Delaware Court of Chancery Reaffirms High Bar for Caremark Oversight Liability: Lessons from the In re The Boeing Co. Derivative Litigation

Executive Summary

On August 13, 2026, the Delaware Court of Chancery issued a landmark ruling in In re The Boeing Co. Derivative Litigation, dismissing Caremark oversight claims against Boeing’s current and former directors and officers with prejudice. The decision, authored by Justice Morgan T. Zurn (recently appointed to the Delaware Supreme Court and sitting by designation in the Court of Chancery), reinforces the exacting bad-faith standard plaintiffs must satisfy to establish oversight liability under Delaware law and provides important reassurance to directors who maintain functioning oversight systems. This 2026 ruling represents the second major Caremark decision arising from Boeing’s 737 MAX program in the Court of Chancery. It follows a 2021 decision and, with the inverse result, reflects how Boeing’s subsequent governance reforms positioned the company to defeat the later claims.

Background

The litigation arose from a January 5, 2024, incident in which a door plug detached from an Alaska Airlines Boeing 737 MAX during flight, forcing an emergency landing. Stockholder plaintiffs brought derivative Caremark claims against Boeing’s directors and officers, alleging two principal failures: (1) failure to respond in good faith to red flags of systemic manufacturing and safety deficiencies; and (2) implementation of production targets that could not be safely or lawfully met. 

This case followed Boeing’s earlier 737 MAX crashes in October 2018 (Lion Air Flight JT 610) and March 2019 (Ethiopian Airlines Flight ET 302), which had already resulted in significant corporate governance reforms. Those reforms included the creation of an independent aerospace safety board committee, extensive board and committee reporting requirements, and the formation of a new safety organization. The plaintiffs argued that, despite these reforms, the Board failed to discharge its oversight duties with respect to ongoing manufacturing and safety risks. 

In an earlier 2021 decision, the Court of Chancery had denied a motion to dismiss Caremark claims arising from the 2018 and 2019 crashes, finding that plaintiffs had adequately pled that the Board lacked any committee charged with direct responsibility for monitoring airplane safety and had no regular process for receiving safety information. Boeing’s subsequent governance reforms resulted in a different outcome with respect to the later Caremark claims.

Core Legal Issues and the Court’s Reasoning

A. The Caremark Standard: Bad Faith as the Central Limiting Principle

The Court framed its analysis around the threshold question of demand futility under Court of Chancery Rule 23.1, asking whether a majority of the Board faced a substantial likelihood of Caremark liability such that a pre-suit demand on the Board would have been futile. 

The Court reiterated that Caremark liability requires more than gross negligence. Plaintiffs must plead particularized facts demonstrating an “intentional dereliction of duty” or “conscious disregard for one’s responsibilities” amounting to a breach of the fiduciary duty of loyalty. As Delaware law presumes that directors perform their duties in good faith and with reasonable care, the bar for Caremark liability remains exceptionally high. 

Critically, the Court emphasized that fiduciary duties do not demand omniscience: “Fiduciaries who make a good-faith effort to implement and attend to a reasonable board-level reporting system satisfy their baseline oversight duty, and Delaware law does not demand omniscience.”

B. Reaffirmation of the Business Judgment Rule - Legal Compliance vs. Business Risk Oversight

A central aspect of the decision was the Court’s reinforcement of the distinction between oversight of legal compliance risks and oversight of general business risks.  The Court emphasized that:

• Legal compliance risks are “black and white”: Directors do not have discretion to violate positive law, and the standards governing their conduct are clear. 

• Business risk oversight receives broader deference: Directors have more business judgment discretion in managing general business risks, where courts are reluctant to second-guess good-faith business judgments in hindsight. 

The Court noted that attaching the same liability standard to operational decisions would require determining in hindsight whether a business judgment was “right” – an “almost impossible” task.

C. “If Everything Is a Red Flag, Then Nothing Is”

The Court characterized the alleged “red flags” raised by plaintiffs, including workforce inexperience and supply chain defects, as general operational concerns speaking to business risks rather than legal risks.  The Court found that these purported warnings were, at most, “yellow flags” of operational concerns that demonstrated the reporting system was working, not failing. 

The Court rejected plaintiffs’ attempt to recast Boeing’s robust reporting practices as evidence of disloyalty, stating that extensive reporting on safety, manufacturing, and compliance 3 risks, together with management’s responsive actions, should not be “recast from a best practice into evidence of disloyalty.”

D. Production Targets and Good Faith Business Judgment

The Court rejected plaintiffs’ theory that Boeing’s maintenance of production targets despite safety concerns implied bad faith. Instead, the Court found that the record showed Boeing adjusted or delayed production targets in response to informed assessments of changing conditions, which supported the presumption of good faith. 

The Court held that, absent particularized allegations that directors knowingly caused the corporation to violate positive law or consciously disregarded clear warnings that the corporation was headed for serious corporate trauma, a later corporate trauma does not support an inference that the board acted in bad faith.`

Key Takeaways and Practical Recommendations

Clients should consider the following actions to mitigate Caremark exposure and ensure compliance with Delaware oversight duties:

1. Establish Robust Board-Level Reporting Systems

• Implement formal reporting systems tailored to mission-critical legal and compliance risks. 

• Ensure that reporting systems include clear escalation channels for red flags.

• Document the design and implementation of these systems in board minutes and resolutions.

2. Maintain Detailed Books and Records

• Keep contemporaneous records of board and committee meetings, including discussions of safety, manufacturing, and compliance risks. 

• Document management’s responses to identified risks.

• Preserve records of investigations and follow-up actions.

3. Differentiate Legal Compliance from Business Risk Oversight

• Establish separate oversight protocols for legal compliance risks (where standards are clear) and business risks (where directors have broader discretion). 

• Ensure that legal compliance oversight includes clear protocols for monitoring adherence to positive law.

• For business risks, document the board’s informed decision-making process.

4. Respond Proactively to Identified Risks

• When risks are identified, ensure that management responds promptly and that the board oversees those responses. 

• Document the board’s oversight of management’s remediation efforts.

• Avoid the appearance of ignoring identified risks.

5. Adjust Business Decisions Responsively

• When production targets or business decisions must be adjusted in response to changing conditions, document the rationale for those adjustments. 

• Ensure that adjustments are based on informed assessments, not on a desire to maintain unrealistic targets.

6. Consider Mission-Critical Risk Committees

• For companies in industries with mission-critical risks (e.g., aviation, pharmaceuticals, financial services), consider establishing board committees with direct responsibility for monitoring those risks. 

• Ensure that committee mandates are clear and that committee activities are documented.

7. Prepare for Demand-Futility Scrutiny

• Recognize that the demand-futility stage is often where Caremark claims are won or lost. 

• Ensure that board records demonstrate active oversight and good-faith decision-making.

• Consider periodic reviews of board records to ensure they would support a defense against Caremark claims.

8. Leverage Governance Reforms as a Defense

• Companies that have implemented governance reforms following prior incidents should ensure those reforms are well-documented and actively maintained. 

• Governance reforms can serve as powerful evidence of good-faith oversight efforts.

Conclusion

The In re The Boeing Co. decision provides important reassurance to directors of Delaware corporations that the high threshold for Caremark liability remains intact. Boards that maintain functioning oversight systems, regularly monitor for legal compliance, and make informed decisions about business risks will be afforded a strong presumption of good faith. 

However, the decision also serves as a reminder that Caremark claims remain a significant litigation risk, particularly for companies in industries with mission-critical safety or compliance obligations. The contrast between the 2021 decision (which allowed Caremark claims to survive based on Boeing's pre-reform oversight failures) and the 2026 decision (which dismissed claims based on Boeing's post-reform oversight systems) demonstrates the tangible value of robust governance practices.

For more information or to discuss how these developments may affect your company, please contact Tammara Fort, Head of M&A, or Samara Thomas, Of Counsel.

SEC Proposes New Regulatory Framework for Crypto Asset Offerings

On August 18, 2026, the U.S. Securities and Exchange Commission (the “SEC”) proposed a new regulatory framework, Regulation Crypto Assets, designed specifically for certain offerings involving crypto assets. The proposal represents a significant step in the SEC’s broader effort to replace the application of securities rules developed for traditional securities offerings with a more tailored framework for crypto-related capital formation.

Background

Regulation Crypto Assets builds on the SEC’s release “Application of the Federal Securities Laws to Certain Types of Crypto Assets and Certain Transactions Involving Crypto Assets” of March 17, 2026. In that release, the SEC distinguished between a crypto asset itself and the transaction or arrangement through which the crypto asset is offered and sold. A crypto asset that is not itself a security may nevertheless be offered or sold pursuant to an “investment contract” under the traditional Howey test for what is or is not a security.

The proposal focuses on these arrangements. A “covered investment contract” would generally mean an investment contract under which (i) a crypto asset is subject to the investment contract, (ii) that crypto asset is not itself a security, and (iii) no asset other than that crypto asset is subject to the investment contract. Accordingly, the proposal is not a general exemption for tokenized stocks, bonds or other “digital securities”; rather, it is intended principally for transactions involving non-security crypto assets that are nevertheless offered or distributed as part of an investment contract.

Key Takeaways

• Startup Exemption: allows early-stage projects to raise up to $5 million over a maximum of 4 years without requiring audited financial statements.

• Fundraising Exemption: modeled similarly to Regulation A, it offers Tier 1 (up to $20 million) and Tier 2 (up to $75 million) pathways for more mature projects seeking large-scale capital.

• Investment Contract Safe Harbor: If an issuer completes or permanently ceases its promised essential managerial efforts, the investment contract is deemed terminated, and the underlying crypto asset is no longer subject to securities laws.

• Preemption of State Law: By redefining “qualified purchasers,” the proposal preempts state blue sky registration requirements for exempt offerings, which is designed to significantly streamline secondary market liquidity.

Startup Exemption: Up to $5 Million During a Four-Year Period

The proposed Startup Exemption is intended primarily for early-stage crypto projects that are still developing the functionality, network or application associated with a crypto asset. An issuer relying on the proposed Startup Exemption could conduct covered transactions involving up to $5 million during a maximum four-year period without registering the offering under Section 5 of the Securities Act of 1933 (the “Startup Exemption”). The exemption generally could be used only once by the issuer and its affiliates with respect to the same or a substantially similar crypto asset.

