider having your outside counsel assess your privilege practices as they would in litigation, and conduct annual privilege audits to review practices and identify vulnerabilities.
10. Prepare for privilege challenges. Even if the board follows each of these tips, privilege may be challenged in litigation or inadvertently waived. Establish clear protocols now: designate who is empowered to waive privilege (typically only the board or authorized officers), document your privilege procedures, and maintain a privilege log for sensitive matters. Understand the consequences of waiver (including deliberate waivers), which can extend beyond a single document to the entire subject matter. When litigation looms, do not wait to implement a legal hold, and seek a Rule 502(d) order to protect against inadvertent waiver. By implementing these protocols, you can create a culture that minimizes risk and preserves the attorney-client privilege.

The views expressed in this article are solely those of the authors and not their respective employers, firms or clients.

This article was published in advance of a Showcase CLE program titled “What’s Up with the Tariffs? A Primer on Tariffs, Trade Agreements, Economic Sanctions, Business Impact, and the Economy” that took place at the American Bar Association Business Law Section’s 2025 Fall Meeting. All Showcase CLE programs were recorded live and will be available for on-demand credit, free for Business Law Section members.

Since taking office on January 20, the U.S. President has issued a series of Executive Orders (“EOs”) declaring national emergencies with regard to drug and human trafficking and other criminal behavior in North America, as well as worldwide trade imbalances, and imposing tariffs (collectively, the “2025 Tariffs”). Since then, the tariffs have been the subject of litigation, attempted Congressional action, and economic debate.

Executive Orders and Actions Timeline for the 2025 Tariffs: Canada and Mexico

February 1: The U.S. President issued two EOs declaring states of emergency with regard to the northern border with Canada and the southern border with Mexico and imposing 25% tariffs on imports from Canada and Mexico (EOs 14193 and 14194). Energy and energy resources were only subjected to 10% tariffs.

The EOs invoked the International Emergency Economic Powers Act of 1977 (“IEEPA”) to impose the additional tariffs. There was explicitly no de minimis carveout. Both EOs also stated that the tariffs and their scope might be increased or expanded if Canada or Mexico imposed retaliatory tariffs on imports from the United States.

The justification cited for the import tariffs on goods from Canada was “failure of Canada to do more to arrest, seize, detain, or otherwise intercept [drug trafficking organizations], other drug and human traffickers, criminals at large, and drugs.” The justification for the Mexican import tariffs on goods from Mexico was identical, except that it targeted “illicit drugs” rather than all drugs.

February 3: Tariffs were paused until March 4 in recognition of the governments of Canada and Mexico taking “immediate steps designed to alleviate the illegal migration and illicit drug crisis through cooperative actions” (EOs 14197 and 14198).

March 2: De minimis import tariffs from Canada and Mexico were paused (EOs 14226 and 14227). Historically, de minimis imports have been duty-free to avoid administrative expense and inconvenience disproportionate to the revenue that would be collected.

March 6: Eliminated tariffs for all imports from Canada and Mexico that were duty-free under the existing United States-Mexico-Canada Agreement (“USMCA”) (EOs 14231 and 14232). The reason cited for the tariff adjustment was the employment and innovation that the automotive production industry brings to the United States. The duty on potash, used to make agricultural fertilizer, was also reduced from 25% to 10%.

April 2: Imports from Canada and Mexico were exempted from a new general 10% tariff on “all imports from all trading partners” worldwide, plus an additional 11–50% on imports from a list of fifty-seven countries, imposed in response to concerns cited about trade deficits and lack of reciprocity in bilateral trade relationships (EO 14257). The EO similarly invoked IEEPA to impose the tariffs.

No additional tariffs were imposed on Canada and Mexico. However, the EO provides that if the tariffs already imposed this year are terminated or suspended, there would be a 12% tariff on imports not eligible for special treatment under the USMCA with the following exceptions: energy and energy resources, potash, and parts or components of “an article substantially finished in the United States.”

July 12: The U.S. President posted a letter on social media to the President of Mexico announcing a 30% tariff would go into effect on August 1.

July 30: The de minimis tariff exemption for goods shipped for consumption was suspended globally, including for imports from Canada and Mexico (EO 14324). Effective August 29, the IEEPA-related tariffs apply, plus a specific duty per package ranging from $80 to $200 per item.

July 31: The U.S. President announced on social media that there would be a ninety-day delay on the Mexico tariffs. By contrast, tariffs on imports from Canada were increased from 25% to 35%, with the EO citing “Canada’s lack of cooperation in stemming the flood of fentanyl and other illicit drugs across our northern border” (EO 14325). An additional 40% tariff rate was also applied to goods “transshipped to evade applicable duties.” The tariffs were effective August 1.

Litigation

The 2025 Tariffs have been challenged in numerous courts, including the U.S. Court of International Trade (“CIT”). On May 28, the CIT in V.O.S. Selections, Inc. v. Trump vacated the orders for what it referred to as the “Trafficking Tariffs” and the “Worldwide and Retaliatory Tariffs,” holding that IEEPA did not authorize imposing them, and granted a permanent injunction. The plaintiffs are five businesses that make or import products including wine and spirits, water line pipes, children’s learning kits, fishing gear, and cycling clothing, as well as twelve states. The injunction was stayed pending appeal.

Subsequently, on August 29, the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”) affirmed the CIT’s holding, but vacated the universal injunction and remanded the case to the CIT to reevaluate whether there was irreparable harm and, if so, the proper scope of any injunctive or other relief.

Also, on May 29, in Learning Resources, Inc. v. Trump, the U.S. District Court for the District of Columbia (“DDC”) found that jurisdiction over the tariffs was not exclusive to the CIT because the tariffs were based on IEEPA authority. The DDC granted a preliminary injunction only as to the two plaintiffs, which are companies that make children’s educational toys. The injunction was stayed pending appeal in the U.S. Court of Appeals for the District of Columbia.

Legal Analysis

Taxation and the Separation of Powers

Tariffs are a tax paid by businesses and consumers that import goods from other countries. The U.S. Constitution grants Congress the exclusive power to impose and collect taxes and duties as well as to regulate commerce with foreign nations (Article I, Section 8, Clauses 1 and 3).

Congress has periodically delegated limited authority to impose tariffs to the President—for example, with regard to administration of tax collection. Under certain circumstances, the President has also been granted the authority to adjust tariffs by international trade agreements that are approved by Congress. However, in each case the statutory grant of authority has imposed clear limitations, and IEEPA contains no such delegation.

International Emergency Economic Powers Act

IEEPA gives the President the authority to declare a national emergency in response to an “unusual and extraordinary threat” to the “national security, foreign policy, or economy of the United States.” The threat must have “its source in whole or substantial part outside the United States,” and the exercise of authority must “deal with” the threat.

