Read the English translation here.

Wenn Strategie auf Emotion trifft – so gelingt »Cross-Border M&A« im Mittelstand

Warum scheitern grenzüberschreitende Verkäufe trotz guter Zahlen? Und wie macht man ein Familienunternehmen wirklich »M&A-ready«? Mirko von Bieberstein, Experte für internationale Transaktionen, gibt Einblicke in die komplexe Welt der Cross-Border-Deals.

Interview mit Mirko von Bieberstein, M&A Anwalt bei Cleary Gottlieb Steen & Hamilton LLP

Herr von Bieberstein, die M&A-Nachfolgeregelung ist ein komplexes Unterfangen – dies umso mehr, wenn dabei noch der Faktor »cross-border« hinzukommt. Welche Interessen gibt es Ihrer Erfahrung nach hier abzuwägen?

Ich begleite häufig Transaktionen zwischen deutschen Unternehmen und ausländischen Käufern, oft aus den USA. Dabei erlebe ich regelmäßig einen klassischen Interessenkonflikt: Ein familiengeführtes deutsches Unternehmen hat meist sehr klare, oft unumstößliche Vorstellungen vom Kaufpreis – und zwar noch bevor der Käufer überhaupt die Due Diligence (DD) gestartet hat. Wenn die Nachfolge über einen M&A-Prozess gelöst werden soll, ist das für die Inhaberschaft hochemotional, denn schließlich ist das Unternehmen ihr Lebenswerk. Natürlich geht es rational um die Maximierung des Preises, aber da schwingen auch viele ideelle Faktoren mit: So wollen die deutschen Verkäufer etwa Garantien für den Erhalt der Belegschaft, der Standorte und oft auch der Marke. Es geht ihnen also um das Fortbestehen einer gewachsenen Unternehmenskultur. Das ist ein zutiefst emotionaler Prozess, der weit über nackte Zahlen hinausgeht.

Wie präsentiert sich die Lage im Gegenzug auf der Käuferseite?

Hier prallen Welten aufeinander. Der erste Reibungspunkt bei Cross-Border-M&A im Mittelstand ist nicht selten die kulturelle Differenz. Ausländische Investoren operieren oft mit einer völlig anderen Geschwindigkeit und Erwartungshaltung. Zudem fehlt ihnen oft das Gespür für die regionale Bedeutung und die soziale Rolle, die ein deutsches Unternehmen in seiner Heimat spielt. Nehmen wir einen strategischen Investor als Beispiel: Dieser will expandieren, Marktzugang gewinnen und vor allem die Technologie absichern. Der Erhalt einer traditionsreichen Marke ist für ihn nicht zwingend ein wertbildender Faktor. Das führt unweigerlich zu Missverständnissen. Eine weitere Kernfrage ist die künftige Rolle der Inhaberschaft – gerade im Mittelstand haben wir eine extrem personenzentrierte Kundenbindung – das sogenannte »Key-Man-« oder »Key-Woman-Risk«. Wenn der Käufer fordert, dass die bisherige Führungsperson an Bord bleibt, entstehen oft komplexe Rollenkonflikte, die geregelt werden müssen.

Sie haben das Beispiel eines strategischen Investors ausgeführt. Was zeichnet dieses aus und wo liegen die Unterschiede zu einem Finanzinvestor?

Diese beiden Käufergruppen unterscheiden sich fundamental. Ein strategischer Investor – etwa ein Zulieferer, Partner oder Konkurrent – kennt den Markt. Er will durch den Kauf wachsen, Synergien heben und Know-how gewinnen. Oft bringt der Erwerb des Unternehmens aufgrund von Synergien einen zusätzlichen Mehrwert mit sich. Aufgrund dieser Synergieeffekte kann er einen höheren Kaufpreis bieten – die sogenannte strategische Prämie. Das kann sich für den Verkäufer finanziell sehr lohnen. Ein Finanzinvestor (Private Equity) hingegen denkt meist in einem Zeithorizont von vier bis zehn Jahren. Sein Ziel liegt in der Wertsteigerung und im anschließenden gewinnbringenden Weiterverkauf. Der Vorteil hier: PE-Häuser professionalisieren das Unternehmen oft massiv, holen Industrieexperten rein, bringen den Betrieb auf Vordermann oder stellen die nötigen finanziellen Mittel für Wachstumssprünge bereit. In diesem Modell bleibt die alte Inhaberschaft oft noch länger im Unternehmen, da deren Expertise für die Übergangsphase unverzichtbar ist.

Kommen wir auf die kulturellen Differenzen zwischen Verkäufer- und Käuferseite zurück. Inwieweit können Sie in Ihrer Rolle als Berater und Anwalt hier vermitteln?

Unsere Aufgabe erschöpft sich tatsächlich nicht in der juristischen Tätigkeit, vielmehr leisten wir auch kulturelle „Übersetzung“ und vermitteln. Professionelle Beratung ist hier das A und O, um zu verhindern, dass die Stimmung zwischen den Parteien kippt. Bei Cross-Border-Deals müssen auf beiden Seiten Expertinnen und Experten sitzen, die die Sprache des jeweils anderen – auch im übertragenen Sinne – verstehen. Wir fungieren als Kommunikatoren und Übersetzer, um sicherzustellen, dass keine irreversiblen Verwerfungen entstehen, bevor der Vertrag überhaupt unterschriftsreif ist.

Was empfehlen Sie deutschen Unternehmen konkret, um »M&A-ready« zu werden, wenn sie im Ausland nach Käufern suchen? Worauf sollten Familienunternehmen besonders achten?

Vorbereitung ist alles. Die »M&A-Readyness« sollte man frühzeitig, idealerweise bis zu zwei Jahre im Voraus, planen. Oft sind auch mehrere Familienangehörige am Unternehmen beteiligt, was die Zielfindung erschwert. Man muss sich ehrlich fragen: Was will ich eigentlich erreichen? Welche Ziele haben Priorität? Rund sechs bis 12 Monate vor dem eigentlichen Verkaufsstart sollte eine umfassende »Vendor Due Diligence« durchgeführt werden.

Was umfasst eine solche »Verkäufer-Due-Dilligence« genau?

Man durchleuchtet das eigene Unternehmen mit den Augen eines Fremden, um Risiken aufzuspüren und rechtzeitig zu beseitigen. Ein massiver Störfaktor sind oft unklare Eigentümerstrukturen oder lückenhafte Dokumentationen aus der Vergangenheit. Strukturen wie stille Beteiligungen, Treuhandlösungen oder komplexe Gesellschafterdarlehen sind zwar viel verbreitet, müssen aber vorab sauber dokumentiert oder im Idealfall aufgelöst werden. Auch die Dokumentation von Intra-Group-Verbindungen und Transfer Pricing muss präzise vorbereitet sein, sonst drohen später empfindliche Preisabschläge im Hinblick auf steuerliche Risiken. Besonders bei US-Mandanten sind zudem Compliance-Themen wie ESG (Environmental, Social, Governance) zentral. Börsennotierte amerikanische Firmen können und werden sich kein Sanktionsrisiko einkaufen. Hier muss eine angemessene Struktur aufgesetzt werden, die alle Beteiligten mitnimmt. Ohne professionelle Beratung ist das kaum zu stemmen.

Sprechen wir über das kritischste Thema: den Preis. Wie verhindert man, dass Wunschvorstellung und Angebot beim Preis zu weit auseinanderdriften?

