In Drakes Landing Associates, L.P. v. Tilden Park Capital Management, L.P., C.A. No. 2025-0898-NAC (Del. Ch. July 29, 2026), Vice Chancellor Nathan Cook held that, because Section 365(a) of the Delaware General Corporation Law (DGCL) requires PBC directors to balance stockholders’ pecuniary interests, the interests of other constituencies materially affected by the corporation’s conduct and the public benefit stated in its charter, the court could not review the directors’ decisions under the price-maximization-focused Revlon standard that would otherwise require the company to follow a process reasonably designed to secure the best price reasonably available for stockholders in a sale-of-control transaction.

The court left open whether a modified form of enhanced scrutiny, which it termed “PBC enhanced scrutiny,” might still apply as a standard of review applicable to the sale of a PBC. However, it did not resolve that question, because it applied the statutory safe harbor in DGCL Section 365(b) that provides that a PBC director’s decision is deemed to satisfy their fiduciary duties if the decision “is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.”

The decision is the court’s most instructive guidance to date for PBC directors, and it carries immediate implications for how PBC boards and their advisors structure, document and defend change-of-control and control-shifting transactions – including sale transactions and dilutive rescue financings that are common among late-stage private companies and smaller public companies. Moving forward,PBC directors should be aware that a well-documented record of informed, disinterested directors’ balancing stockholder, other constituency and public benefit interests remains critical in the change-of-control context.

Overview of Delaware PBCs

Subchapter XV of the DGCL (Sections 361–368) allows a Delaware corporation to elect PBC status: a for-profit corporation intended to operate in a responsible and sustainable manner and to produce one or more specific public benefits identified in its charter. Delaware enacted its PBC statutes in 2013 and made it easier to become a PBC in 2020 by eliminating the supermajority stockholder vote and appraisal rights previously required to convert into or out of PBC status.

Directors of a conventional Delaware corporation may weigh other constituencies only insofar as doing so advances stockholders’ pecuniary interests.¹ Section 365(a) instead requires PBC directors to balance three interests: stockholders’ pecuniary interests, the interests of those other constituencies materially affected by the corporation’s conduct and the specific public benefit(s) identified in the charter.

The statute pairs that obligation with PBC-specific protections. Section 365(b) provides a safe harbor under which a director is “deemed to satisfy” their fiduciary duties if a decision implicating the balancing requirement is informed, disinterested and not one that no person of ordinary, sound judgment would approve. Section 365(c) provides that, absent a conflict of interest, a failure to satisfy the balancing requirement does not constitute an act not in good faith or a breach of the duty of loyalty for purposes of DGCL Sections 102(b)(7) and 145.

Many private and public companies have adopted PBC status, yet Subchapter XV had generated no judicial guidance on what PBC directors owe stockholders in a change of control until now. Drakes Landing is the first written decision to address that gap – both the standard of review that governs a PBC board in a change-of-control transaction and what a plaintiff must plead to overcome the Section 365(b) safe harbor.

Background

MPower Financing is a Delaware PBC whose stated mission is to give international students access to financing for post-secondary education. After an equity raise launched in late 2024 failed to materialize, MPower faced an urgent liquidity need (its debt covenants required a minimum cash balance of $17 million by January 31, 2025). Two existing lenders, which together held roughly $109 million of MPower debt and 25.5% of its common stock (one of which also had two board designees), proposed immediate financing coupled with an option to convert their existing debt into equity. After negotiation of the term sheet, the final proposed terms included a $20 million financing and a conversion price of $2.25 per share – a steep discount to the $15.50 per share valuation in MPower’s last financing round in July 2021. The conversion option, if exercised, would have increased the funds’ ownership from ~25% to ~85% and substantially diluted existing stockholders.

MPower’s board approved the term sheet, with the lender board designees recusing themselves, and then appointed a three-member special committee of disinterested, independent directors. The committee retained legal and financial advisors, directed a process to evaluate any comparable capital solutions with less dilution, opened a data room to third parties and ultimately approved the financing transaction. The company and the funds executed the transaction with an exchange agreement under which the funds would lend MPower $28.125 million through a secured convertible note and a governance agreement entitling the funds to designate seven directors (comprising a majority of the board) and granting them consent rights over stock issuances, additional debt, mergers and recapitalizations, charter changes, board size, management hiring and firing and any bankruptcy filing. Although not a merger, the parties did not dispute that the terms of the financing constituted a change-of-control transaction that would be subject to Revlon enhanced scrutiny for a non-PBC.

Stockholder plaintiffs sued the special committee for breach of fiduciary duty and the funds for aiding and abetting, arguing principally that the committee’s market check was too thin to surface a better, less dilutive alternative. Defendants moved to dismiss the complaint under Court of Chancery Rule 12(b)(6).

The court’s analysis

• Revlon does not apply to PBC directors. The court held that Revlon’s singular focus on obtaining the best value reasonably available cannot be squared with Section 365(a)’s directive to balance stockholder, stakeholder and public-benefit interests, and as a result, Revlon does not govern PBC directors’ conduct.
• A modified “PBC enhanced scrutiny” standard of review may survive, but the court did not decide. Enhanced scrutiny could still test whether a PBC board’s balancing fell outside the range of reasonableness – the “enormous implications” of a control transaction do not disappear because the company is a PBC. The court left the question for another day because Section 365(b) independently required dismissal.
• Section 365(b)’s safe harbor protected the special committee. A PBC director is deemed to satisfy their fiduciary duties on a balancing decision that is informed and disinterested and not one that no person of ordinary, sound judgment would approve. The plaintiff bears the burden of pleading facts showing the safe harbor was not satisfied. Plaintiffs conceded the committee members were disinterested and independent, leaving only the “informed” prong and the prong that no person of ordinary, sound judgment would approve such matter, which is a question of waste.
• Plaintiffs failed to plead that the committee was uninformed. Because PBC directors must consider a broader set of interests, a plaintiff must plead that the board failed to inform itself as to all three Section 365(a) interests. Plaintiffs attacked only the market check – a purely pecuniary critique – and never alleged the committee failed to inform itself about stakeholder or public-benefit considerations.