This is the first time that IEEPA has been used as a basis for imposing tariffs. The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has interpreted and administered IEEPA and other sanctions laws to impose targeted economic and trade sanctions against named countries, individuals, and organizations since its creation in 1950. Regulations issued under IEEPA Section 1702 generally include instructions to block or license transactions as opposed to imposing a tax or a fee.

The authority to tax is not listed in the enumerated IEEPA powers. All three courts that have ruled on the 2025 Tariffs considered the meaning of the authority to “regulate . . . importation” that is enumerated in Section 1702 and concluded that the 2025 Tariffs exceeded the President’s authority.

The rulings so far have suggested the power to “regulate . . . importation” in IEEPA would be better interpreted consistent with historic context. For example, it might be deemed authority to “fix or adjust the time, amount, degree, or rate of” transactions as in the third meaning of regulate in the Merriam-Webster dictionary.

IEEPA was also intended to be more limited in scope and have more procedural limitations than the Trading with the Enemy Act (“TWEA”) that had been the primary basis for economic and trade sanctions prior to IEEPA’s enactment in 1977. All three courts expressed concerns about the lack of limitations on the 2025 Tariffs, for example on scope, magnitude, and duration. The procedural limitations of IEEPA also include being subject to the National Emergencies Act of 1976 (“NEA”), which requires reporting to Congress and gives Congress the authority to terminate a national emergency declared by the President.

An additional consideration is that there is no direct nexus between the 2025 Tariffs and stopping illicit drug transactions, human trafficking, or criminal activity. IEEPA requires that the sanctions “deal with an unusual and extraordinary threat with respect to which a national emergency has been declared . . . and may not be exercised for any other purpose.” If the intent of the tariffs is to raise taxes, then they are not being imposed for the purpose of dealing with those threats. And while they may make those transactions more expensive, they do not stop them, change their legal status, or bring the perpetrators to justice as enforcement of other existing laws might do.

United States v. Yoshida

The government relied in its arguments on the precedent in United States v. Yoshida International, a 1975 U.S. Court of Customs and Patent Appeals (“CCPA”) decision upholding a 10% import surcharge imposed for five months by President Nixon in August 1971. As described in the DDC decision, the tariffs were only imposed on “goods already subject to tariff reductions,” so the surcharges “did not exceed the original statutory maximum set out by Congress.”

Importantly, the 10% import surcharge at issue in Yoshida was adopted in response to a balance of payments deficit, which is not the same as a trade deficit. At the time, the U.S. dollar had a fixed exchange rate with gold at $35 per ounce. The exchange rate was set in accordance with the international Bretton Woods Agreement signed by forty-four countries in 1944 and adopted by Congress in 1945.

In August 1971, the U.S. government did not have sufficient gold reserves to cover the dollars in circulation around the world. So President Nixon suspended the “gold standard,” and other countries could not exchange dollars for gold at a fixed rate. The import surcharges were a temporary measure in anticipation of exchange rate fluctuations.

In March 1973, the United States and other countries instituted floating exchange rates, so that issue is now moot.

Pending Supreme Court Litigation

On September 9, the U.S. Supreme Court agreed to consider consolidated expedited appeal of the V.O.S. Selections and Learning Resources cases. Oral argument is scheduled for the first week of November, and it is anticipated that the Supreme Court will rule on the validity of the tariffs. If they are invalidated, the government may have to refund the tax revenue.

The 2025 Tariffs will remain in place in the interim unless the President rescinds them or Congress acts sooner.

Congressional Action

Congress can terminate an emergency declared under the National Emergencies Act of 1976 with a joint resolution that has sufficient support to survive a Presidential veto. There have been numerous bills related to the 2025 Tariffs introduced in both the U.S. Senate and the U.S. House of Representatives. Among them:

• Senate Joint Resolution 37 to terminate the national emergency with regard to Canada declared on February 1, 2025, passed the Senate on April 2, 2025, by a vote of 51–48, but it has not been acted on in the House.
• Senate Joint Resolution 49 to terminate the national emergency declared on April 2, 2025, in justification for the Worldwide Tariffs was narrowly defeated on April 30 by a vote of 49–49.
• Bipartisan companion bills S. 1272 and H.R. 2665 have been introduced that would subject import duties under the Trade Act of 1974 to a forty-eight-hour notification requirement and a maximum period of sixty days unless Congress approves or disapproves them by joint resolution.

The draft Joint Resolutions that would terminate the national emergencies were voted on prior to the CIT, DDC, and Federal Circuit decisions. A carefully phrased preamble to a joint resolution that takes into account other existing laws more appropriate to address the challenges facing the United States, as well as the economic impact of the tariffs, could bring broad bipartisan support.

Tax Revenue and Economic Developments

According to U.S. Department of the Treasury data, tariffs generated approximately $165 billion in tax revenue this year as of September 9, which is already an increase of almost $90 billion more than the amount for the entire 2024 calendar year. However, tariffs are intended to reduce imports. So over time, tariff revenue should decrease.

Capital-intensive industries in particular have faced extraordinary tax increases as a result of the 2025 Tariffs. For example, U.S. auto manufacturers Ford Motor Company and General Motors issued company statements forecasting that they will pay approximately about $2 billion and up to $5 billion respectively this year as a result of the tariffs.

Preliminary Bureau of Labor Statistics (“BLS”) data shows that manufacturing jobs decreased by 33,000 between January and August. There are also other increasing signs of economic harm.

According to BLS, the annualized inflation rate increased from a 2025 low of 2.3% in April to 2.9% in August. The unemployment rate increased from 3.7% in January to 4.3% in August.

Conclusion

The 2025 Tariffs have been imposed in a series of EOs carried out mercurially in an extraordinarily compressed timeframe. They have damaged international relations, made it impossible to conduct business with any certainty, and been the subject of successful legal challenges. They have also created artificial price inflation for businesses and consumers and appear to be causing economic harm to the U.S. economy.

Costs from the 2025 Tariffs increase every day, as do the economic disruptions and distortions. Other existing laws such as anti-money laundering, narrowly tailored sanctions with regard to named individuals or organizations, and criminal laws are more appropriate to address concerns with illicit drugs, human trafficking, and criminal behavior.

Trade agreements are carefully crafted during multiyear negotiations because they are a balance of economic interests. Those years allow input from stakeholders, including governments, businesses, and consumer groups. They also allow time for stakeholders to adjust, plan, budget, negotiate or renegotiate mutually beneficial business agreements, establish infrastructure, and arrange financing.

Canada and Mexico are the closest trading partners to the United States both geographically and by trade volume. The USMCA covers both tariff and nontariff barriers, and it just came into force in 2020. Its predecessor, the North American Free Trade Agreement (“NAFTA”), was in place for twenty-six years.

The USMCA is the appropriate mechanism for addressing any trade imbalances and trade disputes. To the extent there are any adjustments that need to be made, the USMCA is scheduled for joint review on July 1, 2026.

Advance consultations are already beginning. On September 16, the Office of the United States Trade Representative (“USTR”) issued a request for comment and scheduled a public hearing for November 17.