Ein gewisser »Evaluation-Gap« lässt sich kaum vermeiden. Es geht daher vor allem darum, wie man mit diesen Differenzen umgeht. Die kommerzielle Seite gibt hier den Takt vor, aber der Preis bleibt immer die größte Herausforderung. Der Verkäufer sieht sein Lebenswerk, der Käufer sieht eine Informationsasymmetrie und fragt sich: Welche Risiken kaufe ich mit ein? Wenn der Verkäufer keine umfassende Due Diligence zulassen will, und gleichzeitig weitgehende Garantien ablehnt, wird es schwierig. Es gibt jedoch bewährte Instrumente zur Risikoverteilung.

Können Sie Beispiele nennen?

Da wäre etwa der Earn-Out zu nennen: Der initiale Kaufpreis ist niedriger, aber der Verkäufer partizipiert an der künftigen Wertschöpfung, wenn vereinbarte Kennzahlen (z.B. Umsatzziele) erreicht werden. Man teilt sich das Risiko. In der Praxis ist dies allerdings streitanfällig, wenn die Parameter nicht glasklar definiert sind. Dann gibt es den sogenannten Phasenkauf: Man verkauft zum Beispiel erst 75 Prozent des Unternehmens und veräußert die restlichen 25 Prozent zu einem späteren Zeitpunkt. Auch die Rückbeteiligung (Roll-over) ist ein bewährtes Mittel. Dabei veräußert der Verkäufer alles, reinvestiert aber einen Teil des Erlöses direkt beim Käufer. So bleibt er am künftigen Erfolg beteiligt und signalisiert dem Käufer Vertrauen in das eigene Unternehmen.

Welche rechtlichen Fallstricke lauern spezifisch bei Cross-Border-Transaktionen?

Die Liste ist lang. Zentral sind die Bereiche Gewährleistung und Haftung. Eine saubere Due Diligence ist die unverzichtbare Grundlage für die Garantien des Käufers. Viele KMU sträuben sich anfangs dagegen, ihr Unternehmen so tief durchleuchten zu lassen, aber es ist der einzige Weg. Ein Standard-Tool ist heute die Gewährleistungsversicherung (W&I Insurance). Versicherer übernehmen dabei das Risiko für Garantieverletzungen. Das entlastet beide Seiten. Zudem darf man das regulatorische Risiko nicht unterschätzen, etwa die außenwirtschaftsrechtliche Investitionskontrolle. Der Bund kann Erwerbe durch ausländische Investoren prüfen und bei Gefährdung der öffentlichen Ordnung und Sicherheit beschränken und im Extremfall sogar verbieten. Besonders bei Investoren aus China im Technologiebereich ist das ein heißes Eisen. Im Prozess müssen beide Seiten zu einer realistischen Einschätzung der Risiken kommen und der Verkäufer wird versuchen das Risiko einer Untersagung oder Beschränkung in der Transaktionsdokumentation auf den Käufer abzuwälzen.

Wie sieht der zeitliche und strukturelle Rahmen eines M&A-Prozesses am Ende aus?

Rein operativ nimmt der Prozess meist ein halbes bis dreiviertel Jahr in Anspruch. Für den Verkäufer beginnt die Arbeit durch das »Aufhübschen« der Firma aber viel früher. Wir unterteilen das in drei Phasen. Die erste stellt die interne Planung dar. Dabei geht es um die Auswahl der Berater, die Zielformulierung und die Strukturierung. Man entscheidet: Gehe ich direkt auf einen einzigen Käufer zu oder wähle ich ein Bieterverfahren? Es wird ein »Teaser« (Exposé) entworfen und in Umlauf gebracht. Phase zwei wird als »Marktphase« bezeichnet: Die Gegenseite kommt ins Spiel, Teaser werden (oft über Banken) an Interessenten versendet. Nach Unterzeichnung von Vertraulichkeitsvereinbarungen folgen umfassendere Informationen und erste, unverbindliche Angebote gehen ein. Die Anwältinnen und Anwälte beginnen mit dem Kaufvertragsentwurf und am Ende bleiben erfahrungsgemäß vier bis fünf ernsthafte Interessenten für die Due Diligence übrig. Zum Schluss folgt dann die Finalisierung: Ein halbwegs bindendes Angebot wird abgegeben, es folgen die harten Verhandlungen und schließlich der Abschluss (Signing) und Vollzug (Closing) des Kaufvertrags.

To ensure the ADGM private funds framework remains fit for purpose, the CP also seeks any broader feedback on the ADGM’s existing regulatory frameworks for Private Credit Funds, ADGM Green Funds, ADGM Climate Transition Funds and private Real Estate Investment Trusts. This approach reflects the FSRA’s commitment to maintaining an ongoing dialogue with fund managers employing such strategies, with a view to improve the regulatory regime applicable to these specialist fund categories.

Overall, we expect the proposed reforms to further enhance the ADGM’s positioning as a leading, highly competitive and institutionally credible domicile for private fund managers across a broad range of strategies and fund sizes.

The CP represents the first phase of a two-stage consultation process regarding the FSRA’s comprehensive reform of the ADGM funds regime, with a second consultation paper on additional reforms expected later in 2026, including on public funds. The FSRA invited stakeholder submissions in the form of comments to the CP. We submitted comments during the consultation period, which closed on January 30, 2026.

This alert memorandum provides a high level overview of the CP and its practical implications and does not purport to be an exhaustive summary of the CP or the laws and regulations applicable to ADGM funds and fund managers.

I. Overview

The ADGM has developed a comprehensive funds framework, positioning itself as a leading global centre for private fund formation and cross-border asset management. Under the FSRA’s existing rules, prospective ADGM-based fund managers are required to complete an approval process to obtain “Category 3C” licenses to “manage collective investment funds”, following which they become subject to minimum base capital requirements and are generally required to appoint the following officers (which, subject to certain exemptions, must be UAE-resident): (i) Licensed Director/Partner, (ii) Senior Executive Officer, (iii) Finance Officer, (iv) Compliance Officer and (v) Money Laundering Reporting Officer.

The CP proposes sponsor-friendly enhancements to the ADGM’s private funds regulations for the benefit of: (a) ADGM-based private fund managers with no more than $200 million in committed capital across all their funds and that only operate closed-ended funds (“Sub-Threshold Fund Managers” or “STFMs”) and (b) managers of private funds (whether closed-ended or open-ended) solely targeting large institutional investors (such as sovereign wealth funds) with a minimum subscription per investor of $5 million and no natural persons permitted to be investors (“Institutional Fund Managers” or “IFMs”). Both STFMs and IFMs would benefit from reduced capital requirements, streamlined licensing and exemptions from certain governance obligations (e.g., no requirement to appoint a Finance Officer or establish an internal audit function).

II. Eased Regulations for Sub-Threshold Fund Managers (STFMs)

Given the lower systemic risks associated with their activities, STFMs will benefit from reduced minimum base capital requirements. Currently, ADGM private fund managers must by default maintain base capital equal to the higher of (a) $50,000 and (b) an Expenditure-Based Capital Requirement of 13/52 of Annual Audited Expenses (i.e., base capital equivalent to at least 13 weeks of annual expenses). Under the CP, the FSRA proposes that STFMs would be subject only to a fixed $50,000 base capital requirement, with no Expenditure-Based Capital Requirement.