Unlike many existing private offering exemptions, the Startup Exemption is designed to facilitate broad distribution of crypto assets. As proposed, covered investment contracts sold under the exemption would not be treated as restricted securities or otherwise subject to rule-based resale restrictions; general solicitation would be permitted; and the exemption would not limit participation to accredited investors or impose individual investment caps on retail investors. The SEC explained that these features are intended in part to facilitate the “network effects” that may be important to the development of crypto networks and applications.

The reduced regulatory burden does not mean that the offering would be disclosure-free. Before conducting a covered transaction, an issuer would be required to file a Form NOR (Notice of Reliance) with the SEC and make specified disclosures publicly available on a website free of charge. Those disclosures would address, among other matters, the issuer’s representations or promises regarding its essential managerial efforts, the relevant crypto asset and network or application, the terms of the offering, token supply and distribution, material risks and conflicts of interest. The issuer would generally be required to update its disclosures for material changes and ultimately file a transition report on Form TR.

Notably, unlike the proposed Fundraising Exemption discussed below, the Startup Exemption as currently proposed would not be limited to U.S.-organized entities. An eligible issuer could be an entity, an individual, or a group of individuals or entities. The SEC is, however, specifically requesting comment on whether U.S. incorporation, U.S. residency or other U.S.-nexus requirements should be added to the final rule.

This distinction could be particularly important for non-U.S. crypto sponsors considering access to U.S. investors.

Fundraising Exemption: A Regulation A-Style Framework for Offerings Up to $75 Million

For larger capital raises, the SEC proposes a second exemption modeled substantially on Regulation A but tailored specifically to covered investment contracts.

The proposed Fundraising Exemption would have two tiers. Tier 1 would permit offerings of up to $20 million in a 12-month period, including no more than $6 million offered by affiliated selling securityholders. Tier 2 would permit offerings of up to $75 million in a 12-month period, including up to $22.5 million offered by affiliated selling securityholders.

Unlike the Startup Exemption, an issuer seeking to rely on the Fundraising Exemption would need to file an offering statement on Form 1-CRYPTO through EDGAR and obtain SEC qualification before sales. The offering circular would include the crypto-specific narrative disclosures required under Regulation Crypto Assets, a discussion of the issuer’s financial condition and financial statements. The framework also would permit certain “testing-the-waters” communications.

The financial statement requirements would vary by tier. Tier 1 financial statements generally would not be required to be audited, although audited financial statements obtained for other purposes may need to be included. Tier 2 offerings would require audited financial statements, with the audit conducted in accordance with U.S. GAAS or PCAOB standards and subject to specified auditor independence requirements.

Both Tier 1 and Tier 2 issuers would be subject to ongoing reporting after qualification, including annual reports on Form 1-KC, semiannual reports on Form 1-SC, and specified current reports on Form 1-UC. Certain Form 1-UC events would be reportable within four business days. This is an important difference from Regulation A, under which ongoing reporting generally applies to Tier 2 but not Tier 1 issuers.

Retail investors would be permitted to participate. However, unless a purchaser is an accredited investor, the aggregate purchase price generally could not exceed 10% of the greater of the purchaser’s annual income or net worth for an individual, or 10% of the greater of annual revenue or net assets for a non- natural person. Issuers generally would be permitted to rely on purchaser representations unless they know that the representation is untrue.

The Fundraising Exemption is considerably narrower than the Startup Exemption with respect to issuer eligibility. As proposed, an issuer must be an entity organized under U.S. law. In addition, a majority of its executive officers or directors must be U.S. citizens or residents, more than 50% of its assets must be located in the United States, and its business must be administered principally in the United States. Certain blank-check companies, investment companies and issuers subject to specified SEC orders would be ineligible.

Accordingly, many offshore crypto projects—including projects that establish a U.S. subsidiary but retain management, assets and operations primarily outside the United States—may not qualify for the Fundraising Exemption without restructuring their operations. Non-U.S. issuers should therefore evaluate the proposed eligibility standards carefully before treating Regulation Crypto Assets as a potential U.S. fundraising pathway.

Investment Contract Safe Harbor: When Does the Securities Law “Wrapper” End?

Under the proposed safe harbor, an investment contract ceases to exist if the issuer has completed or otherwise permanently ceased all essential managerial efforts that it represented or promised it would undertake and is not making, and does not intend to make, new representations or promises to undertake essential managerial efforts with respect to the crypto asset. The issuer also would be required to file a Form TR, including a certification and an analysis supporting its determination.

If the conditions are satisfied, the SEC would take the position that the reporting, registration and other requirements arising from the investment contract no longer apply from that point forward.

The significance of this mechanism is that it provides a potential regulatory “off-ramp.” A project could initially raise capital in a transaction subject to the federal securities laws while the project team undertakes promised development activities, but the underlying crypto asset could later trade outside the securities-law framework once those promised essential managerial efforts have been completed or permanently ceased.

The safe harbor would not be mandatory or exclusive. Failure to qualify for Rule 400 would not necessarily mean that the crypto asset continues to be subject to an investment contract; market participants could still analyze the asset and transaction under Howey and the SEC’s March 2026 interpretation. Conversely, filing a Form TR would not prevent the SEC from challenging an issuer’s conclusion if the safe harbor conditions were not actually satisfied.

For issuers, this places increased importance on how development commitments, milestones and other representations are drafted at the outset of an offering. Promises made in white papers, offering materials, websites, social media communications and other investor-facing materials may become important evidence when determining whether the issuer has completed the “essential managerial efforts” underlying the investment contract.

Proposed Federal Preemption of Certain State Securities Requirements

Regulation Crypto Assets also proposes significant relief from state “Blue Sky” registration and qualification requirements.

Proposed Rule 500 would generally treat purchasers in offerings conducted pursuant to Regulation Crypto Assets as “qualified purchasers” for purposes of Section 18 of the Securities Act of 1933. As a result, securities offered under both the Startup Exemption and the Fundraising Exemption would generally be treated as covered securities and would benefit from federal preemption of state registration and qualification requirements.

The proposed preemption could also extend to qualifying secondary-market transactions while the issuer remains subject to, and current with, the applicable disclosure and reporting obligations under Regulation Crypto Assets. States would nevertheless retain authority to enforce their antifraud laws.

For crypto projects seeking broad distribution and secondary-market liquidity across the United States, this feature could substantially reduce the complexity associated with complying with different state registration regimes.

Implications for Market Participants

Companies, founders and investors active in the crypto sector should begin evaluating the proposal now, particularly where a U.S. capital raise, token distribution or secondary-market strategy is under consideration.

Among other matters, project sponsors should consider whether their existing or contemplated token arrangements would constitute “covered investment contracts”; carefully identify and document representations or promises that could be viewed as essential managerial efforts; evaluate whether the Startup or Fundraising Exemption could provide a more practical alternative to Regulation D, Regulation Crowdfunding, Regulation A or a registered offering; and assess whether their organizational structure and geographic footprint would satisfy the U.S.-nexus requirements applicable to the Fundraising Exemption.

Projects that may ultimately seek to rely on the Rule 400 safe harbor should also consider establishing procedures to track the development milestones and managerial efforts disclosed to investors. The ability to demonstrate, with a clear factual record, that those efforts have been completed or permanently ceased may become important in supporting a future determination that the investment contract has ended.

However, it should be noted that market participants should not begin structuring current transactions on the assumption that the proposal will be adopted in its current form. The SEC has requested comment on numerous substantive issues—including offering limits, issuer eligibility, investor limitations, disclosure requirements, state-law preemption and the conditions for the investment contract safe harbor—and the final rules may differ materially from the proposal. Comments on the proposal are due October 20, 2026. Market participants that could be materially affected by the proposed issuer eligibility requirements, offering limits, disclosure obligations, investor limitations, safe harbor conditions or state-law preemption provisions may wish to consider participating in the comment process.

If you have any questions, please contact Anand Saha (asaha@cronelawgroup.com), Liang Shih (lshih@cronelawgroup.com), Hongye (Eve) Mao (hmao@cronelawgroup.com), Daisy Dai (DDai@cronelawgroup.com) or your usual Crone contact.

Delaware Court of Chancery’s Guilbeau v. Footprint decisions highlight the limits of contractual protections and the importance of board process.

Executive Summary

In two companion rulings decided on April 30, 2026 and May 11, 2026, the Delaware Court of Chancery dismissed every contract claim brought by early-stage investors whose preferred stock protections were wiped out in a dilutive financing and then allowed the core fiduciary duty claims arising from that same financing to proceed under the entire fairness standard. This case shows that a transaction can be fully permitted by the governing documents and still fail as a matter of board process.

That split is the lesson. Vice Chancellor Laster held that the governance agreement permitted what the company did, that Delaware will not imply protections the parties did not write down and that a director designated by a class owes his duties to the corporation and all stockholders rather than to the class that appointed him. Judged as a matter of board process rather than contract, however, the same transaction survived dismissal, with continuing exposure for directors, officers and the fund sponsors whose designees approved it.

To summarize, winning the contract argument does not necessarily end the case. A transaction can be fully authorized by the governing documents and still generate years of fiduciary litigation if the process around it looks opportunistic, compressed or concealed. The 2025 amendments to Section 144 of the Delaware General Corporation Law (DGCL) now offer a more reliable path through that risk, but only for boards that design the process in advance.

Background

Approximately 80 friends and family investors bought Class A preferred stock in Footprint International Holdco, Inc. in 2019 and 2020, raising about $90 million. Their governance agreement gave them a 1.4x liquidation preference, the top of the waterfall and the right to designate a director whose affirmative vote was required before the company could alter their rights, issue senior stock or amend the charter. Three institutional funds then invested $150 million and took board designation rights on a 10-member board.

Over the next two years the company amended the governance agreement five times without notice to or consent from the original investors, each time carving a new class of senior stock out of the protective provision and filing a charter amendment authorizing that class days later. After a SPAC merger collapsed and liquidity tightened, the board formed a special committee that could recommend but not approve or veto. It declined three competing proposals at materially higher valuations and approved a $500 million financing led by the same funds at half the valuation the company itself had used months earlier. The funds took 90% of the round. The rest was offered to other holders on a three-week timeline with diligence conditioned on subscribing first. All Class A protections were eliminated. On the company’s own projections, at a $1.2 billion exit every other constituency would be made whole while non-participating Class A holders would recover 4% of their investment.