Practical takeaways for PBC boards, founders and in-house counsel

A PBC board facing a change-of-control transaction is not bound by a singular obligation to maximize stockholder value. Under Section 365(a), it must balance stockholders’ pecuniary interests against the interests of other materially affected constituencies and the corporation’s stated public benefit – even where that balancing yields less value to stockholders than an unconstrained market process might. That flexibility is meaningfully useful for a PBC weighing bids or financing proposals that differ on more than price. But it is not self-executing: The protection the court applied depends on directors being informed about, and demonstrably weighing, all three statutory interests.

Boards, special committees and management teams of Delaware PBCs negotiating financings, sales or other control transactions should consider the following.

• Build the balancing record contemporaneously. Minutes, committee resolutions, board materials and advisor mandates should show that the directors informed themselves about and weighed all three Section 365(a) interests – not price alone. A record that documents only the financial market check leaves the balancing requirement – and the Section 365(b) safe harbor – exposed. MPower prevailed because the plaintiffs never pleaded a failure to balance, not because the record affirmatively demonstrated one.
• Define the public benefit with precision – and follow it. Directors can only balance interests they have identified. A charter purpose that is vague or aspirational makes it harder to show which stakeholders were considered and why. Companies converting to PBC status before a liquidity event should revisit the charter language – and the stakeholder groups it implicates – well before a deal is on the table. Those specific public benefits identified in the charter will then define the standard to which directors are accountable.
• Preserve the hallmarks of a robust process. Early identification of potential conflicts of interest, recusal by conflicted directors (or formation of a committee, where appropriate), a thoughtful market check and a strong record of a deliberative and informed board all remain central to invoking Delaware’s statutory safe harbors – including for a conventional corporation relying on Section 144.
• Anticipate books-and-records demands. The court twice pointed to plaintiffs’ failure to use DGCL Section 220 before filing. Expect sophisticated minority holders to demand records first and assume that board and committee minutes will be the central exhibit in any later challenge.
• Counterparties should insist on process. Potential acquirors and investors (including convertible debt lenders) negotiating with a PBC directly benefit from the target company following these best practices – which outside counsel can often help facilitate.
• Loop in counsel early on major decisions requiring use of the balancing requirement, even if not a traditional acquisition. The transaction here was not a merger but the combination of two elements that effectively shifted control: a deeply discounted debt-for-equity conversion and a governance agreement conferring board designation and broad consent rights. Late-stage private companies and smaller public companies negotiating bridge, convertible or structured financings that are not uncommon in those ecosystems should apply the same process discipline that they would apply to a sale process.

Drakes Landing confirms that Delaware’s PBC statute offers meaningful protection to directors of mission-driven companies in the change-of-control context, reaffirming the long-standing principle that Delaware courts will not second-guess the decisions of well-informed, disinterested directors acting in the best interests of their applicable constituencies.

1. Many states have adopted some form of a “constituency statute” allowing directors to consider the interests of non‑stockholder stakeholders – e.g., employees, the community, customers – alongside the interests of stockholders. These statutes tend to be permissive, rather than a mandate, to directors discharging their fiduciary duties. ↩︎

Cornerstone’s reports observed a significant rise in the number of filings and potential investor losses compared to H2 2025, driven by filings related to AI, as well as an increase in both the number and value of settlements. NERA’s report – which covers both case filings and resolutions – observed a slight decline in securities class action dismissals. Both firms also identified new filing trends involving tariff-related allegations and pump-and-dump market manipulation, discussed further below.

AI cases fuel record filings and alleged losses 

Cornerstone recorded 117 new federal securities class actions that allege violations of Sections 10(b), 11 or 12,[1] the highest total since H1 2020 and far exceeding the historical semiannual average of 97. The rise in filings was attributable in part to a high number of AI filings, which reached 15 in H1 2026 – close to 2025’s full-year total of 16. Seven of the AI filings related to AI development and five related to data centers.

While AI filings made up only 13% of total filings, they accounted for a disproportionate share of the potential investor losses. In H1 2026, the Disclosure Dollar Loss Index (DDL Index)[2] reached $529 billion (up 77% from H2 2025) while the Maximum Dollar Loss Index (MDL Index)[3] reached $1.86 trillion (up 86% from H2 2025). AI filings accounted for $385 billion of the DDL Index and $1.3 trillion of the MDL Index – 73% of each. Two AI filings alone contributed $1.2 trillion, or 66%, to the total MDL Index.

Tariffs and pump-and-dump emerge as new trends

Beyond the surge of AI filings, H1 2026 also saw the emergence of two new filing trends. The first involves tariff-related allegations. Cornerstone observed that since August 2025, there have been six tariff-related filings, four of them in H1 2026. Plaintiffs in these cases typically allege that the defendants overstated their ability to manage the impact of tariffs or understated how their responses to US tariff policy would negatively affect their businesses.

The second trend concerns alleged pump-and-dump market manipulation. Since November 2025, there have been 10 such filings, with eight brought in H1 2026. Almost all (nine of 10) were filed against non-US issuers in district courts within the US Court of Appeals for the Second Circuit.

Second and Ninth Circuits continue to dominate; life sciences and technology remain primary industry targets

The Second and Ninth Circuits maintained their dominance as the most active jurisdictions for securities class actions. Cornerstone reported that the two circuits together accounted for 70% of filings in H1 2026, up from 64% in H2 2025. Second Circuit filings rose to 46 in H1 2026 (from 34 in H2 2025), driven primarily by a surge in technology-sector filings. The Ninth Circuit saw 34 filings in H1 2026 (up from 23 in H2 2025), six of which were AI filings. Additionally, the Third Circuit saw 12 filings – twice the number filed in H2 2025, but significantly fewer than the 20 filed in H1 2025.