The lighter-touch regime for STFMs reflects international precedent under the EU Alternative Investment Fund Managers Directive (“AIFMD”), which applies differentiated requirements based on, among other factors, manager size. Under the AIFMD, lighter-touch status is available for fund managers with assets under management not exceeding €100 million, or €500 million where funds are unlevered and subject to five-year redemption restrictions. The FSRA’s proposed $200 million threshold represents a reasonable balance between these two AIFMD thresholds. In contrast to the AIFMD approach, the CP does not provide for a second, higher threshold (i.e., $500 million) subject to additional guardrails, such as appropriately calibrated limits on leverage, which may be an area for future consideration. The proposals may also merit further clarification as to which vehicles fall within the definition of a “Fund” for the purpose of calculating the committed capital threshold for STFMs – for example, whether co-investment vehicles, fund-of-one arrangements and similar special purpose vehicles would be excluded from such calculations (as is the approach under the AIFMD).

The CP also seeks feedback on a potential leverage cap of 100% of net asset value for STFM-managed Funds. We consider it to be a reasonable threshold, although the appropriateness of such cap would depend on how leverage is defined and measured, in particular: (a) whether leverage refers to fund-level borrowing only (which we consider to be more in line with market practice) or also attributes portfolio company-level leverage and (b) whether temporary subscription facilities or bridging finance (e.g., facilities with maturities of less than 12 months) would be exempt, given that such facilities are typically treated as working-capital timing tools rather than “true” leverage, particularly where they are fully covered by uncalled commitments and repaid within a short period.

On the other hand, the CP proposes that STFMs would be prohibited from operating as “Host Fund Managers” (i.e., acting as a proxy manager for third-party sponsors) and would remain subject to professional indemnity insurance requirements applicable to other fund managers. These requirements are intended to mitigate potential regulatory oversight risks from the above easing of regulation for STFMs.

III. Eased Regulations for Institutional Fund Managers (IFMs)

Unlike STFMs, IFMs targeting solely institutional investors would have no fundraising limits and would be exempt from professional indemnity insurance requirements, on the basis that institutional investors are better positioned to conduct due diligence, negotiate terms, actively monitor fund managers and replace them during insolvency events. In practice, despite the proposed reforms, many IFMs may nonetheless elect to maintain such insurance voluntarily as a matter of good governance practice.

The CP proposes IFMs would benefit from a minimum base capital requirement equal to the higher of: (a) $50,000 and (b) an Expenditure-Based Capital Requirement of 6/52 of Annual Audited Expenditure (i.e., capital equivalent to at least six weeks of annual expenses). While the Expenditure-Based Capital Requirement is higher than that for STFMs (with no Expenditure-Based Capital Requirement), the figure represents approximately 50% of the current standard requirement for ADGM private fund managers. This strikes an appropriate balance between the full-scope framework and the STFM framework given that institutional investors possess the resources and expertise necessary to navigate a fund manager transition.

Unlike STFMs, IFMs would be permitted to manage open-ended funds, recognising that institutional investors are sufficiently sophisticated to manage liquidity and redemption risks. By contrast with the AIFMD and the U.S. Securities and Exchange Commission Rule 22e-4, the CP does not expressly anticipate requiring IFMs managing open-ended funds to maintain documented liquidity risk management policies, which could be an area for further consideration.

IV. Applying for STFM or IFM status

Existing ADGM-licensed fund managers that satisfy the relevant criteria would be eligible to apply for STFM or IFM status. Fund managers would retain such status only while continuing to satisfy the eligibility criteria; failure to do so would require FSRA notification and eventual transition into the more comprehensive regulatory regime applicable to standard fund managers (referred to as “Full Scope Fund Managers”). The proposals leave open whether cure periods (e.g., 60 to 90 days) would be available for temporary breaches and whether application pathways would exist over the long-term for fluid transition between the categories of IFM and STFM or from a Full Scope Fund Manager to any of an IFM or STFM. Several of the regulatory exemptions which the CP proposes for STFMs and IFMs are currently only available within the ADGM to managers of venture capital funds investing in the securities of early stage companies. Therefore, the proposals would enable ADGM-based fund managers engaged in a broader range of strategies to benefit from lighter regulatory obligations.

V. Additional Regulatory Oversight of Foreign Fund Managers

In line with the FSRA’s policy objective of encouraging international fund managers to establish local operations in the ADGM, the CP also proposes reforms to strengthen the local nexus of fund managers licensed by non-ADGM jurisdictions that operate ADGM-domiciled funds (“Foreign Fund Managers” or “FFMs”). FFMs would be restricted from acting as Host Fund Managers and ADGM funds managed by FFMs would be required to appoint (a) at least one UAE-resident director in the fund vehicle or the general partner (as applicable), (b) an ADGM-based fund administrator, and (c) an ADGM-licensed corporate service provider. New ADGM funds established by FFMs would also be limited to closed-ended Qualified Investor Funds (“QIFs”) (subject to a minimum subscription of $500,000) and required to fully submit to ADGM law and jurisdiction.

Existing ADGM-domiciled funds managed by FFMs will be “grandfathered” with respect to the requirements to (x) only manage closed-ended QIFs, (y) appoint a UAE-resident director and (z) fully submit to ADGM law and jurisdiction, meaning that they will be permitted to continue operating under the existing regulatory framework without being required to comply with the aforementioned new requirements. The CP does not currently provide for a grandfathering mechanism with respect to the requirements to appoint an ADGM-based fund administrator and an ADGM-licensed corporate service provider, or the prohibition on FFMs operating as Host Fund Managers. It remains to be seen whether any transition period for implementation of such requirements (for example, 12 to 18 months) would be introduced for existing FFM-managed funds. Open questions also remain around (i) whether parallel funds, alternative investment vehicles, successor funds and continuation vehicles will be similarly grandfathered alongside their original ADGM fund vehicles, and (ii) whether material amendments or extensions to the terms of existing funds would affect grandfathered status.

VI. Facilitating Employee Co-Investment

The CP proposes reforms regarding Employee Co-Investment Vehicles (“EIVs”). Currently, the ADGM rules are ambiguous as to whether EIVs constitute standalone funds subject to separate licensing and client classification requirements as if the employees were ordinary third-party investors unrelated to the fund manager’s operations. The CP proposes to facilitate employee investment into employer managed private funds by exempting EIVs from rules on minimum subscription amount per investor and client classification regulations. As a result, eligible employees would not be required to satisfy the net worth thresholds applicable to professional clients. The CP acknowledges that EIVs play an important role in allowing fund managers to further incentivise key employees and demonstrate to investors that employees directly involved in executing the investment strategy have “skin in the game”. The CP proposes targeted regulatory adjustments to better support this investment structure.

Under the proposals, an investment in EIVs not treated as regulated funds would be limited to front office employees, directors of fund managers or investment advisors directly involved in executing or advising on the Fund’s investment strategy. If an ineligible person is admitted to an EIV, the vehicle would be tainted and therefore cease to qualify as an EIV and instead be treated as an ordinary Fund subject to minimum subscription rules and client classification requirements. The CP suggests that the eligibility test for employees should apply at the time of initial investment. It would be helpful for the final rules to clarify whether the eligibility test should be applied only at the point of initial subscription, with no requirement to re-test eligibility at each subsequent capital call and no divestment obligation should the employee subsequently cease to meet the eligibility criteria during their tenure.

Additional areas for clarification include whether: (i) consultants and independent contractors with equivalent roles in investment decision-making may participate, (ii) former employees who were eligible at the time of initial commitment would also be permitted to retain existing interests and fund their original commitment amounts, (iii) family members of eligible employees may participate in EIVs, consistent with common market practice for employee co-investment programs and (iv) a limited cure period (e.g., 90 days) would be available for inadvertent breaches and tainting, allowing remediation before the vehicle loses its EIV status.