Key Holdings

The contract claims were dismissed in full

• No implied constituency duty. Delaware does not recognize constituency directors. A director designated by a class, a fund or a contract owes fiduciary duties to the corporation and the entire body of stockholders. Because well-established Delaware law already governed the question, there was no gap for the implied covenant to fill.

• No implied right to a permanent board seat or to additional vetoes. The governance agreement permitted amendment, and nothing barred an amendment eliminating the designated director. The express protective provisions already covered senior issuances, charter amendments and interested transactions, so the investors could not claim an implied entitlement to better ones.

• Where a contract confers discretion, the bar for challenging its exercise is high. A party must not exercise a discretionary right maliciously and without any justification rationally related to the shared contractual purpose. The complaint conceded that the company needed financing, which gave the defendants a contractually grounded reason for the deal.

• Tortious interference and promissory estoppel fell with the contract claims. Accepting appointment as the designated director is not a reasonably conceivable promise to protect the appointing class, because that promise would conflict with the director’s actual fiduciary duties.

The fiduciary claims largely survived

• Entire fairness applied. 5 of 10 directors were conflicted at the pleading stage, including the company’s chief technology officer, whom the court treated as non-independent because the financing was essential to the company’s survival and therefore to his job. A recommend-only special committee offered no protection under the law that governed prior to the 2025 amendments to Section 144 of the DGCL.

• The pay-to-play structure was arguably coercive. Nominal equal access did not sanitize the deal. Non-participating holders could not preserve the status quo, and the access was not genuinely equal given the 90% pre-allocation, the three-week decision window and the conditioning of diligence on prior subscription. The valuation gap supported an inference of unfairness on price.

• Secrecy became evidence even though the amendments were authorized. The contract ruling confirmed no notice or consent was owed. The fiduciary ruling still treated the two-year pattern of quiet amendments as support for unfair dealing. Technically permitted conduct can be procedurally unfair.

• Sponsors faced aiding and abetting exposure, but the controller claim failed. Considering each fund employed or was closely affiliated with its board designee, the designee’s knowledge of the breach was imputed to the fund, and the fund’s participation could be inferred from that relationship and from its role in shaping the financing. A fund does not stand outside the transaction because it acted through a designee. Separately, a 26.4% block did not establish transaction specific control given the other large institutional blocks and a single designee out of 10.

Why Section 144 did not apply

The 2025 amendments do not reach matters already pending as of February 17, 2025, so the court applied prior law. Going forward, where a conflicted board majority acts without a controlling stockholder, Section 144(a) permits business judgment style protection through approval by a committee of at least two disinterested directors who are informed of all material facts and act in good faith without gross negligence, or through an informed and uncoerced vote of disinterested stockholders. There is no statutory requirement to delegate veto authority, so an advisory committee of the kind that failed here could qualify today, provided its members are disinterested, informed and act in good faith. The safe harbor does not cure a coercive structure or incomplete disclosure.

Practical Implications

• Identify your disinterested directors before the deal. Confirm in writing, in the minutes, that at least two directors are disinterested and independent as to the transaction and its participants. Assume an officer-director will not qualify where the transaction affects the company’s survival.

• Document the informational record, not just the vote. The safe harbor turns on directors being informed of all material facts. Minutes should reflect what was disclosed, which alternatives were considered and why they were rejected. Three outside proposals were passed over in present instance without documented engagement.

• Give notice even when the documents do not require it. The company owed no notice and gave none, and the secrecy still became evidence. Where amendments erode minority rights, inform the affected holders at the time, not when the amendment is to be relied upon.

• A designee is not your agent. Sponsors should not expect a designated director to vote their book. Consider recusal or screening on transactions in which the fund participates and satisfy yourself the process would survive entire fairness review even where you expect the safe harbor to apply.

• Make participation rights real. If non-participating holders cannot preserve the status quo, the structure is coercive regardless of nominal access. Offer proportionate allocation, a workable timeline and diligence before commitment rather than after.

• Investors should protect the protection itself. Delaware will not imply protections you could have negotiated for. Require class level consent for any amendment to the protective provisions, extend them expressly to mergers, conversions and recapitalizations and add a standing notice covenant. A books and records demand under Section 220 of the DGCL was what surfaced the concealed amendments here.

Conclusion

Guilbeau reaffirms a strict view of freedom of contract. Sophisticated parties get the bargain they wrote, and the courts will not repair a contracted-for deal just because it turned out badly for one side. The companion ruling shows that this same principle cuts both ways. Contractual authorization is a defense to a breach of contract claim. It is not a defense to a claim that the board ran an unfair process.

The revised Section 144 of the DGCL gives boards a more predictable route to deference than the law applied here, and we expect it to resolve many of the disputes considered in this present case. However, the newfound predictability does not change the fundamentals. Disinterested decision makers, full disclosure, a good faith process and an uncoerced choice for stockholders remain the price of protection. The Section 144 amendments will lessen fiduciary duty litigation, but they will not foreclose it.

Please contact us to discuss how the developments discussed in this alert affect your governance documents, board composition or a contemplated transaction.

1. Guilbeau v. Footprint International Holdco, Inc., C.A. No. 2024-0968-JTL (Del. Ch. 2026) (Laster, V.C.). The opinions are available from the Delaware Judiciary:

https://courts.delaware.gov/opinions/download.aspx?id=395120

https://courts.delaware.gov/opinions/download.aspx?id=395520

This alert is provided for general informational purposes only and does not constitute legal advice or create an attorney client relationship. Please contact your regular contact at the firm to discuss how these developments may affect your company.

SEC Stays Nasdaq’s New $5 Million MVLS Delisting Rule

Just a week after it approved Nasdaq’s new $5 million Market Value of Listed Securities continued listing requirement (the “MVLS Requirement”), the SEC automatically stayed the rule change and thus gave a lifeline to many small-cap listed companies. The stay was triggered after the Small Public Company Coalition (“SPCC”), a coalition representing small public companies, investors, financial institutions, and other participants in the small and microcap markets, filed a notice of intent to petition for review of the approval. As a result, the MVLS Requirement is not currently in effect, and no company can be suspended or delisted under it unless and until the Commission lifts the stay.

A Pause, Not a Reprieve

As discussed in the prior Crone memo on this topic, the MVLS Requirement was particularly strict: no cure period, no stay of trading during an appeal, and a Hearings Panel with little power to grant extra time. The SEC’s stay means none of that currently applies. While the stay is in place, no Nasdaq-listed company can be suspended or delisted under the MVLS Requirement, and the 30-business-day countdown that would otherwise trigger a Staff Delisting Determination is not running for anyone.

That said, clients should not treat this as the final word on the matter. While the SEC stay is automatic and mechanical, it says nothing about how the SEC will ultimately rule on this after further review. The rule could be affirmed, modified, or sent back for further review, and there is no deadline for that decision, leaving market participants with no sense of certainty about what may come next. This is a pause, not a reprieve, and the underlying pressure on small-cap issuers has not gone away.

Effect on the Market, For Now

For issuers whose MVLS has been hovering near or below the $5 million line, this is genuine, if provisional, relief. Companies that had been rushing to raise capital or engineer a market-value bump purely to avoid an imminent determination now have the opportunity to make that decision on the merits rather than under duress.

We would encourage clients in this position to use this opportunity productively: keep monitoring MVLS on an ongoing basis, keep any remedial plans in motion, and treat this window as a chance to get ahead of the issue before the rule potentially returns. We at Crone remain ready for conversations on how companies who may be affected by this can proactively plan for the potential effects.

If you have any questions, please contact Anand Saha (asaha@cronelawgroup.com), Liang Shih (lshih@cronelawgroup.com), Daisy Dai (DDai@cronelawgroup.com), Hongye (Eve) Mao (hmao@cronelawgroup.com) or your usual Crone contact.

SEC Approves Nasdaq Rule Establishing New $5 Million Market Value of Listed Securities Requirement for Continued Listing

Overview

Nasdaq has spent the better part of the last five years narrowing the path for small, thinly traded companies to remain on its markets, and on July 22, 2026, that campaign reached its sharpest point yet. The Securities and Exchange Commission (the “Commission”) approved a proposed rule change filed by The Nasdaq Stock Market LLC (“Nasdaq”), adopting a new continued listing requirement. Under the new rule, companies listed on the Nasdaq Global Select Market, Nasdaq Global Market, and Nasdaq Capital Market must maintain a minimum Market Value of Listed Securities (“MVLS”) of at least $5 million on a continued-listing basis (the “MVLS Requirement”). What sets this rule apart from the usual continued listing framework is not the threshold itself, but the penalty for missing it: a sustained failure to satisfy the MVLS Requirement now results in immediate suspension and delisting, with no cure or compliance period, and an appeal to Nasdaq’s Hearings Panel will not stay the suspension.

For issuers, boards, and investors accustomed to Nasdaq’s more forgiving deficiency framework, with its 180-day grace periods, extensions, and multiple opportunities to regain compliance, this is a meaningfully different regime. Below we walk through how the rule came about, what it actually requires, and what it is likely to mean in practice for companies operating near the threshold.

We urge all of our clients who may be affected by this to proactively talk to us here at Crone about important steps that may be taken to plan for and protect against the outcomes of this major change in the Nasdaq listing landscape.  We are standing by to assist.

Why Now: The Road to the MVLS Requirement

The rule did not appear overnight. Nasdaq first floated the proposal in January 2026, and the Commission took the relatively unusual step in April of instituting formal proceedings to decide whether to approve or reject it. Nasdaq revised the proposal in June 2026, primarily to give its Hearings Panel somewhat broader discretion on appeal, and the Commission approved the amended version in July.

The rule’s underlying rationale is straightforward: Nasdaq and the Commission treat a low stock price as a curable problem, since companies can often resolve it quickly through a reverse split. A market value below $5 million is treated differently. Rather than a temporary condition, it is viewed as a structural indicator that the company can no longer sustain a viable trading market. On that view, an extended compliance period would not meaningfully change the outcome; it would simply delay a listing that is, in substance, already unsustainable.