By industry, the consumer noncyclical sector – driven largely by life sciences and healthcare companies – continued to lead the pack with 44 filings (up from 35 in H2 2025). The technology sector was in second place with 24 filings, up from nine in H2 2025 and double the semi-annual average of 12 – largely driven by AI filings.

More settlements at higher values and on longer timelines

Both Cornerstone and NERA documented a meaningful increase in settlement activity, as well as higher settlement values.

Cornerstone recorded 39 settlements in H1 2026, compared to 32 in H1 2025. Total settlement value reached $2.2 billion, which, when annualized, would be the highest since 2020. Both the average ($56.4 million) and median ($20 million) settlement values in H1 2026 exceeded the average and median settlement values from 2017 to 2025 ($46.8 million and $13 million, respectively).

The distribution of settlement values continued to shift toward larger amounts. Only 15% of H1 2026 settlements were below $5 million, compared to 26% of the settlements between 2017 and 2025. A majority of the settlements in H1 2026 were clustered in two ranges – $5 million to $9 million (26%) and $25 million to $49 million (26%) – with each range accounting for a larger share of settlements than it did historically. There were four “mega settlements” ($100 million+) in H1 2026, in line with historical numbers.

Cornerstone found that, for settled Section 10(b) cases, plaintiff-style damages – a proxy for potential investor losses – was the most important determinant of settlement amounts. The first half of 2026 saw that measure increase significantly, suggesting that settlement values may increase even more in the years to come. In H1 2026, the median plaintiff-style damages of settled Section 10(b) cases reached $660 million, more than double the $290 million in 2025, while average plaintiff-style damages hit $1.5 billion, a 29% increase from 2025. Settlement values rose more modestly than plaintiff-style damages – though the median settlement in Section 10(b) cases was still at its highest level over the last 10 years. The median settlement as a percentage of plaintiff-style damages was 5.4% in H1 2026 (the second lowest in the last nine years), while the median settlement amount was $23 million (an increase of 44% from 2025).

As in prior years, Cornerstone found that settlement amounts tend to be higher in cases with both Section 10(b) and Section 11 claims, greater defendant assets, parallel derivative actions or an institutional investor serving as lead plaintiff. Two of those drivers were notably prevalent in H1 2026: parallel derivative actions and institutional investor lead plaintiffs each featured in 61% of settled cases with Section 10(b) claims.

NERA observed that the timeline for settlements has increased. The median time from filing to settlement increased from 3.3 years in 2025 to 3.7 years in 2026 – the second longest over the past decade.

Fewer dismissals

NERA reported 56 dismissals in H1 2026. When annualized, the number of cases dismissed would be 112, compared to 136 in 2025.

The median time from first complaint to dismissal remained relatively stable at 1.5 years in 2026.  

[1] Defined as “core filings” in the Cornerstone report and “standard cases” in the NERA report. For simplicity, this article omits the words “core” and “standard” when discussing such filings.

[2] The DDL Index measures the “dollar-value change in the defendant firm’s market capitalization” between the two days immediately before and after the end of the putative class period.

[3] The MDL Index measures the “dollar-value change in the defendant firm’s market capitalization” from the day with the highest market capitalization during the putative class period to the end of the putative class period.

This ruling creates uniformity nationwide on an issue that had split the circuits, with the US Court of Appeals for the Second Circuit previously holding that pecuniary loss was required to obtain disgorgement, and the First and Ninth Circuits holding it was not. The SEC’s ability to continue seeking disgorgement without showing pecuniary loss is meaningful, given the SEC obtained orders for $10.8 billion in disgorgement of ill-gotten gains and prejudgment interest in fiscal year 2025.[1]

Sripetch marks the third time in 10 years that SCOTUS has addressed SEC disgorgement – and the issue may be back for a fourth round soon. The Court’s opinion resolved the pecuniary loss question, but Justice Clarence Thomas’s concurrence raised another – whether SEC disgorgement is a legal rather than equitable remedy, a determination that would give defendants a Seventh Amendment jury trial right. While that question is not yet before SCOTUS, Justice Thomas noted that a circuit split has developed on the issue, signaling it may be ripe for review. Both questions are addressed in turn below.

No pecuniary harm required for disgorgement

As we discussed in this January 2026 post, SCOTUS granted certiorari in Sripetch to resolve whether the SEC must show that investors suffered actual financial loss to obtain disgorgement. The Court held that it need not, concluding that “a showing of pecuniary loss is not required before an investor may qualify as a victim of an offender’s wrongdoing entitled to compensation.”

In reaching that conclusion, the Court drew on “traditional equitable principles” and case law stretching back to the early 1900s, clarifying that the touchstone for disgorgement is interference with a victim’s legally protected interests, not loss of any kind. As Justice Gorsuch put it, “[w]hat all these and a great many other cases have in common is this: Applying traditional equitable principles, a court ordered the defendant to disgorge the value of the gain attributable to his invasion of the plaintiff’s legally protected interests without requiring a showing of pecuniary loss.”

Against that backdrop, Justice Gorsuch addressed and rejected the petitioner’s arguments to the contrary. He observed that, “[a]t bottom,” the petitioner’s “real worry” seemed to be that the SEC would return to its past practice of seeking disgorgement awards that surpassed a defendant’s net profits and went “beyond compensati[ng]” victims by sending the funds to the US Treasury. That practice was recognized and cabined to an extent by the Supreme Court’s decisions in Kokesh v. SEC (2017) and Liu v. SEC (2020).[2] Following Liu, in 2021, Congress expressly authorized the SEC to seek (and federal courts to order) disgorgement “[i]n any action or proceeding brought by the Commission under any provision of the securities laws” through a new statutory provision (15 U.S.C. § 78u(d)(7)).

The Sripetch petitioner’s concern, as Justice Gorsuch characterized it, was that “without a pecuniary loss requirement, the SEC might lose sight of traditional equitable principles altogether” and “try to use [the new provision] as a tool to resume its efforts to seek penalties for the Treasury rather than compensation for victims.” Justice Gorsuch acknowledged that an attempt by the government to “depart from traditional equitable principles” would exceed the limits established in Liu and raise additional questions (including a defendant’s potential entitlement to a jury trial). But he did not agree that this possibility had any bearing on the question at hand of whether disgorgement requires a showing of pecuniary loss.