VII. Key Takeaways

The CP represents a significant step in the ADGM’s continued development as a leading jurisdiction for private fund formation. If the proposed rule changes are enacted, fund managers pursuing private equity, private credit, real estate, infrastructure and other strategies would benefit from streamlined regulatory treatment previously available only to venture capital fund managers, provided they either raise no more than $200 million in committed capital or target exclusively institutional investors within the ADGM. The EIV reforms would provide greater certainty for employee co-investment structures, while the FFM reforms are expected to encourage international fund managers to establish a more substantial ADGM presence.

We encourage stakeholders to: (i) assess whether their existing fund structures qualify for STFM or IFM status; (ii) consider the timing of new applications relative to implementation; (iii) for FFMs, evaluate whether establishing a fully licensed ADGM presence would be advantageous; and (iv) review employee co-investment arrangements in light of the proposed EIV framework.

Given the CP’s invitation for general comments on the ADGM’s other specialist regulatory frameworks for Private Credit Funds, ADGM Green Funds, ADGM Climate Transition Funds and private Real Estate Investment Trusts (“REITs”), fund managers employing relevant strategies should note the FSRA’s additional interest in reforming such areas and the possibility of further engaging with the FSRA, particularly as future consultation papers or regulations addressing these fund categories may be forthcoming.

Since its establishment in 2015, the ADGM has experienced exceptional growth and record-breaking foreign investment, further cementing Abu Dhabi’s status as the “Capital of Capital”. The ADGM reported that in the first half of 2025, total assets under management within the ADGM surged by 42% compared to the first half of 2024, as the number of operational entities grew by 42% year-on-year and the number of new Financial Services Permissions granted to firms grew by 45% year-on-year.[2] The proposed reforms are expected to further contribute to this momentum.

We continue to monitor these developments closely and would be pleased to assist you in evaluating how these reforms may affect your fund structures and operations as well as discuss with you any feedback on the proposed reforms that may be relevant to the second phase of the consultation process.

[1] ADGM Financial Services Regulatory Authority, Consultation Paper No. 12 of 2025 – Proposed Enhancements to the FSRA’s Funds Framework (November 24, 2025). https://adgmen.thomsonreuters.com/rulebook/consultation-paper-no-12-2025-proposed-enhancements-fsras-funds-framework [Comment period closed on January 30, 2026]

[2] “ADGM is the MENA Region’s Largest IFC with 11,128 Active Licences at the end of H1 2025” Report published by the ADGM (8 September 2025). https://www.adgm.com/media/announcements/adgm-is-the-mena-region-largest-ifc-with-11128-active-licences-at-the-end-of-h1-2025

The private credit market has reached a pivotal stage in its growth, with direct lending now matching the broadly syndicated loan market at $1.5-2 trillion in size and forecast to reach $3 trillion by 2028. Furthermore, private credit has expanded beyond direct lending to include other strategies including asset-backed finance and debt-equity hybrid capital. What began as an alternative to traditional bond and syndicated loan markets for smaller deals or where those markets were not available has evolved into a key segment of global capital markets, reshaping how companies, including large public companies, access financing.

The Broadening Scope of Private Credit

While private credit historically originated as direct lending in senior loan format to middle market, below-investment-grade companies, the market has undergone a transformation in both scope and sophistication.

• Up and down the capital structure: The private credit market now extends beyond senior loans to include junior lending (often with equity upside), mezzanine financing, infrastructure debt, real estate lending and asset-backed finance. For companies, this means access to an expanded menu of financing alternatives, including tailored solutions that traditional bank lenders historically would not provide.
• Companies of all sizes: Private credit serves the full spectrum of companies, from venture-backed growth firms to middle-market enterprises and large-cap corporations, encompassing both private and public entities. This breadth reflects the market’s maturation and the growing recognition among CFOs and treasurers that private credit can offer advantages such as speed, flexibility and confidentiality.
• Across the credit spectrum: Private credit lenders are active across the credit rating spectrum from investment-grade borrowers to leveraged credits and stressed or distressed situations. The emergence of investment-grade private credit, in particular, opens up potential alternatives to the long-standing dominance of public bond markets and commercial bank lending for highly rated issuers.

Private credit is not typically top of mind for investment-grade companies, who enjoy ready access to financing on attractive terms through relationship commercial banks and the investment grade bond market. However, recent private credit deals by Rogers Communications, Intel and Meta, among others, demonstrate the evolution of this market. Private credit won these deals in the digital infrastructure space by providing sophisticated joint-venture financing structures that did not require consolidation of the financing as “debt” from an accounting or credit rating agency perspective. Meta also pursued its private credit financing alongside a large public bond issuance.

The Evolving Role of Banks in Credit Markets

Banks remain critical players in credit markets, operating simultaneously as competitors to private credit firms and as essential providers of liquidity to private credit asset managers through fund finance facilities.

• Banks versus private credit: On the competitive front, banks have demonstrated their continued relevance in large-cap financing. JPMorgan’s recent $20 billion acquisition financing for Electronic Arts exemplifies banks’ enduring capability to underwrite and syndicate jumbo acquisition finance transactions, particularly for large strategic deals involving household-name companies. In these situations, banks retain advantages: balance sheet capacity, established syndication networks, integrated advisory relationships and pricing that can undercut private credit when market conditions permit. Recent easing of bank regulations may further enhance bank appetite to compete head-on with private credit lenders.
• Banks provide private credit: Many major banks have an asset management division to manage and invest third-party funds into private credit. These asset management teams are walled-off from the traditional commercial lending operations, essentially constituting private credit lending teams housed within a bank. Some other major banks that don’t have their own private credit operations have entered into joint ventures with asset managers to team up on originating and investing in private credit opportunities.
• Banks lend to private credit lenders: Banks serve as crucial enablers of the private credit industry through debt finance they provide to the private credit funds themselves in what is referred to as fund financing. Subscription facilities (revolvers to funds backed by limited partner commitments), NAV facilities (Net Asset Value facilities, where existing investments serve as collateral new lending) and other lending structures provide private credit managers with leverage and liquidity, enhancing returns and enabling more aggressive deployment of capital.

Focus on Credit Quality and Diligence

Given recent headline bankruptcies including First Brands and Tricolor, market participants are increasingly focused on credit quality in the private credit market, both in the context of potential defaults as well as reliability of the internal valuations (“marks”) of private credit investments held by large asset managers.

This heightened scrutiny reflects the market’s maturation and the inevitable reality that not all private credit investments will perform as underwritten. As the asset class has grown, so too has the population of borrowers, and with greater volume comes greater dispersion in credit outcomes. High-profile defaults or restructurings, while still relatively rare, have prompted investors and commentators to question whether private credit’s historical performance will prove sustainable. Competition among lenders also can increase the risk for a due diligence or underwriting miss or documentation gap.

In response, it remains to be seen whether private credit lenders will tighten due diligence requirements or apply more conservative underwriting standards. Should companies expect more detailed information requests, stricter covenant packages and potentially higher pricing for credits perceived as carrying execution risk? The market for debt financing remains highly competitive, so borrowers will continue to enjoy negotiating leverage to set terms, particularly in the large-cap segment of the market.

Private Credit Trading

Market participants are making efforts to develop secondary trading in private credit, particularly in the investment-grade segment. While some indicators suggest modest progress—with increased trading activity and the emergence of market-making capabilities—this market remains in its early stages. Significant challenges remain as trading practices are still not fully standardized. Secondary trading poses some fundamental challenges in private credit, as borrowers value the relationship stability and confidentiality that private markets provide relative to public markets. Moreover, private credit lenders may not want to mark their loan portfolios to reflect “market” prices, particularly where the market is not liquid or transparent. In 2026, this nascent secondary market will represent both an opportunity and a challenge for the industry as it matures.