When an insured is pursuing a representation and warranty insurance (“RWI”) claim, a critical consideration is whether diminution in value damages (“DIV Damages”) can be asserted as Loss covered by the RWI policy.^[1] This article, being published in four parts, discusses Delaware mergers and acquisitions (“M&A”) damages law regarding DIV Damages and describes how an insured can pursue them as part of an RWI claim.

This is Part III of this article; it discusses the requirements for a DIV Damages award as part of an RWI claim. Part I of this article addressed (i) the principal differences between DIV Damages calculated using a multiple of EBITDA methodology (“MOE Methodology”) and DIV Damages calculated using a discounted cash flow methodology (“DCF Methodology”), and (ii) the evolution of cases involving DIV Damages calculated using an MOE Methodology under Delaware M&A damages law.^[2] Part II of this article addressed the evolution of cases involving DIV Damages calculated using a DCF Methodology under Delaware M&A damages law. Part IV of this article will discuss the limitations on, and other matters regarding, a DIV Damages award as part of an RWI claim.

Each part of this article contains practice tips for attorneys for insureds seeking recovery of DIV Damages as part of an RWI claim.

Requirements for DIV Damages With Respect to an RWI Claim

There are three basic requirements for any RWI claim,^[3] and therefore for any claim for DIV Damages under an RWI policy. An insured must establish that:

1. R&W Breach: An R&W Breach has occurred;
2. Loss: The target business or the insured has suffered a Loss as defined in the RWI policy (in the case of DIV Damages, a diminution in value of the target business with recurring effect);
3. Proximate Cause: The R&W Breach was the proximate cause of the Loss.

A different way to say the foregoing is that after the Acquisition, (i) the insured becomes aware of revenue or expense information about the target business without required disclosure by the seller, and (ii) had the insured known about the problem prior to the Acquisition, the insured would have reduced the purchase price that it paid for the target business.

Effectively, the DIV Damages serve as a post-Acquisition purchase price adjustment in favor of the insured.

1. R&W Breach

Some types of R&W Breach are more likely to lead to a claim for DIV Damages, while others are more likely to lead to a claim for out-of-pocket damages (i.e., a “1x claim”).

The following types of R&W Breach are more likely to lead to a claim for DIV Damages:

• Historical Income Statements: R&W Breaches regarding the target’s historical income statements^[4]—provided in the case of DIV Damages calculated using an MOE Methodology that the income statement line items in question are not those added back in calculating EBITDA (interest on certain types of debt (I), income and similar types of taxes (T), depreciation (D), and amortization (A)) or in making adjustments to EBITDA as that term was used by the buyer—may lead to a claim for DIV Damages.
• Significant Customers: R&W Breaches regarding the target’s significant customers are also likely to lead to DIV Damages, particularly representations and warranties that deal with the continued existence or strength of significant customers’ relationships with the target business or the pricing of the products or services provided to those customers.^[5]
• Other Types: Any other type of R&W Breach that can be deemed to have an adverse effect on the target business’s (i) Measurement Period EBITDA, and an anticipated recurring adverse effect on the target business’s EBITDA going forward after the Acquisition, or (ii) projected cash flows going forward after the Acquisition, may lead to a claim for DIV Damages. Examples are representations and warranties regarding compliance with laws, disclosure of liabilities, operating taxes (e.g., sales and use taxes), and regulatory status.

One other note regarding R&W Breaches: Very rarely does an Acquisition Agreement contain a representation and warranty with respect to the Measurement Period EBITDA itself or with respect to projections provided for the target business.^[6] Even though Measurement Period EBITDA or projections may be a critical piece of information regarding the target business and the purchase price to be paid therefor, buyers typically do not request and sellers typically do not offer such a representation and warranty.^[7]

2. Loss

Two types of loss can result from an R&W Breach:

• Third-party loss, for which the amount is rarely in doubt after the amount owed to the third party has been liquidated or settled, even though there may be an issue of whether the amount thereof (as well as any defense costs with respect thereto) is covered by the RWI policy.
• First-party loss, for which both the amount and whether that amount is covered by the RWI policy are at issue.

DIV Damages are expectation damages that are a type of first-party loss. Although there may be other types of methodologies to calculate DIV Damages, they almost always are calculated using an MOE Methodology or a DCF Methodology.^[8]

a. Issues With Respect to DIV Damages Using Either an MOE Methodology or a DCF Methodology

Certain issues are similar regardless of the methodology used in calculating DIV Damages.

i. Determining the Validity of DIV Damages

The Loss must be in the form of an adverse effect on the target business.

• Examples in the case of an MOE Methodology:
  • An actual adverse effect in the form of an overstatement of the target business’s Measurement Period EBITDA by reason of revenues of the target business having been overstated or expenses of the target business having been understated due to a financial statements R&W Breach.
  • A deemed adverse effect in the form of the target business being forced to pay an expense after the Acquisition that should have been reflected in the target business’s Measurement Period EBITDA, such as a regulatory fine or an operating expense that relates back to the EBITDA Measurement Period.
  • A deemed adverse effect in the form of the target business’s Measurement Period EBITDA having included revenue from a customer that has been lost during or after the end of the EBITDA Measurement Period, with that customer loss being the subject of an R&W Breach regarding significant customers. (Note in this example that the historical Measurement Period EBITDA was still accurate, but that cash flows from that customer will not recur after the Acquisition and can therefore be treated as a deemed reduction of the target business’s Measurement Period EBITDA.)
• Examples and principles in the case of a DCF Methodology:
  • Any type of R&W Breach that has a recurring adverse effect on EBITDA of the target business should also have an adverse effect on the projected cash flows of the target business for the DCF Measurement Period.^[9]
  • The adverse effect on the target business’s projected cash flows may be the result of an overstatement of revenue, an understatement of expense, or a combination of the two. It may be an adverse effect that began before the consummation of the Acquisition of the target business, or after the consummation, but in either case it must result from the R&W Breach in question.
  • The focus of the Loss requirement for an RWI claim is on an anticipated adverse effect on the target business’s projected cash flows for the DCF Measurement Period. Unlike the adverse effect on the target business’s Measurement Period EBITDA in the case of DIV Damages calculated using an MOE Methodology, which can be either actual or deemed, the adverse effect on the target business’s projected cash flows will always be an actual adverse effect, even to the extent that it is still only anticipated.

A claim for DIV Damages can only readily be made if the buyer can prove that the purchase price for the target business was based on either an MOE Methodology or a DCF Methodology.

The simplest and most effective proof of that is if the indication of interest (“IOI”) or the letter of intent (“LOI”) for the Acquisition explicitly sets forth the metrics of the methodology that the buyer used in arriving at the proposed purchase price for the target business.^[10]

Short of such explicit proof, evidence that the buyer established the purchase price for the target business on such a basis and that the seller knew the buyer was doing so should be sufficient under Delaware M&A contract damages law.^[11]

Short of that would be proof that the buyer primarily used such a methodology and that it was the most appropriate way to have valued the target business or established the purchase price for the target business.^[12]

ii. Determining the Diminution in Value

The determination of the diminution in value resulting from an R&W Breach is more of a forensic science than a legal analysis, and even then with some art mixed in.