This rule also fits a broader pattern. It is one of several steps Nasdaq has taken in recent years to tighten continued listing standards for small and micro-cap issuers, following a period in which the number of non-compliant issuers rose sharply, from a small handful earlier in the decade to well over a hundred at the peak, and has remained elevated since despite some decline from that high. Viewed in that context, the MVLS Requirement is less an isolated technical fix than the latest, and most severe, step in a sustained effort to move persistently low-value companies off Nasdaq’s markets rather than allow them to remain listed in a non-compliant state.

Key Provisions of the New Rule

New MVLS Threshold

Threshold: Under amended Nasdaq Rules 5450(a)(3) and 5550(a)(6), companies listed on the Nasdaq Global Select Market, Nasdaq Global Market and Nasdaq Capital Market must maintain an MVLS of at least $5 million, calculated as closing bid price multiplied by shares outstanding, aggregated across share classes.

Immediate Suspension and Delisting

No cure period: Under amended Nasdaq Rule 5810(c)(1), a company that fails to maintain the $5 million MVLS threshold for 30 consecutive business days will receive a Staff Delisting Determination, and its securities will be immediately subject to suspension and delisting under amended Nasdaq Rule 5810(c)(3)(C), with no cure or compliance period available.

No Automatic Stay Pending Appeal

Trading pending appeal: Under amended Nasdaq Rule 5815(a)(1)(B), a timely request for Hearings Panel review will not stay the suspension of trading where the deficiency relates to the MVLS Requirement. The company’s securities will generally trade in the over-the-counter (“OTC”) market pending the Hearings Panel’s written decision.

Hearings Panel Exception

Available relief: Under new Nasdaq Rule 5815(c)(1)(I), the Hearings Panel may (a) reverse the delisting decision if it finds the Staff Delisting Determination was issued in error, or (b) grant an exception of up to 180 days from the Staff Delisting Determination for the company to demonstrate that it satisfies all requirements for initial listing, which are generally higher than continued listing standards.

What This Means for the Market

The practical effect will likely show up quickly. Because the 30-business-day countdown has presumably already been running informally for companies that were trading below $5 million when the rule took effect, the first wave of Staff Delisting Determinations under this framework could begin to surface within a matter of months. Companies hovering near the threshold no longer have the luxury of treating a dip below $5 million as a routine deficiency letter to be dealt with later. By the time Nasdaq staff issues a determination, the clock has effectively already run out.

The rule also changes the economics of an appeal. Under the ordinary continued listing framework, a Hearings Panel request buys a company real time and, often, continued trading on Nasdaq while the matter is considered. Here, the securities are expected to move to the OTC market for the duration of any appeal, and the Panel’s authority is narrow. It can find that Staff made an error, or grant extra time to meet Nasdaq’s tougher initial listing standards, but it cannot simply extend the clock on the existing deficiency the way it might for a bid-price or equity problem. For a company that depends on Nasdaq-level liquidity, analyst coverage, or index eligibility to raise capital, even a temporary shift to the OTC market during an appeal can be damaging in its own right, independent of how the appeal is ultimately resolved.

There is also a market-structure dimension worth flagging for clients. The rule is explicitly aimed at the segment of the market most associated with thin trading, low institutional ownership, and susceptibility to manipulation, often smaller, newer, or reverse-merger companies without a natural, deep shareholder base. Pushing that population toward the OTC market more quickly, with less opportunity to fight a determination while remaining listed, will likely accelerate an existing trend of consolidation among Nasdaq’s smallest issuers. At the same time, critics’ concerns are not unreasonable. A company can fall below $5 million in market value for reasons that have nothing to do with fraud, such as a broad market downturn, sector rotation, or a single bad quarter, and this rule does not distinguish between that company and one that is genuinely being propped up or manipulated. The absence of a cure period means the rule will, by design, sometimes catch companies that a more forgiving standard would have let recover.

Practical Takeaways

• Monitor proactively, not reactively. Given the immediate and incurable nature of this deficiency, listed companies should track their MVLS (closing bid price multiplied by shares outstanding, aggregated across share classes) on an ongoing basis, rather than waiting for a Nasdaq staff notice, since a sustained MVLS below $5 million for 30 consecutive business days now triggers automatic suspension and delisting with no cure period.

• Treat a Hearings Panel appeal as limited protection. The appeal will not stay the suspension, the company’s shares will trade OTC in the interim, and the Panel’s authority is narrow, permitting it only to reverse a determination issued in error or to grant up to 180 days for the company to meet Nasdaq’s more stringent initial listing standards.

• Plan ahead of the threshold, not at it. Companies trading in the vicinity of $5 million in market value should consider, well before any deficiency arises, the tools available to build a cushion, such as additional capital raises or strategic transactions, since by the time a Staff Delisting Determination issues, most of the usual remedial runway will already be gone.

If you have any questions, please contact Anand Saha (asaha@cronelawgroup.com), Liang Shih (lshih@cronelawgroup.com), Daisy Dai (DDai@cronelawgroup.com), Hongye (Eve) Mao (hmao@cronelawgroup.com) or your usual Crone contact.

SEC Issues Exemptive Order Shortening Minimum Offering Period for Non-Convertible Debt Tender and Exchange Offers

Overview

On June 30, 2026, the ’SEC issued an exemptive order (the “Order”) permitting tender or exchange offers for non-convertible debt securities to remain open for a minimum offering period of just five business days, rather than the 20 business days generally required under Exchange Act Rule 14e-1(a). The Order supersedes the ’prior position that had been put forward through no-action relief letters, and thus formalizes and expands the abbreviated offering period into a standing exemptive order.

Background

Tender offers generally must remain open for at least 20 business days under Exchange Act Rule 14e-1(a). Since 1986, the SEC staff has allowed shorter offering periods for non-convertible debt tender offers through a series of no-action letters, most recently a five business day minimum period under a January 2015 no-action letter (the “2015 Letter”). On June 30, 2026, the SEC replaced the 2015 Letter with a formal exemptive order (the “Order”), expanding and codifying this five business day relief for qualifying non-convertible debt tender and exchange offers (a “Five Business Day Tender Offer”).

Conditions for a Five Business Day Tender Offer

To qualify for the shortened five business day minimum offering period, an offer must satisfy the following conditions:

Eligible Offerors and Securities

• Offeror: The offer must be made by the issuer of the subject non-convertible debt securities, a direct or indirect wholly owned subsidiary of the issuer, or a parent company that directly or indirectly owns 100% of the issuer'’s capital stock (other than directors'’ qualifying shares).

• Eligible securities: The offer may be made for any class or series of non-convertible debt securities, regardless

Consideration and Proration

• Consideration: The offer must be made solely for cash and/or "Qualified Debt Securities," meaning non-convertible debt securities that are substantially similar in all material respects (including but not limited to issuer, guarantors, collateral, lien priority, 2 covenants, and other terms) to either the securities subject to the offer or the issuer'’s most recent pari passu issuance, except for maturity, interest payment and record dates, redemption provisions, and interest rate, provided that interest must be payable only in cash.

• Pro-ration: If the offer is for less than all outstanding securities of the class or series and is oversubscribed, securities must be accepted for payment on a pro rata basis (disregarding fractions) according to the amount tendered by each holder.

• Exchange offers: If Qualified Debt Securities are offered as consideration in an exchange offer, participation must be limited to Qualified Institutional Buyers (pursuant to Rule 144A), non-U.S. persons (pursuant to Regulation S), and/or institutional accredited investors (pursuant to Regulation D).

Restrictions on Timing and Context

• No consent solicitation: The offer must not be made in connection with a solicitation of consents to amend the indenture (or similar governing agreement) where the amendment requires the consent of holders of more than a simple majority of the outstanding principal amount of the subject securities.

• No default: The offer must not be made while a default or event of default exists under the indenture or any other material credit agreement to which the issuer is a party.

• No bankruptcy or restructuring context: The offer must not be made while the issuer is subject to bankruptcy or insolvency proceedings, has commenced a consent solicitation for a “pre-packaged” bankruptcy, or has board-authorized discussions with creditors regarding a consensual restructuring.

• No proximity to extraordinary transactions: The offer may not commence within ten business days after the first public announcement or consummation of a change of control or other extraordinary transaction (such as a merger, reorganization, liquidation, or sale of substantially all assets), nor within ten business days after announcement or consummation of a material asset purchase, sale, or transfer requiring pro forma financial information pursuant to Article 11 of Regulation S-X.

• No competing or layering offers: The offer must not be made in anticipation of or in response to other tender offers for the issuer'’s securities, nor made concurrently with another tender offer for a different class or series of the issuer'’s securities if the effect would be to add obligors, guarantors, or collateral, or increase lien priority.

Disclosure and Announcement Requirements

• Commencement announcement: The offer must be announced by 10:00 a.m. Eastern time on the commencement date via a widely disseminated press release or wire service, including the offeror'’s identity, the securities sought, the consideration offered, the expiration date, proration procedures (if applicable), and a hyperlink to the offer materials; the offeror must also use commercially reasonable efforts to email the announcement to subscribing investors and issue a results press release promptly after consummation.

• Changes to amount or consideration: Any increase or decrease in the amount of securities sought (other than an increase of up to 2% of the class or series) or any change in the consideration offered must be publicly announced no later than 9:00 a.m. Eastern time on the third business day before expiration.

• Other material changes: Any other material change to the offer'’s terms must be publicly announced no later than 9:00 a.m. Eastern time on the second business day before expiration.

• Proration factor: For offers that are for less than all outstanding securities, the offeror must use commercially reasonable efforts to announce the proration factor by 10:00 a.m. Eastern time on the business day following expiration, or as soon as practicable thereafter.

Withdrawal Rights and Payment

• Withdrawal rights: Tendered securities must be withdrawable at least until the earlier of the offer'’s expiration or, if extended, the tenth business day after commencement, and at any time after the 60th business day after commencement if the offer has not closed by then.

• Payment timing: The offeror must not pay the consideration until promptly after expiration of the offer, consistent with Exchange Act Rule 14e-1(c).

If you have any questions, please contact Anand Saha (asaha@cronelawgroup.com), Liang Shih (lshih@cronelawgroup.com), Daisy Dai (DDai@cronelawgroup.com), Hongye (Eve) Mao (hmao@cronelawgroup.com) or your usual Crone contact.

SEC Proposes Major Overhaul of Capital Markets Access and Public Company Reporting

The SEC has proposed sweeping reforms to expand access to public capital markets and significantly reduce reporting and compliance burdens for public companies.