Private Credit in Distressed Situations

Given their broad and flexible lending mandates, private credit lenders are often the lender of choice for rescue financings to stressed and distressed companies. Private credit’s advantages in distressed situations are manifold: speed of execution, certainty of funding, flexibility in structuring, greater risk appetite and willingness to provide capital when traditional lenders retreat.

Liability management exercises (LMEs)—where borrowers use new private credit facilities to refinance or restructure existing obligations—have become particularly prevalent. These transactions often involve complex intercreditor arrangements, creative collateral packages and sophisticated legal structures designed to maximize flexibility for borrowers while protecting new lenders’ positions. In the meantime, this activity has not been without controversy. Existing creditors have increasingly challenged aggressive LMEs as improper, leading to litigation and regulatory scrutiny. [1]

With a few notable exceptions, LMEs have occurred in companies with broadly syndicated capital stacks rather than private credit. Distressed companies that have only private credit debt are less likely to need divisive LMEs or full-blown Chapter 11 processes. The concentrated, often “clubby” lender base that private credit provides can make it easier for distressed companies to settle a consensual process to either obtain more runway (via waivers and extensions) or else hand over the keys to lenders.

The Retail Frontier

We expect to see further development of private credit firms offering products to retail investors, in light of the Trump administration’s Executive Order in August 2025 opening the door to alternative assets in 401(k) plans.[2] This regulatory shift potentially unlocks trillions of dollars in retail capital that has historically been confined to traditional stocks and bonds.

For private credit managers, retail distribution offers a vast new pool of permanent capital, reducing reliance on institutional investors and bank financing and potentially enabling longer-duration lending strategies. For retail investors, access to private credit promises portfolio diversification and potentially enhanced returns, albeit with attendant risk, liquidity constraints and complexity.

Strategic Considerations

As we navigate 2026, the usual caveats about market uncertainty aside, private credit is likely to see another strong year in terms of deal volumes, further penetration of new markets and a source of innovation. What began as “alternative” credit has become a mainstream capital source, rivalling traditional markets in scale and often surpassing them in flexibility. Understanding this landscape is critical to obtaining and navigating a broad menu of financing alternatives. Those who embrace its possibilities and remain clear-eyed about its risks will be best positioned to capitalize on the opportunities ahead.

[1] For additional information on LMEs, see our liability management transactions article elsewhere in this memorandum.

[2] For additional information, see our 401(k) plan article elsewhere in this memorandum.

As liability management transactions (LMEs) become increasingly prevalent, directors are frequently called upon to evaluate these complex transactions. We outline key considerations for boards contemplating these transactions under Delaware law.

LMEs are strategic transactions implemented by borrowers, often at the request of a key group of lenders, to take advantage of flexibility in current loan documentation. Typically, LMEs take the form of one of the following three transaction structures:

1. Drop-Down Financing: A borrower transfers material assets (often material intellectual property or a valuable business unit) to an unrestricted subsidiary (which is excluded from the loan agreement covenants) or a non-guarantor subsidiary, in each case resulting in the liens on the underlying assets being released. Structurally senior debt is subsequently incurred at the unrestricted subsidiary/non-guarantor subsidiary from existing lenders, private equity sponsor, or third parties, with proceeds on-lent to the borrower to fund cash flow shortfalls and bolster liquidity. Participating lenders end up with structurally senior debt and non-participating lenders are left with subordinated debt.
2. Uptier Transaction: A borrower incurs new money “super-priority” loans provided by a group of existing lenders that is senior to the company’s existing debt, with existing debt of participating lenders exchanged for or “rolled up” into (typically a lesser amount of) “second” priority loans, while existing loans of non-participating lenders are effectively subordinated to a “third” priority position.
3. Double-dip: A borrower creates a new subsidiary that is not a guarantor of the company’s existing debt (NewCo) which incurs new debt from participating lenders. The transaction creates two separate claims against the same source of credit support whereby: (1) the existing borrower and guarantors under the company’s existing secured debt guarantee NewCo’s debt, and (2) NewCo on-lends the proceeds of the new debt to borrower/guarantors and pledges that receivable to its lenders. In a “pari plus” transaction (a variation of the Double-dip), the new debt receives the benefit of additional guarantees and collateral that the lenders to the existing borrower do not receive, in addition to pari passu credit support from the existing credit group.

Companies and sponsors pursue LMEs to, among other things, extend maturities, raise liquidity and/or de-lever (at times by capturing debt discount). Existing creditors often push companies to pursue such transactions to enhance credit protections, improve their rate return through new money financings, exchange or extend debt at favorable prices, and position themselves better for a potential Chapter 11 restructuring. Recent studies have shown that about half of LMEs undertaken since 2016 do not prevent a future default or bankruptcy filing.

LMEs have become prevalent in the market since the J. Crew transaction in 2016 (which is generally regarded as the first high-profile drop-down transaction). LMEs have been described as forms of “lender on lender violence” or “tranche warfare” as participating lenders receive enhanced priority and economics to the exclusion of non-participating lenders. As a result, many lenders in the market have responded by demanding certain minority lender protections in loan agreements, frequently dubbed as “LME blockers.”[1]

Given the strategic importance of and potential creditor litigation inherent in LMEs, boards should carefully navigate their fiduciary obligations throughout the decision-making process. Under Delaware law, boards of directors owe fiduciary duties to represent the best interests of the corporation and its stakeholders. Generally speaking, the duty does not extend to creditor unless the company is insolvent. The two core fiduciary duties are the duty of care and the duty of loyalty and good faith.

With respect to the duty of care, Delaware law provides significant protection through the Business Judgement Rule under which directors are protected from being second-guessed on the merits of individual business decisions, meaning directors cannot be penalized for making what turns out to be a bad business decision, so long as the decision was made in good faith and on an informed basis.

Before embarking on LME discussions, boards should develop a sufficient record that they have considered alternative avenues (i.e., solicited proposals from existing and third-party lenders and evaluated other transactions such as equity raises or asset dispositions) and have obtained the advice of qualitied professionals, which may include lawyers, financial advisors (which advise on operational improvements to improve margins and liquidity) and investment bankers (which advise on balance sheet transactions and lender negotiation dynamics). Board should also analyze their directors’ and officers’ (D&O) insurance policies. Ensuring adequate coverage is in place before entering into potentially contentious negotiations is a prudent risk management step. A number of insurance companies now offer policies solely to cover potential exposure (particularly litigation) arising out of LMEs.

LMEs can involve complex conflicts of interest that trigger heightened scrutiny. Many LMEs involve a sponsor or related parties investing additional capital to facilitate the broader transaction, creating a situation where a controlling stockholder or other interested party may be on both sides of the transaction. In such circumstances, board actions may be examined under an “entire fairness” standard rather than the deferential Business Judgement Rule. This higher bar requires demonstrating both fair dealing (process) and fair price, with the defendant bearing the burden of proving “entire fairness” at trial.

To address these potential conflicts and shift the burden of proving entire fairness, boards typically establish a special committee process involving the appointment of independent directors to the board and a newly formed special committee. The special committee can establish procedures and timetables, retain professionals, negotiate the transaction, analyze the economic fairness of the offer(s), and either present recommendations to the full board or have fully delegated authority to approve the transaction.

Over the past decade, an entire industry of independent directors specializing in the analysis of LMEs has emerged. Such directors are often appointed to boards by sponsors when a company faces an impending catalyst for a liability management transaction (i.e., an impending maturity, projected covenant breach, liquidity shortfall or the company’s existing debt is trading at a discount). These directors provide comfort to board members and lenders alike as they have credibility with stakeholders and experience in evaluating similar transactions.