The first step is to identify the actual or deemed adverse effect of the R&W Breach on the Measurement Period EBITDA or on the projected cash flows and terminal value. It may seem obvious, but if, for example, a significant customer has been lost prior to the consummation of the Acquisition without required disclosure by the seller, then the adverse effect is not measured by the revenue received from that lost customer during the Measurement Period but instead by that amount of revenue net of the costs that would have been incurred to earn such revenue and that can be avoided by the target business, often referred to as “avoided costs.”^[13]

The second step is to determine whether or not such net revenue (i.e., EBITDA or cash flow) from that customer would have been recurring enough to justify the award of DIV Damages.^[14]

b. Issues With Respect to DIV Damages Calculated Using an MOE Methodology

An MOE Methodology is composed of two elements: (i) Measurement Period EBITDA and (ii) a multiple applied to the Measurement Period EBITDA.

i. Measurement Period EBITDA

In addition to add-backs for I, T, D, and A, EBITDA is often adjusted to add back certain other costs and expenses to arrive at an “Adjusted EBITDA” for the target business. The buyer’s accounting expert’s quality of earnings (“Q of E”) report is the best source for an explanation of such adjustments and for information about a target business’s EBITDA generally.

ii. Multiple

If the purchase price for the target business was calculated using an MOE Methodology, then the multiple used in calculating DIV Damages should be the same multiple that was used in calculating the purchase price.^[15] If a multiple has more than one number right of the decimal point, it is most likely an implied multiple (i.e., a multiple derived simply by dividing the purchase price by the Measurement Period EBITDA).^[16]

c. Issues With Respect to DIV Damages Calculated Using a DCF Methodology

A DCF Methodology is composed of three elements: (i) cash flow projections, (ii) terminal value, and (iii) a discount rate applied to each of the projected cash flows and the terminal value.^[17]

i. Cash Flow Projections

Because such projections are of cash flows, not of financial accounting income, noncash charges such as depreciation and amortization typically are not treated as reductions to revenue, unlike cash charges such as cost of goods sold (“COGS”) and selling, general, and administrative expenses.^[18]

If the purchase price for the target business was calculated using a DCF Methodology, then the calculation of DIV Damages may not require an in-depth analysis of the cash flow projections that were so used, but instead may only require use of the same projections but with the effects of the R&W Breach in question (including any avoided costs) backed out to calculate the deemed actual value of the target business as of the date of the R&W Breach.^[19]

ii. Terminal Value

There essentially are two types of terminal value used in a DCF Methodology:

The first type (which is more of a “continuing value”) assumes that the target business will experience steady growth after the final period of the projections, and then applies a mathematical formula to the final period’s net cash flow amount to calculate a sum of the infinite, growing cash flows, with that result discounted to net present value by application of the chosen discount factor.

The second type (which is more of an actual “terminal value”) takes the final period’s net cash flow amount and multiplies it by a market multiple, with that product discounted to net present value by application of the chosen discount factor.^[20]

In either case, the terminal value will constitute a significant portion (often 70 percent or more, pre-discounting) of the aggregate cash expected to be received from the target business.

iii. Discount Rate

Except to the extent that the cash flow projections were themselves adjusted for risk, the discount rate used should account for risk,^[21] and not solely to account for the time value of money (often referred to as the “risk-free rate”), to arrive at the DIV Damages—that is, the appropriate post-Acquisition purchase price adjustment discounted to then-present dollars and to reflect the probability of future risk.

A typical factor to use to account for risk is the buyer’s weighted average cost of capital (“WACC”).^[22] However, if DIV Damages are being calculated on a “with/without” basis, then the same discount rate used by the buyer in calculating the purchase price for the target business (the “with” case) should be used to calculate the deemed actual value of the target business backing out the effects of the R&W Breach in question (the “without” case).

It is often the case that the buyer did not actually use a DCF Methodology to “set the purchase price” for the target business, but instead only to confirm that the purchase price was within a range in line with the buyer’s expectations for its return on the Acquisition. In that context, it may be necessary to resize the DIV Damages calculated from the “with/without” analysis to correspond to the purchase price.^[23]

3. Proximate Cause

For DIV Damages to be recoverable Loss under an RWI policy, it is not sufficient merely to identify an R&W Breach and a Loss in the form of a shortfall in Measurement Period EBITDA or with respect to projected cash flows of the target business. That R&W Breach must have been the proximate cause of that Loss.^[24]

The typical process for an insured to formulate an RWI claim is to identify an R&W Breach and then to determine what losses have been proximately caused by that R&W Breach and whether such losses are recoverable under the RWI policy.

However, sometimes the script is flipped, and the insured identifies a loss impacting the target’s post-Acquisition business and then tries to find an R&W Breach that might have “caused” that loss (a “loss in search of a breach”).

In the case of an R&W Breach or Breaches with respect to the target’s historical income statement(s), the R&W Breach(es) needs to cover the entire Measurement Period for DIV Damages calculated using an MOE Methodology to be recoverable. Since the Measurement Period will often be a last twelve months (“LTM”) or trailing twelve months (“TTM”) period that does not match up with a single historical income statement covered by the financial statements representation and warranty, the R&W Breaches will need to apply to more than one such financial statement.^[25]

Practice Tips for Attorneys for Insureds

In the RWI policy claim evaluation phase, consider doing the following:

• Have a qualified forensic accounting firm or valuation firm weigh in on the evaluation and calculation of potential DIV Damages.
• Interview any manager or other key employee who worked for both the target business or the seller prior to the Acquisition and the target business or the buyer after the Acquisition, with an eye toward getting their input on the information going into a potential DIV Damages claim (before the RWI carrier or its counsel does so).
• For DIV Damages calculated using an MOE Methodology, review in depth the Q of E report prepared for the buyer prior to consummation of the Acquisition to understand the target business’s EBITDA generally and any adjustments thereto specifically.
• Determine whether anything should be done or not done to attempt to mitigate Loss associated with the potential DIV Damages.
• Try to avoid any action or omission by the target business or the insured that could be asserted as calling into question any material element of the DIV Damages.

This article is the third in the RWI Practice Insights series by John T. Capetta.