Disgorgement: A legal remedy?

What’s on the horizon for SEC disgorgement? SCOTUS in Sripetch assumed without deciding that disgorgement is an equitable remedy. But according to Justice Thomas (writing separately), disgorgement under the Securities Exchange Act of 1934 (Exchange Act) as it stands today is fundamentally a legal remedy. In his concurrence, he reasoned that:

1. SEC disgorgement “more closely resembles legal restitution” rather than traditional equitable remedies, such as constructive trusts, equitable liens and accounting for profits.
2. The structure and substance of Congress’s 2021 amendments to the Exchange Act reflect that the legislature “reclassified” SEC disgorgement as a legal remedy.

The practical stakes are significant. If SEC disgorgement is a remedy at law, the Seventh Amendment would entitle defendants to a jury trial and prohibit the SEC from seeking disgorgement in equity. Justice Thomas identified a developing circuit split on this issue, and his concurrence reads as an open invitation for a future petitioner to bring the question squarely before the Court.

Key takeaways

• Sripetch confirms that the SEC is not required to show investors suffered financial loss to obtain an award of disgorgement. This decision strengthens the SEC’s ability to seek disgorgement – particularly in the Second Circuit, which now must conform to the Court’s decision.
• We may see disgorgement return to the high court sooner rather than later. Justice Thomas’s concurrence argued forcefully that SEC disgorgement is no longer an equitable remedy under the current statutory regime. The SEC’s enforcement efforts could be significantly impacted if SCOTUS were to determine disgorgement is a legal remedy for which defendants are entitled to a jury trial under the Seventh Amendment.

[1] The SEC noted that a large percentage of the FY2025 disgorgement figure was attributed to a single long-running action.

[2] Justice Gorsuch acknowledged that following Liu, an open question remains of “whether the SEC may seek disgorgement when it is ‘infeasible to distribute the collected funds to investors.’”

Read the article to learn more about recently enacted AI disclosure laws, related enforcement actions and securities litigation, and practical steps to manage the risk of AI records diverging from other public statements.

These trading suspensions raise significant concerns for foreign issuers, particularly because most of the SEC’s orders state that the potential manipulation was “effectuated through recommendations made to investors by unknown persons [emphasis added] via social media.” Thus, companies that may themselves be victims of third-party manipulation now face the compounding harm of being treated as suspected wrongdoers and having their trading halted, along with potential collateral consequences, such as reputational damage, SEC inquiries and shareholder lawsuits. In addition, Nasdaq recently proposed a new rule that would allow it to delist stocks where the SEC has imposed trading suspensions, effectively cutting off a company’s access to the US capital markets.  

Foreign issuers – particularly those based in Asia – should consider evaluating their vulnerability to third-party market manipulation and developing a response plan in the event of a stock price rally that potentially triggers regulatory scrutiny. Likewise, foreign private companies seeking access to the US capital markets should be mindful of the risk of potential market manipulation for microcap companies.

Characteristics of companies subject to trading suspensions

The 14 companies affected by the trading suspensions conduct a range of business operations, from beauty products and food catering to online travel services, digital advertising and traditional Chinese medicine therapies. Most of the companies were founded more than 10 years ago.

These companies also share some common characteristics:

• Asia-headquartered and offshore-incorporated: As noted above, all 14 companies are headquartered in Asia, including six in mainland China or Hong Kong, five in Singapore, and one each in Indonesia, Malaysia and Japan. All but two are incorporated in offshore jurisdictions, such as the Cayman Islands and the British Virgin Islands.

• Recent IPOs with modest IPO proceeds: Twelve of the 14 companies went public in 2025, while the other two went public in 2024. Their IPO proceeds ranged from $5 million to $15 million, and all 14 companies were considered “microcap” at the time of their IPOs (i.e., with market capitalization of less than $300 million). Thirteen of the companies priced their IPOs at $4 per share, the minimum bid price required by Nasdaq and the NYSE.

• Significant stock price fluctuations leading to trading suspensions: For some companies, trading was suspended while the stock price was surging; for others, the suspension occurred as the price declined from a spike. Several of the 14 companies experienced a dramatic stock price increase shortly after the IPO. For example, the stock price of Charming Medical surged from $4 to $29.36 within 10 days of the IPO. Other companies saw their stock prices remain steady for an extended period before experiencing sudden volatility. QMMM’s stock price stayed between $1 and $4 for a year after its IPO, when it suddenly spiked to $207 before plummeting to $71 within the span of a week. These abnormal trading patterns prompted the SEC to suspend trading, in some cases within weeks of the companies’ IPOs.

SEC’s trading suspensions extended by stock exchanges

The SEC’s orders suspending trading in the securities of these 14 companies are nearly identical. In each order, the SEC stated that there was “potential manipulation” in the company’s securities “through recommendations made to investors by unknown persons via social media,” which “appear to be designed to artificially inflate the price and trading volume” of the company’s securities. The SEC further stated that “the public interest and the protection of investors” required it to suspend trading in the securities of the company.

As noted in our November 2025 Law360 article, although the SEC is only authorized to suspend trading for up to 10 business days, the stock exchanges (Nasdaq and NYSE) continued to halt trading for these companies after that period expired. Nasdaq announced that “trading will remain halted” until the issuer “has fully satisfied Nasdaq’s request for additional information.”

To date, trading remains halted for all 14 companies, and it is unclear if they will ultimately persuade the SEC and the stock exchange to lift the trading halt. All 14 companies publicly stated that they were cooperating with the investigations and denied any involvement in market manipulation. Many of the 14 companies also stated in their public filings that there were no material changes to their business operations, although several companies disclosed changes to their directors, executive officers and/or auditors since the SEC suspended trading in their stocks. Two companies disclosed in their public filings after the trading suspensions that they moved their headquarters.