From a legal review and board oversight perspective, close scrutiny should be paid to existing documentation to ensure that the proposed LME is permitted and that requisite consent from existing creditors is obtained. Boards should receive briefings on the terms and process to ensure risks are appropriately considered. Lenders, particularly minority lender groups, have been known to try to block an LME through an injunction otherwise seek damages following consummation of the LME. Particular attention should be paid to:

• Indebtedness, lien, investment and restricted payment covenants
• Amendment provisions (if the LME requires amendments to existing documentation)
• Affiliate transaction covenants (if implicated by the underlying transaction)

Furthermore, boards should pay close attention to the material terms of the proposed LME as documentation often requires enhanced reporting, tighter covenants, more limited baskets (i.e., exceptions to the debt, lien, investment and restricted payment covenants) and other lender protections, including potentially LME blockers. Particular care should be taken to ensure that the company can continue normal operations post-LME closing despite the tighter debt documents.

LMEs present both opportunities and risks for distressed companies. They can present a path forward to a forbearance, restructuring and financing. But they can also result in litigation and might not save the company from a formal proceeding. Directors are called upon to navigate complex fiduciary duties, potential conflicts of interest and intricate documentation requirements. By establishing robust processes—including special committees where appropriate, thorough documentation review, and careful consideration of all strategic alternatives—boards can fulfil their fiduciary obligations and protect themselves from liability.

[1] For additional information on LME blockers, see our October alert memo available here.

Drawing on activity across the United States, Europe, East Asia, the Middle East and Latin America, we examine the market dynamics and complimentary regulatory and macro-economic settings that drove IPO volume and valuations to surge in 2025 and offer insights for the year ahead.  

Overall, while 2025 IPO activity remained uneven across regions, the IPO landscape at a global level saw a year of robust growth in terms of number of issuances and deal values, even amid policy and geopolitical uncertainties.[1] As the market conditions underpinning 2025’s IPO surge continue into 2026, and regulatory reforms around the world continue to encourage more issuances, it is likely that 2026 will continue to see a remarkable level of IPOs. As such, issuers contemplating IPOs in the next 12 to 24 months may find increasingly receptive markets, though geopolitical and regulatory uncertainties continue to require thoughtful preparation and strategic flexibility.

Key themes across markets include

• Strength in Finance, Technology, AI, Infrastructure and Defense. These sectors show outsized investor interest globally, often serving as the backbone of regional IPO pipelines.
• Private Equity as a Persistent Catalyst. Sponsor-backed IPOs continue to anchor issuance windows, especially in the United States and Europe.
• Improved Issuance Conditions as Rates Decline. Easing monetary policy across multiple jurisdictions is lifting valuations and reducing financing costs, enabling issuers to revisit delayed listings.
• Regulatory Transformations. Around the world, regulators implemented reforms in 2025 aimed at strengthening capital markets and attracting IPOs.

United States

U.S. IPO activity accelerated in 2025. Approximately 202 companies with a market capitalization over $50 million priced IPOs in the United States in 2025 compared to 150 in 2024.[2] In a year marred by episodic volatility stemming from tariff policy uncertainty, geopolitical tensions and the late-year U.S. government shutdown, the surge in IPO activity in 2025 demonstrated the strength of investor demand for new issuances.

Technology-driven companies, particularly those specialized in digital infrastructure and cybersecurity, consistently priced at the top of their ranges and delivered strong post-IPO performance, producing multiple notable IPOs in 2025. The year also saw a resurgence in sponsor-backed IPOs and SPACs, each rising to levels not seen since 2021 in terms of number of issuances.[3]  

A notable market narrative is the continued interest in public company reincorporation out of Delaware, spurred by concerns over litigation trends and high-profile cases. In response, Delaware enacted reforms to the Delaware General Corporation Law in 2025 aimed at mitigating perceived litigation risk and reinforcing the state’s leadership position for corporate domicile.[4] 

2026 Outlook for the United States

Market dynamics largely underpinned the surge in U.S. IPO activity in 2025. Namely, a backlog of sponsor and VC-backed companies that had reached maturity coincided with a pent-up demand for IPO-ready companies with strong growth profiles. Going into 2026, this supply and demand dynamic is expected to continue. IPOs will likely be bolstered further by anticipated deregulation by the Securities and Exchange Commission (SEC) and forecasted declines in interest rates.[5] Moreover, the late 2025 U.S. government shutdown resulted in deferred IPOs from well-known issuers that will now likely occur in 2026. Databricks, Canva and Plaid are among those anticipated to test the market.

Europe

In 2025, European IPO volume dropped 20% to 105 deals, and proceeds decreased 10% year-over-year to $17.3 billion.[6] Yet issuance strengthened meaningfully later in the year as monetary easing supported valuations. Switzerland, Sweden, Spain and Germany saw several large, high-quality listings. Additionally, a surge in London IPOs in Q4 lifted hopes for an IPO revival that may continue into 2026.[7]

Private equity-backed IPOs more than doubled year-over-year, aided by anchor investors and early book momentum, features increasingly central to European execution strategies.[8] While cross-border listings declined, Europe produced several notable U.S. listings, including the $1.4 billion IPO of Klarna Group.

Regulatory recalibration across the UK and EU, including reforms to listing and prospectus regimes, tax incentives for post-IPO trading and relaxed French and Belgian disclosure rules, reflects an ongoing effort to enhance the competitiveness of European capital markets. In Italy, policymakers are advancing proposed capital markets reforms, including an optional, simplified governance regime for newly listed issuers, that aim to reduce administrative burdens and enhance the attractiveness of Italian exchanges for domestic and cross-border IPO candidates.[9] 

2026 Outlook for Europe

Banks anticipate a strong start for European IPOs in 2026, with active pipelines building across defense, industrials, financials and technology. Dual-track processes are expected to increase as private equity sponsors seek liquidity in a favorable macro environment. The effectiveness of the EU Listing Act in 2026, as well as adjustments to ESG reporting frameworks, may further reduce compliance burdens and facilitate capital formation. Geopolitical risks and trade tensions remain risks to European IPO activity in 2026.

East Asia

Korea

Bolstered by a Q4 surge in IPOs, the Korean IPO market reversed an early-year lull in 2025 and produced year-over-year gains in net IPO proceeds.[10]

Regulatory reforms accelerated in 2025 as the government undertook multiple amendments to the Korean Commercial Code, expanding shareholder rights, strengthening board independence requirements, mandating hybrid shareholder meetings and advancing cumulative voting standards.

Hong Kong

In the 25th anniversary of the Hong Kong Stock Exchange’s founding, Hong Kong reestablished itself as one of the world’s leading IPO fundraising venues in 2025.[11] Over the course of the year, multiple IPOs on the Hong Kong Stock Exchange each generated proceeds of over $1 billion.

Multiple factors contributed to the Hong Kong Stock Exchange’s banner year in terms of IPOs. Supported by the Chinese Securities Regulatory Commission to pursue listings on the Hong Kong Stock Exchange, multiple leading Chinese companies launched IPOs in Hong Kong in 2025. Institutional investors provided ample demand for new issuances supported by new exchange rules.[12] Additionally, financial collaboration between Hong Kong and Middle Eastern regulators further strengthened demand for Hong Kong IPOs. 

2026 Outlook for Asia

In Korea, while macro risks remain, a combination of governmental reform efforts and a growing IPO pipeline, including companies such as Kbank, Musinsa and Goodai Global, positions Korea for a potential rebound in IPO activity in 2026.