1. This article focuses on buyer-side RWI policies and U.S. law (principally Delaware case law). For purposes of this article:

   • DIV Damages are a form of expectation damages in which the amount of the damages is the difference between (i) the value of the target business as represented to the buyer, almost always the purchase price paid for the target business by the buyer, and (ii) the value of the target business after giving effect to the diminution in the target business resulting from a breach of the Acquisition Agreement representations and warranties (“R&W Breach”) or from fraudulent misrepresentation or deceit regarding the target business.
   • Although there are other methods to calculate DIV Damages, this article focuses on those calculated by using either (i) in the case of a multiple of EBITDA methodology (“MOE Methodology”), (a) an actual or deemed shortfall in the EBITDA of the target business for a specified measurement period (“Measurement Period EBITDA”) caused by the R&W Breach or the fraudulent misrepresentation or deceit, times (b) the multiple applied by the insured to the Measurement Period EBITDA in determining the purchase price to pay for the target business; or (ii) in the case of a discounted cash flow methodology (“DCF Methodology”), the loss of future cash flows and of terminal value over a specified period caused by the R&W Breach or the fraudulent misrepresentation or deceit, discounted to present value by the application of a discount factor.
   • The period of time for which the historical EBITDA is measured in an MOE Methodology and the period of time for which the projections used in a DCF Methodology are included are each referred to in this article as the Measurement Period.
   • As used in this article:
     • the term Loss has the definition set forth in the RWI policy;
     • the term Acquisition Agreement includes stock purchase agreements, merger agreements, asset purchase agreements, and other types of business combination agreements by which a buyer acquires a target business from a seller;
     • the term Acquisition refers to the business combination contemplated by the Acquisition Agreement;
     • the term the buyer and the term the insured are often used interchangeably;
     • the term target and the term target business are used interchangeably;
     • the term R&W Breach also includes a claim under an RWI policy with respect to a tax indemnification provision in the Acquisition Agreement; and
     • the phrase without required disclosure by the seller refers to a failure by the seller to make a disclosure to the buyer even though required to do so by a representation and warranty in the Acquisition Agreement.
   • “Expectation damages” are also sometimes referred to by courts as expectancy damages.

   ↑

2. Although relevant M&A damages law regarding DIV Damages may apply with respect to fraudulent misrepresentation or deceit (each a tort) regarding the target business as well as an R&W Breach (a breach of contract), DIV Damages with respect to an RWI claim can only be asserted for an R&W Breach and therefore will always be subject to M&A contract damages law. However, note in this regard the argument described in infra note 3 with respect to an R&W Breach in the form of a claim under the tax indemnity provision in an Acquisition Agreement. ↑

3. An argument can be made that an indemnification provision in an Acquisition Agreement that is triggered by a specific event, rather than by a breach of representation and warranty, may not be subject to M&A contract damages requirements and limitations that would apply in the context of breach. See Glenn D. West & Sara G. Duran, Reassessing the “Consequences” of Consequential Damage Waivers in Acquisition Agreements, 63 Bus. Law. 777, 785 (May 2008) (section titled “The Impact of Indemnification Provisions on General Contract Damages Rules”). The foregoing brings into question whether an R&W Breach in the form of a claim under a tax indemnification provision triggered by the incurrence post-Acquisition of taxes with respect to the pre-Acquisition Measurement Period may be more effective than one in the form of a claim for breach of the taxes representation and warranty in an Acquisition Agreement with respect to the same incurrence.

   On a different side of the foregoing argument, the provision of indemnification as a remedy (and even the sole remedy) in an Acquisition Agreement for breaches of representation and warranty should not be interpreted to prohibit a claim for the contractual remedy of expectation damages, unless expectation damages have been expressly excluded. See Interim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513, 549 (Del. Super. Ct. 2005); see also Hudson’s Bay Co. Luxembourg, S.A.R.L. v. JZ LLC, No. 10C-12-107, 2011 WL 3082339, at *2 (Del. Super. Ct. July 26, 2011) (“A claim for indemnification resulting from the breach of a representation and warranty is a claim for breach of contract.”), aff’d on other grounds, 80 A.3d 960 (Del. 2013) (unpublished table decision). ↑

4. However, if an R&W Breach with respect to the historical balance sheets of the target business leads to the need to create a new accrual or to increase an existing accrual, and the accrual or increase would have a recurring effect on EBITDA or on the projected cash flows of the target business post-Acquisition, then DIV Damages may be appropriate. ↑

5. The length of the relationship with those customers is important for this purpose, but with the focus being on the anticipated prospective length, not on the historical retrospective length. ↑

6. Indeed, most Acquisition Agreements contain an explicit disclaimer of any representation or warranty regarding projections provided to the buyer for the target business. ↑

7. In Dura Medic, the target did make representations and warranties as to its last twelve months (“LTM”) ending on April 30, 2018, financial statements, but appears not to have explicitly made a representation and warranty as to the LTM April 30, 2018, EBITDA derivable therefrom. In re Dura Medic Holdings, Inc. Consol. Litig., 333 A.3d 227, 243 (Del. Ch. 2025). In Cobalt, the opinion refers to “Crystal’s representation that WRMF’s annual broadcast cash flow was $5 million,” Cobalt Operating, LLC v. James Crystal Enters., LLC, No. 714, 2007 WL 2142926, at *1 (Del. Ch. July 20, 2007) (footnote omitted), aff’d, 945 A.2d 594 (Del. 2008) (unpublished table decision); to “WRMF’s cash flow [being] in fact $5 million, as represented by Hilliard [Crystal’s sole owner],” id. at *7 (footnote omitted); and to “Hilliard’s representation that WRMF’s cash flow for the twelve months leading up to the closing would be $5 million,” id. at *8. However, the description of the Acquisition Agreement in Cobalt does not refer to such a representation, id., and thus the references in the opinion to such a “representation” by Crystal or Hilliard appear not to be references to a representation and warranty in the Acquisition Agreement about WRMF’s cash flow for the Measurement Period. For a finding that a buyer could have sought a specific representation and warranty regarding the value of the target business but failed to do so, see Interim, 884 A.2d at 551. However, the foregoing finding in Interim does not appear to have been followed in other Delaware M&A damages cases. ↑

8. See NetApp, Inc. v. Cinelli, No. 2020-1000, 2023 WL 4925910, at *18 (Del. Ch. Aug. 2, 2023) (“Precedent in the M&A context provides . . . illuminating guidance. In that setting, Delaware courts routinely use the purchase price as the starting point for benefit-of-the-bargain damages calculations. This makes sense. The purchase price for a company is often the result of arms’-length negotiations between sophisticated parties and reflects the potential risks and rewards of execution. The price might have been established with a market approach using a multiple, or an income approach using a discount rate. Damages, then, may be calculated using the corresponding method to account for any diminution in value attributable to the misrepresentation.” (footnotes omitted)).

   Interestingly, in NetApp, Vice Chancellor Will rejected the buyer’s claim for lost synergistic profits calculated using a DCF Methodology but granted the buyer DIV Damages calculated using a multiple of revenue methodology proposed by the seller.