On May 19, 2026, the Securities and Exchange Commission (“SEC”) proposed significant rule changes that, if adopted, would fundamentally expand access to the public capital markets for a broader range of issuers while significantly reducing the compliance burden for the vast majority of public companies. The proposals address a longstanding concern; the cost and complexity of going and staying public has grown considerably over the decades, causing many companies to seek capital through private markets instead. The SEC is now proposing to extend many benefits previously reserved for only the largest and most established companies to a much broader range of issuers.

Registered Offering Reform

Expanded Shelf Registration Access (Form S-3 Amendments):

The proposed amendments would significantly broaden access to Form S-3, the short-form registration statement that allows eligible issuers to register securities offerings more quickly and cost-effectively than through a full Form S-1 filing. Key changes include:

Amendment to Form S-3 Registrant Requirements

• Exchange Act Reporting (One-Year Seasoning, Current, and Timely Requirements):

  The proposed amendments would eliminate the current requirement that an issuer must have been an Exchange Act reporting company for at least 12 calendar months before filing a Form S-3. Under the proposed amendments, an issuer would immediately become eligible to use Form S-3 upon having a class of securities registered under section 12(b) or 12(g), or becoming subject to section 15(d), of the Exchange Act — meaning issuers in their first year as public companies could access Form S-3 as soon as they are current and timely in their Exchange Act reporting obligations, which requirement is retained.

• Certain Failures to Make Payments and Defaults:

  The proposed amendments would remove the current requirement that conditions Form S-3 eligibility on an issuer's satisfaction of certain factors related to payment defaults and failures, meaning that an issuer's history of financial difficulties or defaults would no longer disqualify it from using Form S-3.

• Electronic Filings and Interactive Data Files:

  The proposed amendments would remove two existing Form S-3 eligibility conditions: (i) General Instruction I.A.7(a), which requires an issuer to have filed all required electronic filings with the Commission; and (ii) General Instruction I.A.7(b), which requires an issuer to have submitted all required Interactive Data Files electronically to the Commission during the preceding 12 calendar months.

• Prohibition on Use of Form S-3 by Certain Ineligible Issuers:

  Although the proposed amendments would broaden Form S-3 eligibility, certain categories of issuers that pose a greater risk of non-compliance with Federal securities laws would be prohibited from using the form and would instead be required to use Form S-1. Specifically, the following categories of issuers would be prohibited from using Form S-3:

  • Newly Added: “BSP issuers,” defined as issuers that are, or within the past three years were, a blank check company, a shell company other than a business combination related 2 shell company, or an issuer in an offering of penny stock, with an exception for former Special Purpose Acquisition Companies (“SPACs”) that have successfully completed a de-SPAC transaction and are no longer shell companies at the time of filing;

  • Existing Restrictions (Carried Over from Rule 405): The remaining prohibited categories are not new and are carried over from the existing “ineligible issuer” definition under Rule 405. Issuers falling into any of the following categories would continue to be barred from using Form S-3: (1) convicted of a felony or misdemeanor; (2) subject to an antifraud-related court or administrative order; (3) subject to a Section 8 refusal or stop order; or (4) facing a pending Section 8A proceeding, in each case within the past three years.

• Prohibition on Use of Form S-3 by Certain Other Issuers:

  In addition to the ineligible issuer prohibitions above, four additional categories of issuers would be prohibited from using Form S-3 at any time: (i) foreign governments and Foreign Private Issuers (“FPIs”); (ii) asset-backed issuers, who are directed to use Form SF-3; (iii) investment companies; and (iv) Business Development Companies (“BDCs”), with both investment companies and BDCs required to use other forms specifically adopted by the Commission for their respective issuer types.

• Successor Registrants:

  The proposed amendments would eliminate the current rule that allows a successor registrant to rely on its predecessor's Exchange Act reporting history for Form S-3 eligibility. Going forward, a successor registrant would be treated as a new Exchange Act reporting company and must rely solely on its own reporting history.

Amendment to Form S-3 Transaction Requirements

• $75 Million Public Float:

  The proposed amendments would eliminate the $75 million minimum public float requirement currently in General Instruction I.B.1 of Form S-3. Under the proposed amendments, any issuer that satisfies the Form S-3 registrant requirements would be eligible to use Form S-3 for any primary or secondary offering of its securities, regardless of the size of its public float.

• Elimination of Baby Shelf Rule and Other Transaction Requirements:

  The proposed amendments would eliminate all transaction requirements under Form S-3's General Instructions I.B.2 through I.B.6. Most notably, this includes the elimination of the “baby shelf” rule under General Instruction I.B.6, which currently caps smaller issuers' primary offerings at one-third of their public float in any rolling 12-month period. Conforming changes would also be made to other parts of Form S-3 and related rules and forms.

• Form S-3 Eligibility of Majority-Owned Subsidiaries:

  The proposed amendments would allow majority-owned subsidiaries that are not Exchange Act reporting companies to register Guarantee-Related Offerings on their parent's Form S-3, provided the parent is eligible to use Form S-3 and both are co-registrants on the same registration statement.

• At-the-Market (“ATM”) Offerings:

  The proposed amendments would expand the pool of issuers eligible to conduct ATM offerings as a result of the broader Form S-3 eligibility expansion. To protect investors, ATM offerings would be limited to securities listed or traded on a qualified “trading market,” defined as a national securities exchange or a Commission-designated market that meets certain minimum standards, such as minimum bid price, public float, and trading volume requirements.

Amendments to Well-Known Seasoned Issuers (“WKSIs”) Eligibility and Enhanced Registration and Communication Benefits:

The proposed amendments would replace the existing WKSI framework with a new three-tier structure that extends enhanced registration and communication benefits to a significantly broader range of issuers. Under the current framework, only issuers with a public float of at least $700 million or at least $1 billion in non-convertible securities issued in primary registered offerings over the prior three years qualify as WKSIs. The proposed amendments would remove these thresholds entirely and replace them with an exchange-listing-based tier structure as follows:

New Issuer Tier Framework:

• Tier 1 — Form S-3 Eligible Issuer:

  Any domestic issuer that is current and timely in its Exchange Act reporting obligations and is not an “ineligible issuer” under Rule 405. No public float threshold or exchange listing is required.

• Tier 2 — Eligible Listed Issuer (“ELI”):

  A Tier 1 issuer that additionally has at least one class of common equity securities listed on a national securities exchange. No public float threshold is required.

• Tier 3 — Seasoned Eligible Listed Issuer (“SELI”):

  A Tier 2 issuer that has additionally been subject to Exchange Act reporting requirements for at least 12 calendar months, representing the highest tier with the most comprehensive benefits.

The table below summarizes the specific benefits available to issuers at each tier:

Enhanced Registration and Communication	Current Rule	Proposed Rule
Rule 139 – research report exemption	WKSIs Any non-WKSI eligible for primary offerings under I.B.1 or I.B.2 of Form S-3	All Form S-3 eligible issuers
Rule 163 – pre-filing offers	WKSIs	ELIs
Rule 163A – pre-filing offers for Form S-8 offerings	WKSIs	ELIs
Rule 164 – post-filing Free Writing Prospectuses ("FWPs") for Form S-8 offerings	WKSIs	ELIs
Rule 413 – ability to register additional classes of securities, or securities of a majority-owned subsidiary	WKSIs	ELIs
Rule 430B(a) – ability to omit: (i) information as to whether the offering is a primary offering or an offering on behalf of persons other than the issuer, or a combination thereof, (ii) the plan of distribution for the securities, (iii) a description of the securities registered other than an identification of the name or class of such securities, and (iv) the identification of other issuers	WKSIs	ELIs
Rule 430B(b) – for resale registration statements, may omit the identities of selling security holders and amounts of securities to be registered on their behalf	WKSIs Any non-WKSI eligible for primary offerings under I.B.1 of Form S-3, subject to certain conditions	All Form S-3 eligible issuers
Rule 433 – prospectus not required to accompany or precede FWPs	WKSIs Any non-WKSI that is Form S-3 eligible for primary offerings under I.B.1 or conducting an offering pursuant to I.B.1, I.B.2 or I.C of Form S-3	All Form S-3 eligible issuers
Rule 456(b)/457(r) – "pay-as-you-go"	WKSIs	ELIs
Rule 462 – automatic shelf registration	WKSIs	SELIs

• Availability of Enhanced Registration and Communication Benefits to Majority-Owned Subsidiaries:

  The proposed amendments would permit majority-owned subsidiaries of ELIs and SELIs to access the Enhanced Registration and Communication Benefits, including automatic shelf registration. A subsidiary that does not independently qualify as an ELI or SELI may still access these benefits based on its parent's status, provided that the subsidiary and parent are co- registrants on the same registration statement and the subsidiary is either registering a Guarantee-Related Offering on Form S-3 or is independently eligible to use Form S-3 and is registering non-convertible securities other than common equity.

• Elimination of WKSI Category of Issuer for Domestic Issuers:

  The proposed amendments would retain the WKSI definition in Rule 405 but amend it to clarify that only FPIs could qualify as WKSIs, which would continue to qualify under the existing criteria.

Form S-1 Amendments — Incorporation by Reference

Form S-1 is the default registration statement available to any domestic issuer not eligible for another form and, unlike Form S-3, is subject to SEC staff review and does not permit shelf or delayed primary offerings. Currently, Form S-1 permits issuers to backward incorporate previously filed Exchange Act reports by reference only if the issuer has filed a Form 10-K for its most recently completed fiscal year, and permits forward incorporation, automatic updating of the registration statement via future Exchange Act filings, only for Smaller Reporting Companies (“SRCs”). The proposed amendments would make the following key changes:

• Elimination of the Form 10-K Requirement for Backward Incorporation:

  The proposed amendments would eliminate the requirement that an issuer must have filed a Form 10-K for its most recently completed fiscal year before being eligible to incorporate previously filed Exchange Act reports by reference. This change would particularly benefit issuers in their first year of Exchange Act reporting who have not yet filed an annual report.

• Extension of Forward Incorporation by Reference:

  The proposed amendments would expand forward incorporation by reference, which allows automatic updating of the registration statement via future Exchange Act filings, to all eligible Form S-1 issuers, not just SRCs. The SEC describes the current limitation as “anomalous,” as it forces larger issuers to file costly post-effective amendments and prospectus supplement updates.