In Hong Kong, analysts predict another impressive year for IPO fundraising numbers, based on the confluence of interest rate cuts in the United States, the global expansion of Chinese enterprises, China’s domestic consumption policies and Hong Kong’s ongoing capital markets reforms.

Middle East

United Arab Emirates

The UAE experienced a notable slowdown in 2025 IPO volume after several blockbuster years, with IPOs raising $1 billion in 2025 compared to $6 billion in 2024 and a high of $12 billion in 2022. The UAE also saw high-profile companies suspend IPO plans, including those of Etihad, one of two flag carriers of the UAE. Regulatory focus in the UAE shifted toward market conduct in 2025, including extensions for internal-control reporting implementation and a new licensing requirements for financial influencers.

Saudi Arabia

Saudi Arabia maintained its regional leadership in IPO activity in 2025. Large-cap listings such as Flynas and Umm Al Qura, as well as high volumes of mid-cap issuances, underscored breadth in the market. However, while IPO issuances in Saudi Arabia remained consistent in volume and deal value as in 2024, share performance of companies that listed on Saudi Exchange in 2025 have been mixed. Saudi Arabia also saw ongoing regulatory reforms in 2025, including the introduction of Saudi Depositary Receipts and ongoing liberalization of foreign investor access. 

2026 Outlook for the Middle East

Across the Middle East, the 2026 pipeline for IPOs is strong, driven by postponed 2025 deals, continued sovereign asset monetization and new frameworks enabling international and dual-listing structures. Technology and fintech issuers represent a growing share of the regional pipeline.

Latin America

Brazil

After a prolonged capital markets freeze, Brazil has seen no traditional IPOs since 2021. The number of companies listed on the Brazilian stock exchange (the B3) has declined to levels last seen before 2020, underscoring the severity of the slowdown.

Mexico

Mexico emerged as one of the most active and dynamic jurisdictions for IPOs in 2025. Notable transactions in 2025 included the IPO of Fibra Next, a spin-off of Fibra Uno, which completed a $431 million IPO. As the owner of the largest industrial real estate portfolio in Mexico, this listing was a direct play on nearshoring demand for logistics and manufacturing space. Additionally, the private equity-backed natural gas pipeline operator Esentia Energy Development raised $630 million in the largest Mexican energy infrastructure IPO since 2018. 

2026 Outlook for Latin America

Looking to 2026, optimism is improving in Brazil. Equity indices have reached all-time highs, the securities regulator has introduced a simplified issuance framework for SMEs and expected interest-rate cuts may reopen the IPO window, particularly for growth-oriented issuers targeting international markets. Still, persistently high real interest rates, macro-fiscal uncertainty and strong competition from fixed-income products are likely to temper a rapid recovery.

In Mexico, the expected IPO of Banamex in the second half of 2026 is positioned to be one of the year’s most anticipated global offerings. Furthermore, forecasted interest-rate cuts and regulatory reforms are likely to support valuations and broaden issuer eligibility, although the scheduled 2026 U.S.-Mexico-Canada Agreement review may introduce potential volatility.

[1] Globally, IPO proceeds totaled $143.3 billion from 1,014 IPOs, a 21% increase compared to 2024, which saw $118.1 billion proceeds raised from 984 IPOs. See PwC, “London has strongest year for IPOs since 2021 with a strong Q4 for Europe signaling momentum for 2026” (December 31, 2025), available here.

[2] IPO figures as of December 31, 2025 by date of IPO pricing. See Renaissance Capital, “2025 IPO Market Stats,” available here.

[3] See, e.g.,PwC, “IPO markets look primed to accelerate in 2026” (December 12, 2025), available here.

[4] For a discussion of the forces driving companies to consider reincorporation out of Delaware, see our January 16, 2025 publication “Delaware’s Rocky Year–What Lies Ahead?” available here and our shareholder litigation article available elsewhere in this memorandum.

[5] The SEC announced intention to bolster IPOs through reducing disclosure requirements, de-politicizing shareholder meetings and reforming securities litigation, which may also provide headwinds for an active 2026. See, e.g., Atkins Speech, “Keynote Address at the John L. Weinberg Center for Corporate Governance’s 25th Anniversary Gala” (October 9, 2025), available here.

[6] See EY, “2025 Global IPO market key highlights and 2026 outlook” (December 17, 2025), available here.

[7] In 2025, UK IPO proceeds totaled £1.9 billion, of which £1.3 billion was raised from IPOs that occurred in Q4. While this figure is more than double the amount of proceeds from IPOs in 2024, it is much lower than 2021’s IPO proceeds, which totaled £16.8 billion. See MorningStar, “Late spurt of IPOs drives strongest year for London since 2021” (December 31, 2025), available here.

[8] See EY, “How can you navigate your IPO planning with confidence? EY Global IPO Trends Q3 2025”, supra Note 3.

[9] For a discussion of capital markets reforms in Italy, see our November 12, 2025 publication “Listed Companies and Corporate Governance: Highlights from the Capital Markets Reform,” available here.

[10] IPO proceeds increased year-over-year to ₩14.6 trillion, a 15% prior year. See MSN, “IPO proceeds in S Korea rise 14.9 pct on-year in 2025: data” (December 29, 2025), available here.

[11] Hong Kong IPOs raised proceeds of approximately HK$259.4 billion in the first eleven months of 2025, an increase of 228% when compared with the same period in 2024. See HKEX, “HKEX Monthly Market Highlights: November 2025,” available here.

[12] In August 2025, the Hong Kong Stock Exchange implemented a new rule requiring at least 40% of the shares initially offered in an IPO to be allocated to the IPO’s bookbuilding placing tranche went into effect. See HKEX, “HKEX Concludes Consultation on IPO Price Discovery and Open Market Requirements; Launches Further Consultation on Ongoing Public Float Proposals” (August 1, 2025), available here.

The U.S. regulatory and enforcement landscape for digital assets and distributed ledger technology changed dramatically in 2025. Virtually overnight, U.S. regulators shifted from an enforcement-heavy crypto-skepticism that effectively outlawed the participation of traditional financial institutions in digital asset and tokenization markets and threatened the core business of many fintech companies (Fintechs), to a determined focus on flexibility for market participants to engage with digital assets and distributed ledger technology. Most notably in 2025:

• The SEC dropped nearly all of the enforcement actions commenced under the Biden administration against Fintechs that were based on allegations of unregistered broker-dealer, issuance, exchange or clearing agency activities, without accompanying fraud allegations.
• In conjunction with a new “Crypto Task Force,” the SEC and its staff adopted a variety of no-action letters, interpretative statements and FAQs to clarify the interplay of U.S. securities laws and distributed ledger technology, including that:
  • Payment stablecoins are not securities,
  • Certain utility coins may not be securities,
  • Staking and liquid staking do not involve the offer of securities,
  • Registered investment companies and registered investment advisors may use state trust companies for purposes of custodying crypto assets,
  • Broker-dealers may hold crypto and tokenized assets subject to prescribed requirements, and
  • Meme coins purchased for entertainment or cultural purposes typically do not involve the offer and sale of securities.
• The CFTC withdrew guidance imposing stricter requirements on regulated entities related to digital assets and distributed ledger technology, adopted no-action relief permitting commodity brokers (called “futures commission merchants”) to accept digital assets as collateral and issued guidance outlining how regulated entities may be able to accept tokenized assets as collateral for regulatory purposes.
• The CFTC also took a number of steps to facilitate the trading of event contracts, increase retail access to markets without intermediation and allow futures exchanges to list spot purchases and sales of digital assets.
• The U.S. banking regulators withdrew prior guidance that constrained the ability of banks and bank affiliates to engage with digital assets and distributed ledger technology, and then proceeded to adopt a bevy of new guidance that clarifies and expands the ability of banks to engage in such activities.
• The Office of the Comptroller of the Currency (OCC) also granted a number of Fintech firms national trust bank charters to allow further interaction with digital assets and distributed ledger technology together with the benefit of federal preemption and comprehensive federal regulation.
• President Trump convened a Working Group on Digital Assets that issued a series of recommendations designed to strengthen American leadership in digital financial technology and make the United States the “crypto capital of the world.”