   It should be noted that, in the case of either methodology, the purchase price calculated assumes a cash-free, debt-free target business, and the purchase price would be subject to adjustment to the extent that was not the case at the closing of the Acquisition. ↑

9. However, to the extent that the projected cash flows do not include add-backs for Interest or Taxes, or for adjustments to EBITDA, there may be an adverse effect on projected cash flows even though there would not be an adverse effect on EBITDA. ↑

10. Even where an IOI or an LOI sets forth an anticipated Measurement Period EBITDA and a multiple to be applied thereto, the seller (and therefore the RWI carrier) might still argue that the foregoing did not constitute agreement between the seller and the buyer to that as the methodology of setting the purchase price for the target business, and therefore for calculating DIV Damages, or that any such agreement was nonbinding; but any such assertions would likely have little weight with a court or arbitrator authorized to resolve such a dispute, particularly in light of then–Vice Chancellor Strine’s findings in Cobalt. See infra note 15. ↑

11. See, e.g., Cobalt, 2007 WL 2142926, at *7; Swipe Acquisition Corp. v. Krauss, No. 2019-0509, 2020 WL 5015863, at *7 (Del. Ch. Aug. 25, 2020) (“At the pleadings stage, it is reasonably conceivable that an EBITDA multiple could support a damages calculation. Plaintiff alleges that the parties discussed using an EBITDA multiple to calculate the purchase price and that the Buyers, in fact, did so.” (footnote omitted)). In Cobalt, as often happens in such a dispute, the seller Crystal contended that it had “not rel[ied] on cash flow in reaching its decision to sell WRMF for $70 million”; that “it would not have sold for anything less than that price”; and that “regardless of what WRMF’s actual or legitimate cash flow was at the time, Crystal would never have done a deal at that [reduced] price.” Cobalt, 2007 WL 2142926, at *29. But then–Vice Chancellor Strine rejected that argument, stating among other things that “[t]his argument misses the point of awarding a remedy in a breach of contract case like this, which is to compensate the non-breaching party for the injury caused by the breach,” and that, “regardless of whether a deal would have been reached at a reduced price, Cobalt has demonstrated an injury equal to the value of the station in light of its legitimate earnings.” Id. Although the inquiry regarding the R&W Breach is focused on the reasonable expectations of the parties ex ante, the inquiry regarding DIV Damages is focused on the reasonable expectation of the nonbreaching party ex ante. See, e.g., Duncan v. Theratx, Inc., 775 A.2d 1019, 1022 (Del. 2001) (“Expectation damages . . . require the breaching promisor to compensate the promisee for the promisee’s reasonable expectation of the value of the breached contract and, hence, what the promisee lost.”); NetApp, 2023 WL 4925910, at *17 (“Damages are measured from the plaintiff’s perspective at the time of the breach.” (footnote omitted)). Notwithstanding the foregoing, Vice Chancellor Will did not accept the plaintiff’s claim of synergistic damages in NetApp but instead awarded the plaintiff DIV Damages calculated using a multiple of revenue, as proposed by the seller. ↑

12. See, e.g., WaveDivision Holdings, LLC v. Millennium Digit. Media Sys., L.L.C., No. 2993, 2010 WL 3706624, at *23 (Del. Ch. Sept. 17, 2010) (in addition to the buyer’s assertion that it had relied on a multiple of EBITDA methodology in calculating the value to it of the cable systems it had sought to acquire before being jilted, then–Vice Chancellor Strine also favorably noted that it was common in the cable industry to use a multiple of EBITDA valuation methodology, and that the seller, certain debtholders of the seller, and the buyer all used such a methodology to value cable systems in transactions); Taylor Precision Prods., Inc. v. Larimer Grp., Inc., No. 15-CV-04428, 2023 WL 6785802, at *2 (S.D.N.Y. Oct. 13, 2023). In the absence of proof that the seller either agreed to the determination of the purchase price based on a multiple of Measurement Period EBITDA methodology or was at least aware that the buyer was using such a methodology, the seller (and therefore the RWI carrier) may argue that the buyer’s assertion is merely self-serving or does not reflect the entirety of how the buyer determined the purchase price, putting more pressure on the buyer’s proof in that regard.

    It is, of course, possible that a buyer may have calculated the purchase price it offered or paid for the target business using neither an MOE Methodology or a DCF Methodology, or using one or both of those methodologies among others. In that situation, the buyer or its expert may introduce evidence regarding what it believes to be the best way to calculate the actual valuation of the diminished target business, but the buyer’s burden of proof will likely be greater in that situation since it cannot rely simply on its calculated expectation of what the target business was worth as the starting point to calculate that diminution in value. ↑

13. See, e.g., In re Dura Medic Holdings, Inc. Consol. Litig., 333 A.3d 227, 257 (Del. Ch. 2025) (noting that “the Buyers’ [damages] expert . . . calculated the lost earnings for those two customers for LTM April 2018, including offsets for costs and expenses the Company would not have incurred”). For a detailed description of how those avoided costs and expenses were calculated in that case, see id. at 258, n.48. See also Restatement (Second) of Contracts § 347 cl. (c) (A.L.I. 2024) (“Subject to the limitations stated in §350-53, the injured party has a right to damages based on his expectation interest as measured by (a) the loss in the value to him of the other party’s performance caused by its failure or deficiency, plus (b) any other loss, including incidental or consequential loss, caused by the breach, less (c) any cost or other loss that he has avoided by not having to perform.”). The issue of which costs and expenses would be avoided, in full or in part, and which would continue to be incurred is one of the most demanding issues in evaluating DIV Damages, and one in which the input of the insured’s forensic accountants or valuation expert is essential.

    For an excellent introductory explanation of the concept of avoided costs, see Elizabeth A. Eccher, Jeffrey H. Kinrich & James H. Rosberg, Analysis of Cost Behavior When Calculating Damages Part 1: Understanding Costs, Bus. L. Today (Nov. 15, 2018); and Eccher, Kinrich & Rosberg, Analysis of Cost Behavior When Calculating Damages Part 2: Analyzing Avoided Costs, Bus. L. Today (Nov. 15, 2018). ↑

14. See the discussion of Zayo and Dura Medic in Part I of this article regarding the need for a recurring effect. Zayo Grp., LLC v. Latisys Holdings, LLC, No. 12874, 2018 WL 6177174 (Del. Ch. Nov. 26, 2018); Dura Medic, 333 A.3d 227; see also NetApp, 2023 WL 4925910, at *20 (“This did not amount to a one-time loss for NetApp, but would continue to affect future cash flows. In these circumstances, dollar-for-dollar damages would not make NetApp whole.” (footnote omitted)). ↑

15. There appears to have been only one case under Delaware or New York M&A damages law in which a buyer attempted to use a different, reduced multiple to calculate DIV Damages than the one used to calculate the purchase price for the target business, albeit unsuccessfully. See Taylor, 2023 WL 6785802, at *5. ↑

16. For an example of the derivation of an implied multiple, see, e.g., Taylor, 2023 WL 6785802, at *5. Of course, a “multiple” can be derived by dividing the purchase price for a target business by any metric, not just Measurement Period EBITDA. ↑