• Other Changes:

  The proposed amendments would also (i) prohibit BSP issuers from using incorporation by reference; (ii) amend disclosure requirements for material changes, annual financial statements, and periodic report incorporation to align with the elimination of the Form 10-K filing condition; and (iii) no longer allow FPIs to use Form S-1.

Form S-1 Amendment — FPIs, Investment Companies, and BDCs:

The proposed amendments would amend Form S-1 to explicitly prohibit three categories of issuers from using the form: (i) FPIs, who may instead file on Form F-1; (ii) investment companies; and (iii) BDCs, with both investment companies and BDCs required to use other forms specifically adopted by the Commission for their respective issuer types.

Preemption of State Securities Law Registration and Qualification

The proposed amendments would add a new definition of “qualified purchaser” to Rule 146 under Section 18(b)(3) of the Securities Act, which would preempt state securities law registration and qualification requirements for all registered offerings. Under this definition, any person to whom securities are offered or sold pursuant to a registered offering would be deemed a “qualified purchaser,” making such securities “covered securities” and therefore exempt from state-level registration and qualification requirements. Notably, states would retain their authority to investigate and bring enforcement actions for fraud, as well as to require notice filings for fee purposes.

Other Rule Amendments

• Delaying Amendments:

  The proposed amendments would revise Rule 473 so that registration statements would automatically be deemed delayed unless the issuer includes a legend on the facing page stating that effectiveness will follow section 8(a) of the Securities Act, eliminating the current requirement to file a separate delaying amendment. Issuers who want effectiveness on the twentieth day after filing must affirmatively include this legend on the registration statement's facing page.

• Elimination of Certain Conditions Relating to Age of Financial Statements:

  The proposed amendments would eliminate the income-related conditions in Rules 3-01(c)(2) and (3) and 8-08(b)(2) and (3) of Regulation S-X. As a result, SRCs and non-reporting companies would have 90 days after fiscal year end to provide audited annual financial statements regardless of timing of a registration or proxy statement, and non-SRC Exchange Act reporting companies that have filed all required reports would need to provide audited financial statements in a registration statement no later than their Form 10-K due date based on filer status.

Enhancement of Emerging Growth Company (“EGC”) Accommodations and Simplification of Filer Status for Reporting Companies

New Two-Tier Filer Status Framework

The SEC's second proposal would overhaul the existing public company reporting framework by replacing the current five-category filer system (large accelerated filers, accelerated filers, non-accelerated filers, SRCs, and emerging growth companies) with two straightforward categories: Large Accelerated Filer (“LAF”) and Non-Accelerated Filer (“NAF”). The accelerated filer and SRC categories would be eliminated entirely, with NAF becoming the default status for all Exchange Act reporting companies until they qualify as an LAF. The two categories are defined as follows:

• LAF:

  The proposed amendments would significantly tighten the LAF definition in three key respects: (i) raise the public float threshold from $700 million to $2 billion; (ii) require the threshold to be met for two consecutive fiscal years using a 10-trading-day average stock price, rather than a single day's closing price; and (iii) extend the seasoning requirement from 12 to 60 consecutive calendar months of Exchange Act reporting. LAFs would retain their current filing deadlines of 60 days after fiscal year end for Form 10-K and 40 days after quarter end for Form 10-Q.

• NAF:

  Any issuer that does not qualify as an LAF would be classified as a NAF, the default status for all Exchange Act reporting companies. Every registrant would begin as a NAF at IPO and remain so for at least five years, with filing deadlines of 90 days after fiscal year end for Form 10-K and 45 days after quarter end for Form 10-Q.

Extended Disclosure Accommodations for NAFs

• Internal Control over Financial Reporting (“ICFR”) and the Auditor Attestation Requirement:

  NAFs would be exempt from the ICFR auditor attestation requirement under Sarbanes-Oxley Section 404(b). NAFs would still be required to comply with Section 404(a) (management's own assessment of ICFR) and obtain a financial statement audit, but would not be required to obtain a separate auditor attestation. Management’s assessment and report on ICFR effectiveness would still be required of all NAFs.

• Extension of SRC and EGC Accommodations to All NAFs:

  All NAFs would receive the scaled disclosure accommodations currently available only to SRCs and EGCs, making separate reliance on Jumpstart Our Business Startups Act EGC provisions unnecessary for most companies. Key accommodations include:

  • SRC Accommodations Extended to All NAFs:

    • Two (not three) years of audited financials, Management’s Discussion and Analysis, and compensation tables; three (not five) named executive officers

    • Exemption from: risk factors, stock performance graph (except for NAFs that are investment companies), supplementary financial information, pay ratio disclosure, pay versus performance disclosure, market risk disclosures, Compensation Discussion and Analysis, certain compensation tables, related party policies, compensation committee reports, compensation committee interlocks and insider participation disclosure, and resource extraction disclosures

    • Scaled financials under Article 8 of Regulation S-X, provided that investment companies would not be permitted to rely on Article 8; BDCs and face-amount 7 certificate companies would receive equivalent relief under new Rule 3-19, including the ability to provide two rather than three years of statements of operations and cash flows

    • All registrants must disclose unresolved SEC staff comments on Forms 10-K/20-F received 180 or more days before fiscal year end

  • EGC Accommodations Extended to All NAFs:

    • Exemption from pay-versus-performance disclosure

    • Exemption from say-on-pay votes, frequency of say-on-pay votes, and golden parachute compensation disclosure in M&A transactions

    • Option to defer compliance with new or revised Financial Accounting Standards Board (“FASB”) accounting standards until the date that a private company is required to comply with such standards, for up to five years after initial registration with the SEC; this accommodation is currently available only to EGCs and would now be extended as a time-limited on-ramp benefit to all newly public companies; this election is irrevocable, meaning NAFs electing not to use this accommodation may not revisit the election in future filings

    • Confidentiality provisions under Securities Act Section 6(e)(2) for draft registration statements would remain available only to statutory EGCs.

Small Non-Accelerated Filer (“SNF”) — New Subcategory

The proposed amendments would create a new subcategory of NAFs — the SNF — defined as a NAF with total assets of $35 million or less as of the end of each of its two most recent second fiscal quarters. SNFs would receive extended filing deadlines of 120 days (instead of 90) after fiscal year end for Form 10-K and 50 days (instead of 45) after quarter end for Form 10-Q.

Transition Period

The SEC proposes new transition rules governing how existing registrants determine their filer status under the updated LAF/NAF/SNF framework. All registrants must complete this reassessment before the new rules take effect, with a deadline of the end of the fiscal year in which the rules become effective. Importantly, registrants must treat this as a clean-slate evaluation, as prior filer status is irrelevant and the new definitions apply in full. Registrants that miss the deadline will be automatically placed into their former status (LAF for prior LAFs, NAF for all others), with the additional consequence that any automatically designated NAF will be ineligible for SNF status regardless of its total assets. For those that complete the assessment on time, the benefits are immediate: newly qualified NAFs may apply scaled disclosure accommodations starting with their very next SEC filing, while SNFs may take advantage of extended filing deadlines beginning with their next Form 10-Q or 10-K.

Application to Other Filer Types

Asset-backed issuers and FPIs electing to use Form 20-F or Form 40-F would be excluded from the LAF/NAF/SNF framework and would continue under their existing reporting regimes.

Updated Small Entity Definitions

The proposed amendments would raise the total asset threshold for “small entity” status under the Regulatory Flexibility Act from $5 million to $35 million, harmonizing the definitions under the Securities Act and Exchange Act.

If you have any questions, please contact Anand Saha (asaha@cronelawgroup.com), Liang Shih (lshih@cronelawgroup.com), Daisy Dai (DDai@cronelawgroup.com), Hongye (Eve) Mao (hmao@cronelawgroup.com) or your usual Crone contact.

SEC Approves Nasdaq’s Heightened Initial Listing Standards for China-Based Companies

On May 14, 2026, the Securities and Exchange Commission (“SEC”) issued a release granting accelerated approval to a Nasdaq proposed rule change that adopts stricter initial listing criteria for companies operating in China. The new rules will take effect 30 days after the date of the SEC’s approval order.

Below is a summary of the key provisions and practical implications.

The New Listing Requirements

1. Initial Public Offerings (IPOs)

A China-based company listing on Nasdaq through an IPO must conduct a firm commitment offering in the United States to public holders that result in gross proceeds to the company of at least $25 million.

2. Business Combinations

A China-based company listing in connection with a business combination must have a minimum Market Value of Unrestricted Publicly Held Shares of at least $25 million following the transaction.

3. Direct Listings

A China-based company will not be permitted to list on the Nasdaq Global Market or Nasdaq Capital Market through a direct listing. A direct listing will be available only if the company satisfies the applicable requirements for the Nasdaq Global Select Market.

4. Transfers from OTC Markets or Other Exchanges

A China-based company transferring from the OTC market or another national securities exchange must have traded on the market for at least one year and must have a Market Value of Unrestricted Publicly Held Shares of at least $25 million before becoming eligible to list on Nasdaq.

Who Is Covered: Identifying China-Based Companies

Under new Nasdaq Listing Rule 5210(l), the heightened listing standards apply to any company that is headquartered or incorporated in China (including the Hong Kong Special Administrative Region and the Macau Special Administrative Region), or whose business is principally administered in one of those jurisdictions. Nasdaq will determine where a company is principally administered based on a holistic analysis of seven factors:

1. whether the company’s books and records are located in China;

2. whether at least 50% of the company’s assets are located in China;

3. whether at least 50% of the company’s revenues are derived from China;

4. whether at least 50% of the company’s directors are citizens of, or reside in, China;

5. whether at least 50% of the company’s officers are citizens of, or reside in, China;

6. whether at least 50% of the company’s employees are based in China; and

7. whether the company is controlled by, or under common control with, persons or entities that are citizens of, reside in, or whose business is headquartered, incorporated, or principally administered in China.

Specifically, Nasdaq stated that no single factor will automatically determine whether a company is covered. Rather, Nasdaq will evaluate the factors holistically based on the company’s overall facts and circumstances.