In addition, on February 20, 2026, Nasdaq filed a proposed rule change with the SEC that would allow Nasdaq to delist companies whose stocks are subject to trading suspension by the SEC. Nasdaq “believes that the ability for third parties to manipulate a security’s price can indicate that the security does not have sufficient liquidity, and the issuing company does not have sufficient market interest, for listing to be appropriate.” As such, Nasdaq proposed it should have discretion to delist companies under trading suspensions based on a set of factors, including whether any of the company’s advisors (such as auditors, underwriters and law firms) “were involved in prior transactions where the securities became subject to a pattern of concerning or volatile trading.” If adopted, Nasdaq intends to use this new rule to suspend companies “even where the problematic or unusual trading appears to be driven by third parties with no known connection to the company, and even where Nasdaq Staff cannot determine whether the company or any associated individual was involved.” The SEC is currently soliciting comments on the proposed rule change and is expected to either approve or disapprove it within the coming months.

Shareholder lawsuits

Two companies – Charming Medical and Smart Digital Group – were sued for securities fraud in connection with the trading suspensions. In both cases, the plaintiffs named the companies’ directors, officers, auditors and underwriters as defendants.

The complaint against Charming Medical alleges that the company’s “IPO and its extremely small public float” made the company’s stock susceptible to manipulation. The plaintiff further alleges that the company’s offering documents failed to warn investors of the “substantial market manipulation risk,” and that the company failed to dispel false rumors circulated by scammers.

Similarly, the complaint against Smart Digital Group alleges the company violated securities laws by failing to disclose it was the subject of a pump-and-dump scheme and at risk of a trading suspension.

Takeaways

Asia-based companies trading in the US face the risk of having their trading suspended by the SEC based solely on unusual trading patterns or market activity, even when they were not involved with the potential manipulation. The consequences of trading suspensions, followed by indefinite trading halts by stock exchanges, can include loss of access to the US capital markets, prolonged investigations and significant reputational damage.

Moreover, if Nasdaq’s proposed rule change is approved, companies subject to SEC trading suspensions may face delisting proceedings, even where the unusual trading activity appears to have been driven entirely by unaffiliated third parties. Plaintiffs’ law firms appear to be focused on this issue, and it is possible they will file more copycat complaints against companies that have fallen victim to stock manipulation.

To mitigate the risk of falling victim to market manipulation activity, companies based in Asia that are considering going public in the US should be mindful of the distribution of their shares while they remain private. And companies that recently went public in the US should consider monitoring rumors on social media and developing a response plan for an unexpected stock price rally. For example, a targeted company may consider publicly denying any rumors circulating on social media that are designed to drive up a company’s stock price. If they are subject to a trading suspension, companies should be prepared to respond quickly by engaging with the SEC and publicly denying involvement with the market manipulation.

The SEC obtained orders for monetary relief totaling $17.9 billion in FY2025 – a new record – but $14.9 billion of that amount stemmed from a single matter: the judgment in the Robert Allen Stanford Ponzi scheme case, which was initiated in 2009. Excluding the Stanford judgment, as well as disgorgement amounts that were “deemed satisfied” by court orders in non-SEC actions, monetary relief orders obtained in FY2025 totaled $2.7 billion – $1.3 billion in penalties and $1.4 billion in disgorgement. In FY2024, by comparison, the SEC obtained $8.2 billion in financial remedies.

The SEC acknowledged that FY2025 was a “unique period of transition,” with 58% of the enforcement actions having been filed before the US presidential inauguration on January 20, 2025. In the April 7 press release, SEC Chairman Paul Atkins stated that the current SEC administration is prioritizing cases involving “fraud, market manipulation, and abuses of trust” and emphasizing “holding individual wrongdoers accountable.”

Retail investor protection

The FY2025 enforcement results demonstrate the current SEC administration’s focus on securities fraud targeting retail investors, such as Ponzi schemes, offering frauds and disclosure failures. Notably, the press release highlighted an enforcement action against a publicly traded biopharmaceutical company[1] that allegedly concealed a “harsh critique levied by the Food and Drug Administration” (FDA) about the approval prospect of the company’s drug candidate. The company allegedly made false and misleading statements about the drug’s efficacy and likelihood of approval in its initial public offering documents. The company agreed to pay $2.5 million in civil penalties to settle the action.

Individual accountability

The current SEC administration has focused more heavily on individual accountability, with nearly 90% of the stand-alone actions filed since the presidential inauguration involving individual charges. The press release linked to multiple individual enforcement actions, such as actions against three individuals[2] for allegedly creating false documents in municipal bond offerings that raised $284 million, and against the founder of a beverage company[3] for allegedly misrepresenting the company’s business operations and use of investor funds. The SEC also obtained orders barring 119 individuals from serving as officers and directors of public companies, comparable to the 124 individuals barred in FY2024.

Investment advisers

In FY2025, the SEC brought 72 enforcement actions against investment advisers and investment companies, a decline of 26% from FY2024. However, the SEC has stated that “breaches of fiduciary duty by investment advisers” remain a top priority for the agency. The press release highlighted a few notable actions and wins against investment advisers, including a jury verdict[4] against a Massachusetts-based investment adviser for alleged failure to disclose financial incentives for selling certain products, as well as a $150,000 settlement[5] with a New York-based investment adviser for alleged failure to disclose advisory fees in connection with the conversion of certain client accounts.

Cross-border fraud

As discussed in our September 18 and October 28 blog posts, the SEC has formed a Cross-Border Task Force to investigate transnational fraud, such as “pump-and-dump” schemes involving foreign-based companies. Along those same lines, the SEC has also charged individuals in foreign jurisdictions for alleged involvement in insider trading[6] or market manipulation.[7]

Insider trading and market manipulation

“Abusive trading” continues to be a focus of this SEC administration, and in FY2025, the SEC brought 31 insider trading and 15 market manipulation cases, on par with FY2024’s totals of 34 and 17, respectively. As discussed in our December 23 blog post, the SEC is particularly focused on insider trading in biotech stocks, which could be subject to significant volatility in response to clinical trial results, FDA decisions and merger activities.