17. An attorney familiar with the use of a discounted cash flow methodology to calculate lost profits damages will be familiar with much of the terminology used in this subsection. However, it cannot be emphasized enough that there is a fundamental difference between the calculation of DIV Damages using a DCF Methodology and the calculation of lost profits damages using a discounted cash flow methodology. The former is largely an exercise in doing a “with/without” comparison, and the latter is largely an exercise in searching for an unknown number based on cash flow projections likely to be somewhat unreliable and with a discount factor chosen solely for purposes of that exercise. ↑

18. Cf. S.C. Johnson & Son, Inc. v. DowBrands, Inc., 294 F. Supp. 2d 568, 582 (D. Del. 2003) (“As to depreciation, . . . SCJ contends that Mr. Dunbar, DowBrands’ expert, agreed that SCJ would have appropriately subtracted that number if the depreciation was included in the cost of goods sold and . . . depreciation was included in the cost of goods sold.”), rev’d on other grounds, 111 F. App’x 100 (3d Cir. 2004). ↑

19. To the extent that the cash flow projections used in the DCF Methodology were prepared by the buyer, then the RWI carrier may have more opportunity to challenge their reliability. The basis and nature of a challenge to the cash flow projections can get into particularly thorny issues such as, or akin to, proximate cause, contributory fault, no windfall, unjust enrichment, seller disclaimer, discount rate suitability, and RWI carrier substitution for the seller, which are beyond the scope of this article. ↑

20. This second type of terminal value resembles a sale valuation of the target business as of the end of the final period of the cash flow projections calculated in accordance with an MOE Methodology, substituting the projected net cash flow of the target business for the final period for the Measurement Period EBITDA and then subjecting that future deemed sale valuation to the discount factor to account for the time value of money and the “de-risking” of that sale valuation. ↑

21. Technically, the term risk as used in this context should take into account both the probability that a lesser amount of future cash flows or terminal value will be achieved and the probability that a greater amount of future cash flows or terminal value will be achieved, but it is often understood to mean only the former.

    Although a seller (or an RWI carrier, standing in the liability shoes of a seller) could attempt to argue that a disclaimer in the Acquisition Agreement regarding representations and warranties with respect to target business projections precludes their use in DIV Damages calculated using a DCF Methodology, such an argument should fail on the basis that the use of such projections in a DCF Methodology is only for purposes of comparing the ”with” and the “without” cases in such a calculation. ↑

22. See, e.g., Surf’s Up Legacy Partners, LLC v. Virgin Fest, LLC, No. N19C-11-092, 2024 WL 1596021, at *23 (Del. Super. Ct. Apr. 12, 2024) (“A 26.47% discount rate was used and traditional WACC.” (footnote omitted)).

    The use of the buyer’s WACC in determining the appropriate risk-adjusted discount rate is justifiable on the basis that the purchase price represents the amount invested by the buyer to acquire the target business, and the WACC represents the rate of return that the buyer would expect to receive on that investment, taking into account the risks associated with achieving the future cash flows reflected in the projections used. The cost of capital is a weighted average between the expected rate of return on the buyer’s indebtedness and the expected rate of return on the buyer’s equity. The calculation of the former should be relatively straightforward based on the interest rates charged by the buyer’s financing sources, while the calculation of the latter is fairly complex, involving an attempt to approximate the rate of return expected by the buyer’s stockholders on the equity invested in the buyer.

    A further explanation of the discount rate is beyond the scope of this article, and likely beyond the scope of what an attorney for an insured needs to know compared to the buyer’s forensic accountants or valuation expert. For anyone interested in a further explanation, albeit one targeted to a lawyer involved in lost profits litigation, see Robert M. Lloyd, Discounting Lost Profits in Business Litigation: What Every Lawyer and Judge Needs to Know, 9 Transactions: Tenn. J. Bus. L. 9 (2007). ↑

23. See, e.g., S.C. Johnson, 294 F. Supp. 2d at 595–96 (“The Court concludes that SCJ’s damages calculation must be reduced to reflect the ratio of the purchase price to the valuation. Given that SCJ paid $1.125 billion for DowBrands, which was 93% of the valuation, SCJ’s agreement that DowBrands is responsible to reimburse them for the ‘amount of the purchase price’ attributable to Latin America and the instructive case law on the benefit of the bargain rule, the Court concludes that SCJ is entitled to damages in the amount of $21,948,000.00, which is 93% of its valuation of the Latin American business as derived from the valuation of the business as a whole.”). ↑

24. See, e.g., In re Dura Medic Holdings, Inc. Consol. Litig., 333 A.3d 227, 255–56 (Del. Ch. 2025) (“In addition to showing the existence of damages, the plaintiff must show that the damages flowed from the defendant’s violation of the contract. The court evaluates but-for causation by considering how the positions of the parties would differ in the ‘but-for’ world—i.e., the hypothetical world that would exist if the [a]greement had been fully performed. The court evaluates proximate causation by considering how close the relationship is between the causal factor and the resulting damages. If the causal factor is too attenuated, then a court can decline to award damages because of a lack of proximate cause.” (footnotes and internal quotation marks omitted)); NetApp, Inc. v. Cinelli, No. 2020-1000, 2023 WL 4925910, at *26 (Del. Ch. Aug. 2, 2023) (loss of synergistic profits not the proximate result of the misstatements regarding the target business).

    The importance of proximate cause between the R&W Breach, on the one hand, and the Loss, on the other hand, is exemplified by Vice Chancellor Glasscock’s holding in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, No. 7906, 2020 WL 948513 (Del. Ch. Feb. 27, 2020):

    • In Great Hill, Vice Chancellor Glasscock rejected most of the plaintiffs’ claims of breach of contractual representations and warranties in the Acquisition Agreement and of fraud in connection with the purchase of the target company, Plimus (an intermediary between payment processors and vendors), but did find in favor of the plaintiffs with respect to certain breaches of contractual representations and warranties and fraud, in the latter case committed by the target company’s CEO.
    • The most significant of such R&W Breaches and fraud involved nondisclosure to the buyer of pre-Acquisition termination threats by PayPal, which at the time of the closing of the Acquisition was the target company’s largest payment processor by volume and its only United States–based payment processor.
    • In addition, Vice Chancellor Glasscock found that the plaintiffs “suffered harm from the non-disclosure of PayPal’s termination threats.” Id. at *23 (footnote omitted), Moreover, the plaintiffs asserted an enormous amount of losses suffered by them after the Acquisition, in total exceeding the purchase price that the buyer paid for the target company.
    • Nevertheless, Vice Chancellor Glasscock “award[ed] no fraud or contract damages to the Plaintiffs in connection with the misrepresentations regarding PayPal’s termination threats.” Id. at *23 (emphasis added).
    • Although the opinion referenced a number of flaws in the plaintiffs’ damages assertions, particularly speculativeness (i.e., a lack of certainty, to be addressed in Part IV of this article), the court’s decision to award the plaintiffs no damages for the R&W Breaches and the fraud regarding the undisclosed PayPal termination threats came down to the lack of proximate cause between those breaches and fraud and the losses that the plaintiffs had asserted.
    • Those losses assumed that the plaintiffs would prevail on all of their R&W Breach and fraud claims, and the plaintiffs chose not to pare back their losses assertions to those that were the proximate result of the R&W Breaches and fraud that they did prevail on.
    • Vice Chancellor Glasscock found that the plaintiffs’ choice prevented him from awarding damages to them with respect to the undisclosed PayPal termination threats.
    • To use a baseball analogy, the plaintiffs in Great Hill tried to hit a grand slam and instead struck out looking with the bases loaded.