Practical Implications

The approval of these new rules represents a significant tightening of the U.S. listing landscape for China-based issuers. China-based companies considering a Nasdaq listing should evaluate the new requirements at the outset of the planning process. For smaller China-based issuers, the new rules may significantly narrow the path to Nasdaq. Companies that previously contemplated smaller-cap IPOs may now need to raise a substantially larger amount, consider alternative listing venues (e.g., NYSE American or OTC Markets), or pursue additional private financing before seeking a Nasdaq listing.

If you have any questions, please contact Anand Saha (asaha@cronelawgroup.com), Liang Shih (lshih@cronelawgroup.com), Hongye (Eve) Mao (hmao@cronelawgroup.com), Daisy Dai (DDai@cronelawgroup.com) or your usual Crone contact.

SEC Proposes Optional Semiannual Reporting for Public Companies

Overview

On May 5, 2026, the Securities and Exchange Commission ("SEC") proposed rule and form amendments that would give public companies the option of filing semiannual reports in lieu of quarterly reports to meet their interim reporting obligations under the federal securities laws. Currently, public companies subject to Exchange Act Section 13(a) or 15(d) are required to file quarterly reports on Form 10-Q.

The proposed amendments, if adopted, would allow these public companies to elect to file semiannual reports on new Form 10-S instead of quarterly reports on Form 10-Q. As a result, companies that elect to file semiannual reports would file one semiannual report and one annual report for each fiscal year in lieu of three quarterly reports and one annual report. The flexibility provided under the proposed amendments would enable public companies to choose the interim reporting frequency that would best serve the company and its investors.

Key Provisions of the Proposal

• New Form 10-S

The proposed amendments would allow public companies to elect to file semiannual reports on a new Form 10-S instead of quarterly reports on Form 10-Q. Companies that elect to file semiannual reports would file one semiannual report and one annual report for each fiscal year, in lieu of the current three quarterly reports and one annual report.

• Filing Deadlines

The filing deadline for semiannual reports on Form 10-S would be 40 or 45 days, depending on the company’s filer status, after the end of the first semiannual period of the fiscal year.

• Amendments to Regulation S-X

The proposal would also amend Regulation S-X, which governs the financial statement requirements for periodic reports, registration statements, and proxy statements, to reflect the new semiannual reporting option and simplify the existing financial statement requirements.

• Voluntary Election

The proposed semiannual reporting option is voluntary. Companies may choose to continue filing quarterly reports on Form 10-Q if they prefer. The proposal is designed to provide regulatory flexibility, enabling public companies to choose the interim reporting frequency that would best serve the company and its investors.

• Next Steps

The proposing release will be published on SEC.gov and in the Federal Register. The public comment period will remain open until 60 days after the date of publication of the proposing release in the Federal Register.

If you have any questions, please contact Anand Saha (asaha@cronelawgroup.com), Liang Shih (lshih@cronelawgroup.com), Hongye (Eve) Mao (hmao@cronelawgroup.com), Daisy Dai (DDai@cronelawgroup.com) or your usual Crone contact.

Forum Selection After Redomestication: Key Lessons from the 2026 Tesla Derivative Litigation Decision

Executive Summary

A recent Delaware Court of Chancery decision shows how much a company’s forum selection rules can matter when it moves from one state to another. In 2024, Tesla decided to change its state of incorporation from Delaware to Texas. Such a change is known as a “redomestication”. As part of that move, Tesla proposed a bylaw amendment providing that derivative lawsuits – lawsuits brought by stockholders on a company’s behalf – must be filed in Texas. After the proposal but before its adoption and the completion of the redomestication, certain Tesla stockholders filed derivative lawsuits against the company in Delaware. The stockholders likely rushed to action based on the belief that Delaware would be a more favorable jurisdiction for their claims than Texas. The Delaware Court of Chancery was asked to decide whether those cases could remain in Delaware. In a significant decision issued on April 13, 2026, the court held that Tesla’s Texas forum bylaw was enforceable on these facts and dismissed the Delaware actions.

The court emphasized in its decision that Tesla had publicly disclosed the proposed Texas forum shift before the lawsuits were filed, that stockholders approved the redomestication and Texas bylaw days later, and that the bylaw became effective before defendants appeared and before meaningful litigation occurred. The court rejected the argument that Delaware venue was fixed permanently at the moment of filing and instead held that the operative Texas bylaw controlled under these facts. It also held that enforcing the Texas forum bylaw did not violate Delaware General Corporation Law (DGCL) Section 266(e), did not impermissibly change the substantive law governing pre-conversion claims, and was not unreasonable or unjust merely because Texas may be viewed as a less favorable forum for stockholder plaintiffs. 

The decision reinforces three important themes for companies and boards: first, exclusive forum bylaws remain presumptively valid and generally enforceable; second, later-adopted forum bylaws may be enforced against already-filed derivative litigation in the right factual setting; and third, stockholder-approved governance changes connected to a redomestication can materially affect litigation strategy even for claims arising from pre-conversion conduct. 

Background

Tesla publicly announced on April 17, 2024 that it would seek stockholder approval to convert from a Delaware corporation to a Texas corporation and, as part of that redomestication, adopt new bylaws making Texas the exclusive forum for derivative actions brought on behalf of the company.

At the time of that announcement, Tesla’s existing bylaws designated Delaware courts as the exclusive forum for derivative claims, and one plaintiff had also entered into an NDA in connection with a DGCL Section 220 demand that contemplated commencing derivative litigation exclusively in the Delaware Court of Chancery. 

After Tesla announced the proposed redomestication and Texas forum bylaw, stockholders filed three derivative actions in the Delaware Court of Chancery on May 24, June 10, and June 13, 2024, asserting fiduciary duty and oversight claims against Elon Musk and Tesla directors. 

Later on June 13, 2024, Tesla stockholders approved the redomestication and the Texas forum bylaw by a vote of 63% of Tesla’s outstanding shares. The defendants did not appear until after that vote, and the court emphasized that the Texas forum bylaw was already in effect by the time defendants appeared and before any meaningful litigation activity had occurred in Delaware. 

This sequence created what the court effectively treated as a “race to the courthouse” fact pattern: plaintiffs filed after the Texas forum shift had been publicly proposed but before it became operative, while the company completed the stockholder-approved governance change only days later. 

Key Takeaways 

For business executives, the practical lesson is that forum strategy should be part of governance strategy—not an afterthought. If a company is evaluating redomestication, charter amendments, or bylaw updates, litigation planning should be built into the process from the beginning. 

• Forum bylaws can be outcome-determinative. Review forum provisions proactively. Even in the face of redomestication, exclusive forum clauses can influence where pre-conversion fiduciary and derivative claims are heard and may create meaningful procedural advantages. 

• The filing date does not always preserve a particular forum. The court reaffirmed that, under Delaware law, forum selection bylaws may apply to claims arising from conduct predating the bylaw’s adoption. The court rejected the plaintiffs’ position that venue had to be determined solely as of the filing date and held that the later-operative Texas bylaw could control. 

• Procedural posture matters. Tesla benefited from (1) having publicly announced the proposed bylaw before suit was filed, (2) having it shortly thereafter become operative via stockholder vote, and (3) from invoking the venue defense before meaningful litigation took place. 

• Coordinate governance documents. Companies should check bylaws, charters, stockholder communications, and ancillary agreements for inconsistent forum language that could complicate enforcement. The court addressed a plaintiff’s NDA argument and held that the NDA did not bind Tesla to Delaware. Rather, it imposed an obligation on the plaintiff and his counsel for Tesla’s benefit, which Tesla remained free to waive. However, the plaintiff’s argument highlights how inconsistent provision drafting can still invite litigation. 

• Do not assume forum equals governing law. The court held that DGCL Section 266(e), which governs the continuity of liabilities and obligations of an entity converting out of Delaware, did not bar enforcement because the bylaw regulated forum, not substantive choice of law. The opinion recognized that Delaware law could still govern the merits of pre-redomestication fiduciary claims even if those claims must be filed in Texas. 

Conclusion

The Tesla decision is an important marker in the continuing evolution of corporate forum selection, redomestication strategy, and interstate competition for corporate domicile and litigation. The Court of Chancery made clear that, on the right facts, a stockholder-approved forum bylaw adopted in connection with a move out of Delaware can displace pending Delaware derivative litigation and require those claims to be refiled in the new chosen forum. This ruling also signals that jurisdictional strategy is now an increasingly important part of entity management and transaction planning, particularly for companies evaluating whether Delaware remains their preferred long-term corporate home. 

Nasdaq Raises Initial Listing Requirements for SPACs

On April 22, 2026, the Securities and Exchange Commission (SEC) published a notice of filing and immediate effectiveness of a proposed rule change by Nasdaq to increase the initial listing requirements for special purpose acquisition companies (SPACs). The amendment establishes more rigorous financial and liquidity thresholds for SPACs seeking to list on Nasdaq Capital Market and Nasdaq Global Market. 

Historically, SPACs predominantly listed on the Nasdaq Capital Market due to its lower fees and lower initial distribution requirements. More recently, certain SPACs have sought to list on the Nasdaq Global Market. Additionally, the SEC’s 2021 staff statement on accounting treatment for SPAC warrants has led some SPACs to adopt different accounting practices, resulting in insufficient equity to qualify for initial listing on the Nasdaq Capital Market under prior standards.

Below are the rule changes proposed by Nasdaq: 

Nasdaq Global Market

Nasdaq proposes to increase the minimum Market Value of Listed Securities required for SPACs listing on the Nasdaq Global Market from $75 million to $100 million. 

Nasdaq Capital Market

The new rules for SPACs listing on Nasdaq Capital Market include:

• Increase the minimum Market Value of Listed Securities from $50 million to $75 million;

• Increase the minimum Market Value of Unrestricted Publicly Held Shares from $15 million to $20 million; 

• Increase minimum shareholders from 300 round lot holders to 400 round lot holders; and 

• Increase registered and active Market Makers from 3 to 4.

The proposed rule change became immediately effective upon filing with the SEC on April 15, 2026 and will be operative 30 days thereafter. SPACs that complete their listing within the 30-day transition period may continue to qualify under the prior rules. The SEC retains the authority to temporarily suspend the rule change within 60 days of the filing date if the SEC determines that such action is necessary or appropriate in the public interest or for the protection of investors.

If you have any questions, please contact Anand Saha (asaha@cronelawgroup.com), Liang Shih (lshih@cronelawgroup.com), Hongye (Eve) Mao (hmao@cronelawgroup.com) or your usual Crone contact.