Misuse of emerging technologies  

While the SEC has changed its approach to crypto enforcement, it “remains committed to detecting, deterring, and bringing actions against those seeking to take advantage of investors by misusing new technologies.” In FY2025, such actions included charges against digital asset promoters[8] for allegedly making false statements in connection with crypto asset offerings, the founder of a crypto and foreign exchange trading company[9] for alleged misappropriation of investor funds, and the founder of an AI startup[10] for allegedly misrepresenting the company’s use of AI. In the AI startup case, the SEC alleged that the founder told investors that the company used AI to process transactions, when in fact, the company relied largely on contract employees to manually input orders. 

Benefit of self-report and cooperation

The current SEC administration has reiterated the value of self-reporting, cooperation and remediation as tools for mitigating enforcement outcomes. As discussed in our February 27 blog post, the recently updated Enforcement Manual has expanded the cooperation framework and emphasizes the “timeliness” of cooperation.

The press release noted that in FY2025, the SEC imposed reduced civil penalties or declined to recommend enforcement actions against several companies that self-reported, cooperated and remediated securities law violations. One example cited by the SEC involved an investment adviser[11] that allegedly violated Rule 105 of Regulation M by purchasing certain securities after selling short the same securities during Rule 105’s restricted period. The SEC credited the company’s cooperation, including voluntarily gathering documents, conducting a review for prior violations and presenting to the staff on the company’s compliance efforts. The SEC also credited the company’s remediation efforts, such as updating its compliance policies and procedures.

Takeaways

The FY2025 enforcement results reflect the current administration’s much-publicized change of priorities. As it said it would, the SEC appears to have concentrated its resources on fraud and has prioritized charging individuals for securities violations. At the same time, the SEC’s continued emphasis on self-reporting, cooperation and remediation presents a meaningful opportunity for market participants to mitigate potential exposure.

[1] In the Matter of Allarity Therapeutics, Securities Act of 1933 Release No. 11367, Securities Exchange Act of 1934 Release No. 102646 (Mar. 12, 2025).

[2] SEC v. Miller et al., No. 1:25-cv-02702 (S.D.N.Y. Apr. 1, 2025).

[3] SEC v. Scalise et al., No. 2:25-cv-03088 (E.D. Pa. June 17, 2025).

[4] SEC v. Cutter Financial Group, No: 1:23-cv-10589 (D. Mass. Apr. 23, 2025).

[5] In the Matter of One Oak Capital Management, LLC and Michael DeRosa, Securities Exchange Act of 1934 Release No. 102425, Investment Advisers Act of 1940 Release No. 6855 (Feb. 14, 2025).

[6] SEC v. Safi et al., No. 1:25-cv-10516 (D. Mass. Mar. 4, 2025).

[7] SEC v. Kushnarev, No. 1:25-cv-05412 (N.D. Ga. Sept. 22, 2025).

[8] SEC v. Unicoin, et al., No. 1:25-cv-04245 (S.D.N.Y. May 20, 2025).

[9] SEC v. Palafox, et al., No. 1:25-cv-00681 (E.D. Va. Apr. 22, 2025).

[10] SEC v. Saniger, No. 1:25-cv-02937 (S.D.N.Y. Apr. 9, 2025).

[11] In the Matter of Sourcerock Group, LLC, Securities Exchange Act of 1934 Release No. 103629 (Aug. 4, 2025).

Enacted on March 25, 2025, SB21 was widely viewed as an effort to win back companies considering corporate relocation in response to recent decisions by Delaware courts. Among other changes, SB21 contained important amendments to DGCL Section 144’s safe harbor provisions for conflicted transactions, clarifying what constitutes a conflicted transaction and setting forth the steps that must be taken for the safe harbor protection to apply.[1] While Cooley has cataloged elsewhere the full set of changes to Section 144, the Clearway case focused on two amendments:

1. The addition of language protecting directors and officers against “equitable relief, or … an award of damages … by reason of a claim based on a breach of fiduciary duty” where the safe harbor is satisfied.
2. A retroactivity provision specifying that the changes to Section 144 apply retroactively except as to proceedings pending on or before February 17, 2025 (the date SB21 was introduced).

In its recent Clearway opinion, the Delaware Supreme Court rejected constitutional challenges to both provisions. Read on to learn more.

Constitutional challenges

Background

Shortly after being signed into law, SB21 came under attack in a trio of derivative actions, including Clearway, challenging the validity of the two amendments discussed above on state constitutional grounds. In Clearway, Vice Chancellor Lori Will certified the following questions to the Delaware Supreme Court:

1. “Does … eliminating the Court of Chancery’s ability to award ‘equitable relief’ or ‘damages’ where the Safe Harbor Provisions [of Section 144] are satisfied [] violate the Delaware Constitution of 1897 by purporting to divest the Court of Chancery of its equitable jurisdiction?”
2. “Does … applying the Safe Harbor Provisions to plenary breach of fiduciary claims arising from acts or transactions that occurred before the date that Senate Bill 21 was enacted—violate the Delaware Constitution of 1897 by purporting to eliminate causes of action that had already accrued or vested?”

In other words, do the amendments run afoul of the Delaware Constitution by ruling out money damages and equitable relief for safe harbor transactions, and applying these substantive changes retroactively? The Delaware Supreme Court accepted the two certified questions on June 11, 2025. Briefing closed in September, and oral argument was held on November 5, 2025.