    ↑

25. For example, if the Measurement Period EBITDA is for a TTM or an LTM Measurement Period ending on April 30, it may be necessary to piece together that twelve-month period from two or more income statements covered by the financial statements representations and warranties in the Acquisition Agreement, such as an annual income statement and one or more interim income statements. ↑

If you are accepting a letter of credit (“LC”) as support for a payment or performance owed to you, what should you require?

LC Features and Types

Determining what to require depends on the underlying transaction supported by the LC and understanding two key features of an LC: it is documentary, and it is independent.

An LC is “documentary” in that it is an undertaking by an issuer to a beneficiary to honor a documentary presentation by payment (or, in rare cases, by delivery of an item of value).^[1] In other words, the issuer promises to pay the beneficiary if the document or documents specified in the LC are presented in accordance with the LC. An LC is not a suretyship undertaking, where a surety promises to pay if a primary obligor breaches a payment or performance obligation; an LC issuer’s payment obligation is triggered by the presentation of documents, not by the occurrence of a breach.

An LC is “independent” in that the issuer’s obligation is “independent of the existence, performance, or nonperformance of a contract or arrangement out of which the [LC] arises or which underlies it. . . .”^[2] A promise to pay if a primary obligor defaults is a suretyship undertaking; a promise to pay if a beneficiary presents a statement that a primary obligor has defaulted is an LC. An LC issuer’s obligation to pay the beneficiary is independent of whether the issuer is reimbursed or paid a fee or whether the primary obligor actually defaulted.

These features make LCs desirable to beneficiaries, but a promise is only as good as the promisor. You want a creditworthy and reliable issuer, typically an issuing bank or confirming bank located in your jurisdiction and subject to your local law. If the issuer fails to honor the LC, you want to be able to sue it for wrongful dishonor in a convenient forum and not have to worry about cross-border issues like sanctions or currency controls blocking payment.

You also want assurance that the LC is not forged, so you may want your trusted bank to “advise” the LC to you, which means that it communicates the terms and conditions of the LC to you and checks the apparent authenticity of the issuer’s request to communicate those terms and conditions.^[3]

LCs are often classified as “commercial” or “standby” LCs. Commercial LCs (sometimes called documentary LCs) are intended to be drawn upon as payment for the sale or lease of goods or provision of services. Standby LCs (sometimes called independent guarantees) are generally intended to be drawn upon only if an underlying obligor defaults in payment or performance. There is a subset of standby LCs called “direct-draw” LCs, which are typically intended to be drawn upon to avoid the preference risk of the underlying obligor paying the beneficiary and thereafter becoming bankrupt during the preference period.

Choice of Law and Practice Rules

Most LCs state that they are subject to letter of credit practice rules. Beneficiaries would generally be well served to require the International Standby Practices 1998 (“ISP98”) as the rules for a standby LC. The Uniform Customs and Practice for Documentary Credits No. 600 (“UCP 600”) is almost always chosen as the rules for a commercial LC.

The beneficiary would typically want the governing law of the LC to be the law of its local jurisdiction (not, if different, the local law of the issuer or of the obligor that owes the underlying performance or payment).

Obtainment of Payment

The LC should describe each document that must be presented to obtain payment. It often helps to attach a form of each required document as an exhibit to the LC.

The beneficiary should ascertain that it will be able to timely obtain and present each required document in every scenario where it expects payment under the LC. For example, if the LC specifies that a document be signed by a third party, will the beneficiary be able to obtain the signed document?

Beneficiaries should resist any requirement in the LC that the “original” LC must be presented for payment lest they risk nonpayment if the original LC is lost, stolen, or destroyed. Alternatively, beneficiaries can insist on a provision for an LC to be replaced by the issuer if the beneficiary certifies that the original LC has been lost, stolen, or destroyed.

Beneficiaries should check the mechanics for how to present the required document(s). For example, the issuer may specify that the document(s) be presented in paper form at its office. The beneficiary should consider requiring the option to instead present by email or fax.

If the LC’s purpose is to protect you both from the risk of nonpayment of the underlying obligation and the risk that payment will be made but must subsequently be disgorged as preferential in the payer’s bankruptcy, consider using a “direct-pay” LC so that you are paid by the issuer rather than the underlying obligor.

Expiration Dates

An LC typically contains an expiration date (or other presentation deadlines). Make sure that each deadline is far enough in the future that you will have ample time to demand payment in every plausible scenario and that, if the issuer refuses to pay, the deadline allows time for one or two subsequent attempts to cure any discrepancies claimed by the issuer. For example, if the underlying performance is owed to you by December 31, 2025, you may want an expiration date not earlier than January 31, 2026.

If the LC contains an “evergreen” or “auto-extension” clause that automatically extends the expiration date from time to time unless the issuer sends you at least “XX” days’ written notice that there will be no further extension, make sure that the LC permits you to demand payment by presenting a document stating that you received a nonextension notice rather than having to state some other basis for drawing. Also, consider requiring the LC to provide for any notice of nonextension to be sent to at least two people or addresses; this reduces the risks of nonreceipt of the notice and of failing to act timely on the notice.

Transferability

LCs are generally nontransferable unless they provide for transfer. There are circumstances where the beneficiary should require transferability. For example, if the LC is acting as a security deposit supporting a real estate lease, the beneficiary should want the ability to transfer the LC to a new owner if the building is sold. The transfer rules in ISP98 and UCP 600 are complicated and may not fit your transaction, but well-drafted provisions in an LC can override any ill-fitting transfer rules.

Final Thoughts

These are just basics to consider. Particular transactions may raise additional concerns. The structuring and drafting of each LC should be carefully coordinated with the structuring and drafting of the underlying contract or arrangement to be supported by the LC.

A well-drafted LC from a strong, reliable local issuer can provide you with valuable credit support. A poorly drafted LC or an undesirable issuer may leave you unpaid.

1. See U.C.C. § 5-102(a)(6) (“Document”), -102(a)(10) (“Letter of credit”), -102(a)(12) (“Presentation”). ↑

2. Id. § 5-103(d). ↑

3. Id. § 5-107(c). ↑