The Heppner Ruling and the Fragility of AI Privilege

The meteoric rise of generative artificial intelligence (Gen AI) has exposed a systemic vulnerability in the corporate legal shield. As a "question of first impression," the decision in United States v. Heppner (2026) is the first to explicitly deny privilege to AI-generated documents. Its significance lies in the clear signal that the mere involvement of a client and a legal topic does not invoke the protections of the law.

Heppner illustrates that, in a new era of digital discovery, the efficiency of AI-assisted research offers no refuge from the rigorous requirements of legal privilege. The core tension lies in the judiciary’s "technology-neutral" stance. Courts are not carving out "AI exceptions" to established protections; rather, they are applying centuries-old principles to modern prompts. 

Case Background: United States v. Heppner

The matter arose in the Southern District of New York (SDNY) following a grand jury subpoena issued to Bradley Heppner, an executive under investigation for financial misconduct. In preparing his defense strategy, Heppner utilized Anthropic’s Claude chatbot to synthesize legal arguments and research defensive positions. Heppner acted on his own initiative, feeding the AI information he had learned from his defense counsel to generate reports which he then transmitted back to his attorneys. When the FBI executed a search warrant at Heppner’s residence, they seized electronic devices containing these memorialized exchanges.

Why Privilege Failed: The Three-Part Test

In denying the defendant’s claims, Judge Rakoff applied settled, technology-neutral principles rather than creating an AI-specific exception. The court’s analysis demonstrates that when an executive communicates with a consumer grade third-party AI platform, they have the same expectation of privacy as if speaking to a third party in the public square.

1. The Absence of a Fiduciary Relationship. The attorney-client privilege is predicated upon a "trusting human relationship" involving a licensed professional who owes fiduciary duties to the client and is subject to professional discipline. An AI platform, regardless of its sophistication, is not an attorney. The court held that the discussion of legal issues between two non-attorneys (the user and the AI platform) is fundamentally unprotected.

2. The Waiver of Confidentiality. Confidentiality was destroyed at the outset by the terms of service governing the platform. Anthropic’s consumer privacy policy explicitly stated that user inputs could be retained for model training and disclosed to "governmental regulatory authorities." By agreeing to these terms, Heppner surrendered any reasonable expectation of privacy, rendering the communications discoverable.

3. The Purpose of the Communication. The court found that the communications were not made for the purpose of obtaining legal advice from a qualified source. Because Claude expressly disclaims providing legal advice or recommendations —a fact the government confirmed by prompting the AI platform itself — the user cannot claim they were seeking professional counsel from the software.

Furthermore, the work product doctrine failed to attach because the documents did not reflect the "mental processes" of an attorney. Under Second Circuit precedent, protection is reserved for materials prepared by or at the behest of counsel. Because Heppner acted of his own volition without attorney direction, the AI was not an extension of the lawyer’s mind, and the resulting research remained unprotected. 

The Enterprise Distinction and the Kovel Doctrine

There is a material legal gulf between consumer-grade chatbots and enterprise-grade AI deployments. Under the Kovel doctrine, United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), privilege may extend to third-party agents (like translators or accountants) who assist counsel in rendering legal advice. While Heppner was a loss for the defendant, the ruling suggests that enterprise tools—properly structured under attorney supervision and bound by robust confidentiality agreements—may still qualify for protection.

However, a dangerous "wrinkle" exists: if a person inputs pre-existing privileged advice from their lawyer into an AI platform that retains and/or discloses consumer input, that act may constitute a waiver of the privilege over the original communication from the lawyer. This could allow the government to subpoena the attorney’s underlying notes and files that were "fed" into the AI platform.

Consumer vs. Enterprise AI Protection

Feature	Consumer AI (Heppner Context)	Enterprise AI (Counsel-Directed)
Data Training	Inputs used to train models by default.	Explicit contractual "no-training" provisions.
Confidentiality	Broad disclosure rights to authorities.	Signed Data Processing Agreements and strict confidentiality.
Supervision	Client-led; independent initiative.	Directed and controlled by legal counsel.
Work Product Basis	Unprotected independent research.	Attorney mental impressions.
Fiduciary Status	Expressly disclaimed.	Structured as a Kovel agent of counsel.

Practical Guidance: Dos and Don’ts for the AI Era

To mitigate the risks of "discovery exposure," organizations must treat AI integration with the same rigor as any other high-stakes legal workflow.

WHAT CLIENTS SHOULD DO:

• Utilize Enterprise Accounts: Exclusively use enterprise-tier accounts governed by signed Data Processing Agreements with "no-training" covenants.

• Ensure Attorney Direction: All AI-assisted research must be explicitly directed by counsel to support work product claims and reflect the attorney's mental impressions.

• Implement Upjohn-Style Notices: Deploy internal notices stating the AI is for company business, that the company (not the individual) holds the privilege, and that employees must not use it for personal matters.

• Strict Retention Policies: Implement automated retention schedules that discard AI chats after a short period (e.g., 21 days) unless a litigation hold is in place, reducing the "discovery surface area."

WHAT CLIENTS MUST AVOID:

• Consumer-Grade AI Platforms: Forbid the use of free or "Pro" consumer accounts for any sensitive matter. These tools are the primary target for government discovery.

• Inputting Privileged Information: Never "test" or "analyze" pre-existing attorney advice in an AI tool unless that tool has been vetted for confidentiality and the process is directed by counsel.

• The "Privilege Gap": Be aware that separately represented executives and employees cannot use company-provisioned AI platforms for their personal defense; the company holds the privilege, leaving the executive’s personal defense documents exposed.

• Independent Research: Do not allow non-lawyers to perform unsupervised legal analysis using AI, as this creates a permanent, discoverable record of the company's "mental impressions" without the shield of privilege.

The Bottom Line

The Heppner ruling, although not the last ruling of its kind, is a definitive warning that the legal landscape has shifted. While Gen AI is not fundamentally incompatible with privilege, its protection depends entirely on how the use is structured, supervised, and documented. Clients who treat AI as a private confidant and do not apply rigor to its use risk not only the discovery of their research but the total waiver of their legal privilege.

____________________

¹ Upjohn Co. v. United States, 449 U.S. 383 (1981).

SEC publishes order with exemptions from Section 16(a) reporting with respect to certain Foreign Private Issuers

As discussed in our January 2026 memo, beginning in March 2026, directors and officers of “Foreign Private Issuers” (FPIs) will be required to make public EDGAR filings pursuant to Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) of Forms 3, 4 and 5.  These forms cover beneficial ownership of, and transactions in, SEC-registered equity securities.  

On March 5, 2026, the SEC issued an order providing conditional relief from these insider reporting requirements for directors and officers of FPIs incorporated or organized in the jurisdictions listed below, being jurisdictions that the SEC has deemed as having substantially similar insider reporting requirements to those provided in Section 16(a) of the Exchange Act.  The jurisdictions are:

• Canada,

• Chile,

• the European Economic Area,

• the Republic of Korea,

• Switzerland, and

• the United Kingdom.

The SEC’s conditional relief is subject to two further conditions:

1. the director or officer must report under an applicable qualifying regulation in the FPI’s jurisdiction of incorporation or organization; and 

2. the reports must be made publicly available in English within two business days of public posting.

While it is possible that the SEC may include additional jurisdictions in future exemptive relief, as of now for directors and officers of FPIs incorporated in any jurisdiction not listed above with SEC-registered equity securities, the requirement to make Section 16(a) filings will apply from March 18, 2026.  The Crone team is standing by to assist with this.

If you have any questions, please contact Anand Saha (asaha@cronelawgroup.com), Liang Shih(lshih@cronelawgroup.com) or your usual Crone contact.

Foreign Private Issuers will be required to make Section 16(a) reports on share ownership and insider transactions

Beginning in March 2026, directors and officers of “Foreign Private Issuers” (FPIs) will be required to make public EDGAR filings pursuant to Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) of Forms 3, 4 and 5.  These forms cover beneficial ownership of, and transactions in, SEC-registered equity securities.  Previously, directors and officers of FPIs were exempt from these filing requirements.  The change comes pursuant to The Holding Foreign Insiders Accountable Act that was passed into law in December 2025.

What is going to be required for FPIs?

Section 16(a) requires directors and officers of companies with SEC‑registered equity securities to disclose the following maters on Forms 3, 4 or 5, as applicable:

• Initial ownership (Form 3)

Form 3 is required when an individual becomes a “corporate insider,” which in practical terms means been appointed as an officer or director.  Form 3 requires identification of the insider, issuer information (name/ticker symbol), type of security, number of shares owned, and whether ownership is direct or indirect.

• Change in ownership (Form 4)

Form 4 is required when an insider’s beneficial ownership changes.  This would include sales, purchases or equity grants.

• Annual filing to cover transactions not reported (Form 5)

Form 5 is generally due no later than 45 days after the issuer’s fiscal year ends and is only required from an insider when at least one transaction, because of an exemption or failure to earlier report, was not reported during the year.

When will these filings be required?

Directors and officers of FPIs will be required to follow the same timing requirements for filing Forms 3, 4 and 5 as directors and officers of U.S. domestic issuers:

• at the time any such security is registered on a national securities exchange or by the effective date of a registration statement filed pursuant to Section12(g) of the Exchange Act;

• subsequently, within 10 days after any other individual becomes director or officer of the issuer; and

• for a change in ownership, before the end of the second business day following the day of execution of the relevant transaction.

What differences will remain for FPIs as compared to U.S. domestic issuers?

There are three key differences to note:

1. Beneficial owners of more than 10% of an FPI’s registered voting equity securities will not be required to file Section 16 reports, unlike domestic issuers

   1. Directors and officers of FPIs remain exempt from the requirements contained in Section16(b) of the Exchange Act covering “short swing” liability

   2. The SEC will have the discretion to exempt FPIs from the Section 16(a) requirements if the SEC determines that the laws of a foreign jurisdiction apply “substantially similar requirements” to those provided pursuant to the 1934 Act. However, “substantially similar” is not defined or explained in the Act, and it remains to be seen what approach the SEC will take to this and which jurisdictions may qualify.

If you have any questions, please contact Anand Saha (asaha@cronelawgroup.com), Liang Shih (lshih@cronelawgroup.com) or your usual Crone Law Group contact.