The parties’ arguments

Remedies: On the first question, the plaintiff’s arguments focused on Section 10 of Article IV of the Delaware Constitution. Section 10 provides, in relevant part, that the Court of Chancery “shall have all the jurisdiction and powers vested by the laws of this State in the Court of Chancery.” The seminal case on point, DuPont v. DuPont, 85 A.2d 724 (Del. 1951), explains that Section 10’s grant of “general equity jurisdiction of the Court of Chancery … is a constitutional grant not subject to legislative curtailment.” Thus, attempts by the legislature to strip the Court of Chancery of jurisdiction are presumed invalid, unless some non-Chancery tribunal is available to provide “the equivalent of the remedy available in the Court of Chancery.” The plaintiff in Clearway argued that the elimination of equitable remedies and money damages for safe harbor transactions improperly impinged the “jurisdiction and powers” granted to the Court of Chancery.

In response, the defendants – as well as Delaware’s governor, who intervened to defend SB21’s constitutionality – sought to emphasize the amendments’ limited scope. In particular, they argued that the elimination of certain remedies should be viewed, not as a curtailment of the Court of Chancery’s jurisdiction, but rather as an adjustment to the standard of review the court applies to conflicted transactions. They also argued that the plaintiff’s argument would threaten the viability of other provisions of the DGCL.

Retroactivity: On the second question, the plaintiff in Clearway argued that, by applying the changes to pre-amendment acts and occurrences, the legislature was depriving would-be-plaintiffs of a vested right, in contravention of due process and Section 9 of Article I of the Delaware Constitution. The defendants countered that no one has a vested right in particular remedies, and that, in any event, the retroactivity provision did not violate due process because it reflected a rational legislative purpose.

The Delaware Supreme Court’s decision

On February 27, 2026, the Delaware Supreme Court upheld the constitutionality of the two challenged amendments in a unanimous en banc opinion.

Remedies: As to the plaintiff’s first claim – that SB21’s elimination of equitable relief and damages for safe harbor transactions represented unconstitutional jurisdiction-stripping – the court answered in the negative. Among the key reasons underlying the court’s analysis were the following:

• Delaware recognizes a “strong judicial tradition” of presuming the constitutionality of legislative enactments, which will be upheld unless their “invalidity is beyond doubt.”
• Because fiduciary duty claims are still adjudicated by the Court of Chancery – even where the safe harbor requirements are satisfied – the amendment “does not strip the court of its jurisdiction over equitable claims.” In this regard, the court distinguished its decision in DuPont. The court reasoned that in DuPont, unlike here, the statute purported to grant to the Family Court exclusive jurisdiction over support and maintenance actions, depriving the Court of Chancery of the ability to adjudicate such claims. The court likewise distinguished the plaintiff’s other main case, In re Arzuaga-Guevara, 794 A.2d 579 (Del. 2001), on the grounds that it too concerned a statute that purported to vest exclusive jurisdiction in the Family Court.
• The court accepted the defendants’ framing of the amendments as a change to the standard of review for fiduciary claims, noting that, “Rutledge’s claim itself remains with the Court of Chancery’s jurisdiction.”
• Adopting the plaintiff’s more expansive view of jurisdiction stripping and DuPont would imperil other settled provisions of the DGCL, including the short-form merger procedures upheld in Glassman.
• Pulling back, “adopt[ing] DGCL provisions that shape the contours of equitable claims and affect the relief available in intra-corporate litigation” is a core prerogative of the legislative branch.

Retroactivity: The court’s analysis of the retroactivity provision rejected the plaintiff’s contention that the amendment effected an unconstitutional deprivation of a vested right. Key points included the following:

• SB21 “does not extinguish [a would-be plaintiff’s] right of action,” even if “the court must now review the challenged transaction under [different] statutory standards.”
• Although the court stopped short of resolving the question of whether the amendment effected the extinguishment of a vested right, it characterized the proposition as “highly questionable” and observed that the plaintiff’s interest instead “appears to be more ‘an anticipated continuance of the existing law.’”
• In any event, even if a would-be-plaintiff did have a vested right in the availability of particular remedies, for economic legislation like SB21, due process only “requires that the statute bear a reasonable relation to a permissible legislative objective.” And the court easily concluded that SB21 was designed to further a permissible legislative objective, namely the exercise of the General Assembly’s “constitutional authority to create and modify the general corporate law of Delaware.”

Moving forward

Key takeaways for practitioners:

• The principal takeaway here is, of course, that the safe harbor amendments and retroactivity provision of SB21 remain intact, providing corporate decision-makers with greater dealmaking certainty via the statutory safe harbors.
• More broadly, the Delaware Supreme Court has in recent years repeatedly served as a ballast to the Chancery Court, paring or rejecting some of the Chancery Court decisions that had driven companies to consider other alternatives for incorporation. This decision is in line with that trend. SB21 provides much needed clarity to dealmakers undertaking conflict transactions.  As always, however, we can expect the plaintiffs’ bar to continue probing for avenues to challenge conflicted transactions.
  • Accordingly, it remains critical for companies considering strategic transactions that could implicate material conflicts to consult with experienced counsel as early as possible in transaction planning, and ensure corporate/M&A counsel is working hand in glove with their litigation colleagues to devise appropriate processes to mitigate risk from the outset.
• The court’s decision also reflects some measure of deference to legislative decision-making. In so doing, it highlights one of the advantages that Delaware can offer to corporate decision-makers: namely, the ability of the Delaware legislature to respond to concerns of practitioners and corporations.   

[1] For guidance on navigating conflicted transactions in Delaware and Nevada, see this February 25 Cooley article.

The Court of Chancery’s 2024 decision prompted Delaware’s legislature to amend the Delaware General Corporation Law (DGCL) to expressly authorize the type of stockholder agreement challenged in Moelis. However, the new statutory provision (Section 122(18)) does not apply to litigation already pending prior to its enactment, such as Moelis. In a footnote, the Delaware Supreme Court noted that while Section 122(18) might reflect the “public policy of Delaware,” the legislature’s express carve out of then-existing litigation “require[d]” the court to “ignore that public policy” in reaching its decision.

Background

As discussed in our April 8, 2024 blog post, the Moelis case was brought by certain minority stockholders in the investment bank Moelis & Company and arose from a stockholder agreement entered into between the investment bank and its founder (Ken Moelis) before the investment bank’s initial public offering. The stockholder agreement granted the founder certain rights and protections, including veto rights over certain corporate actions and decision making over the composition of the board. The defendants argued that the challenged provisions were valid and that the plaintiff’s challenge was time-barred, either by the three-year statute of limitations or under the doctrine of laches.[1]

The Court of Chancery rejected the defendants’ timeliness argument, holding that the challenged provisions were “void” because they violated Section 141(a), and void provisions are not subject to equitable defenses such as laches. The Court of Chancery also held that even if the defense of laches were available, it would not apply because the plaintiff’s claim was “based on an ongoing statutory violation.” In a separate opinion, the Court of Chancery concluded that several of the challenged provisions were facially invalid because they substantially limited the directors’ ability to exercise their best judgment on behalf of behalf of the company’s stockholders on management matters, in violation of Section 141(a) of the DGCL. The Court of Chancery, however, recognized that the provisions deemed facially invalid would have survived challenge if they were included in Moelis’s charter. The Court of Chancery later awarded the plaintiff’s counsel $6 million in attorney’s fees.

Delaware Supreme Court’s reversal

The Delaware Supreme Court reversed the Court of Chancery’s decision, holding that the plaintiff’s suit was barred by laches. In reaching that holding, the Supreme Court ruled that:

1. The challenged provisions are voidable, not void, and therefore challenges to such provisions could be subject to equitable defenses such as laches.
2. The plaintiff’s claim as to the facial invalidity of the challenged provisions accrued when the stockholder agreement was executed in 2014.

The court concluded that the claim was “time barred under the doctrine of laches,” and thus, the defendant was entitled to summary judgment and the plaintiff was not entitled to attorney’s fees.

Void versus voidable

The Delaware Supreme Court first reversed the Court of Chancery’s determination that the challenged stockholder agreement was void rather than voidable. Acknowledging that the distinction between “void” and “voidable” has “long vexed courts and legal scholars alike,” the court explained that in the corporate governance context, void acts are “illegal acts or acts beyond the authority of the corporation,” whereas voidable acts are those that “the corporation can lawfully accomplish” if done in the appropriate manner. The Delaware Supreme Court rejected the Court of Chancery’s “categorical rule” that “any contractual provision adopted in a manner that exceeds the board’s or management’s authority” is void, even if such provision “could be ratified or enacted in an authorized manner.” Thus, whether the stockholder agreement was void or voidable hinged upon whether there were any lawful means by which Moelis could have accomplished the agreement’s purposes.

The court answered that question in the affirmative, noting that the Court of Chancery recognized that Moelis could have used “alternative methods” to achieve the same governance arrangements provided for in the stockholder agreement (such as by amending its charter). In other words, it was not “beyond the authority of the corporation” to adopt those provisions, thus rendering the provisions voidable, not void. Because the plaintiff failed to meet its “burden of establishing that the challenged provisions are void,” the court rejected the Court of Chancery’s conclusion that equitable defenses like laches were unavailable.

Laches

The Delaware Supreme Court then proceeded to hold that the plaintiff’s suit was barred by laches. To determine whether the plaintiff’s delay in bringing its claim was unreasonable, the court looked to the “statutory limitations period for bringing an analogous legal claim,” which is three years. Because the complaint was filed nine years after the stockholder agreement was adopted in 2014, the timeliness analysis turned on when the claim “accrued.”

The Delaware Supreme Court rejected the Court of Chancery’s conclusion that the claim had not yet accrued because there was an “ongoing statutory violation.” Instead, it held that “the only wrongful conduct alleged in the complaint was the execution of the stockholders agreement,” and that “all the elements of the plaintiff’s claim were present and complete relief was available in 2014.” The court also held that the plaintiff failed to rebut the presumption that Moelis was prejudiced “as a matter of law” due to the plaintiff’s delay.

The court emphasized that its opinion does not provide blanket immunity for stockholder agreements. Rather, facial challenges are timely if filed within three years of the execution of the agreement, and as-applied challenges may be brought even after the three-year limitations period has expired. Indeed, the court noted that Moelis stockholders could still bring as-applied challenges to the stockholder agreement in the future.

Takeaways

Effect of Statutory Amendments: The Court of Chancery’s decision in Moelis was among the cases that prompted Delaware-incorporated companies (especially controlled companies) to consider reincorporation in a different state, a trend commonly referred to as “DExit.” In response, the Delaware Legislature made significant amendments to the DGCL, including adding Section 122(18) to allow for certain stockholder agreements similar to the one at issue in the Moelis case and amending Section 144 to provide for certain safe harbors for controlled transactions. The Delaware Supreme Court’s Moelis opinion sidestepped DExit considerations and the ongoing policy debate in Delaware. Indeed, the court noted that it consciously ignored any public policy reasons behind Section 122(18).

Practically speaking, the adoption of Section 122(18) means that there is a statutory bar on facial (but not as-applied) challenges to stockholder agreement provisions that fall within its scope and were not the subject of existing litigation claims as of August 1, 2024. Provisions not within the scope of 122(18) may still be subject to future facial and as-applied challenges by plaintiffs.

Future Challenges to Stockholder Agreements: Moelis makes it more difficult for stockholders to bring facial invalidity challenges to long-standing corporate governance documents. The Delaware Supreme Court’s opinion first provides valuable guidance on which corporate acts may be deemed void (if the acts are illegal or beyond the corporation’s authority) versus merely voidable (if they can be lawfully accomplished). The opinion then makes clear that a corporate defendant may raise a laches defense whenever a plaintiff challenges a provision in a corporate instrument that is: (1) voidable and not void; and (2) more than three years old. Even when both criteria are met, plaintiffs will argue that case-specific circumstances warrant allowing a particular suit to proceed. But, as a general matter, Moelis gives would-be defendants a potent weapon for side stepping such suits.

[1] As the Delaware Supreme Court explained in its recent opinion, laches is “an affirmative defense that the plaintiff unreasonably delayed in bringing suit after learning of an infringement of his or her rights” that applies to equitable rather than legal claims.