Topping off these regulatory efforts, the U.S. Congress enacted the GENIUS Act, which sets forth a comprehensive federal regulatory framework for payment stablecoins. The legislation makes clear that permitted payment stablecoins are not securities, commodities or deposits, but instead part of a separate regulatory regime administered principally by the OCC, along with the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Secretary of the Treasury and state banking regulators. The GENIUS Act will likely not only legitimate stablecoins and give the market confidence that they can use and transact in such instruments subject to a comprehensive federal regulatory framework, but it will also create a blueprint to incorporate them into everyday transactions throughout the U.S. financial system.

Looking ahead to 2026, we expect this trend to continue. Of particular note:

• The U.S. Congress appears poised to adopt a so-called “market infrastructure” bill that would set out a comprehensive regulatory regime for digital asset brokers, dealers and exchanges, and would bring greater clarity to when transactions in crypto assets may be regulated as offers or sales of securities.
• The SEC will likely continue adopting no-action relief, interpretations, guidance and possibly exemptions and rulemakings that will open new pathways for market participants to engage in digital asset activities and tokenization arrangements. We may also see the adoption of an “innovation exemption” that would create a “sandbox” for market participants to provide services related to digital assets or tokenized securities with fewer regulatory restrictions than generally apply to securities activities, as well as a “super app” registration regime that would allow market participants to obtain a single license to engage in all regulated securities activities. There could also be additional efforts to facilitate 24/7 trading for both digital assets and traditional equity securities.
• Notwithstanding the confirmation of the new CFTC Chairman and anticipated nominations of further Commissioners, we expect the CFTC to continue allowing futures exchanges to list new kinds of contracts, including digital asset derivatives, event contracts and spot purchases and sales of digital assets. The CFTC will also likely explore further ways for commodity brokers, swap dealers and derivatives clearing organizations to accept crypto and tokenized cash and securities as collateral for regulatory purposes, as well as for retail customers to access clearing organizations with no or more limited intermediation.
• The U.S. banking regulators will likely continue their trend of expanding the permissible digital assets and distributed ledger activities of banking organizations, while also considering new trust bank charters and other new ventures and tie-ups for digital asset service providers. We expect to see significant rulemaking and interpretive activity by the banking regulators, at both the federal and state levels, as they take steps to implement the GENIUS Act. The Federal Reserve Board is also considering development of a central bank account for certain types of non-depository charters that would facilitate direct access by certain Fintechs to the U.S. payment rails.

Against this backdrop, we expect market participants to continue investing and innovating dynamically in the digital assets and distributed ledger space in 2026. In particular:

• Fintechs and traditional financial institutions will likely continue to develop new products and services related to digital assets and distributed ledger technology, including new stablecoins; tokenized deposits, securities and other real world assets; new prime brokerage, cross-margining and other financing arrangements and complex derivatives and financial products tied to digital assets and tokenized instruments.
• We expect there to be further proliferation of decentralized exchanges (DEXs) and decentralized finance (DeFi) protocols that may offer new venues to transact in both digital and traditional financial assets. In addition, there may be more venues and operators seeking to offer retail clients disintermediated access to financial markets. We may also see expanded roles for non-custodial wallet providers.
• Fintechs and traditional financial institutions will likely continue the trend of tie-ups, joint ventures and other arrangements that further serve to integrate distributed ledger technology into the traditional financial system.
• Corporate entities and investment funds will likely face questions about steps they are or should be taking to facilitate trading of their securities, whether through tokenization or other arrangements. We also expect corporates to be pushed to accept, or engage intermediaries to develop, new and faster payment methods, including through the use of stablecoins and other digital assets.
• There will likely be more integration and connection between AI services and digital assets offerings.

Many questions lie ahead. We expect there to be robust policy debates in the coming year on many critical issues that could have a dramatic effect on digital assets, distributed ledger technology and tokenization. These include:

• Whether stablecoin issuers can pay “rewards” and if so to whom,
• What requirements should (or will) apply to DeFi protocols and DEXs that offer tokenized securities as well as their associated intermediaries,
• The ability of federal regulators to take actions that effectively preempt state securities, gaming and banking law,
• How quickly traditional financial institutions will adapt to competition from, including whether traditionally regulated financial institutions will be allowed to compete fully with, Fintechs, new payment services providers and newly created charter types, and
• The interaction of AI and distributed ledger technology.

How market participants and policymakers engage and respond to these debates will likely affect the way the digital assets and distributed ledger environments look at this time next year.

On August 7, 2025, the Trump administration issued an executive order titled “Democratizing Access to Alternative Assets for 401(k) Investors” (the Executive Order), marking a step toward facilitating greater inclusion of investment options with exposure to alternative assets in defined contribution plans, including 401(k) plans (collectively 401(k) plans).[1] This development is noteworthy heading into 2026 for boards of directors overseeing companies that sponsor 401(k) plans, as well as those in the asset management industry.

Why this Matters Now

More than 90 million Americans participate in employer-sponsored defined contribution plans, representing over $12 trillion in investment capital. Yet unlike high-net-worth individuals and institutional investors, most 401(k) plan participants have historically been largely precluded from accessing exposure to private equity, private credit, real estate, infrastructure and digital assets.

Throughout the years, there has been a slow but steady move toward enabling 401(k) plans access to alternative assets. The recent Executive Order is reflective of a position that has been gaining momentum—without greater access to investments in alternative asset classes, 401(k) plan participants are missing out on “potential growth and diversification opportunities associated with alternative asset classes.”[2] Despite these growing sentiments, many 401(k) plan fiduciaries and sponsors have been slow to incorporate exposure to alternative assets as part of investment line-ups due to a lack of clear guidance from the Department of Labor (the DOL) and concerns about liability (e.g., from participant lawsuits alleging imprudent selection based on higher risks, lower liquidity and/or excessive fees).

What the Executive Order Does

While there has been significant media coverage of the Executive Order, it is important to keep in mind that it does not usher in any immediate regulatory changes. The Executive Order directs the DOL to reexamine its guidance regarding the investment of 401(k) plans in alternative assets and, to the extent deemed appropriate by the DOL, to issue clarifying guidance by early February 2026. The Executive Order also directs the Securities and Exchange Commission (SEC), in consultation with the DOL, to consider ways in which to facilitate the investment by 401(k) plan participants in alternative assets.

While there are quite a few outstanding questions to be addressed by the DOL and the SEC before we see significant regulatory changes in this space, there are still timely considerations to keep in mind going into 2026.

What Boards Should Consider in 2026

Below is a high-level overview of some general considerations for 2026:

1. Action by the DOL and SEC: In response to the Executive Order’s directive, the DOL may issue a notice of proposed rulemaking in the early days of 2026. Companies should be on the lookout for DOL and/or SEC rulemaking.
2. Determining the Board’s Role: Consider what role (if any) the board will play in determining next steps (if any) relating to alternative assets and the 401(k) plan.
3. Assessing Current Plan: Encourage management to review the current governing documents, investment policy statement and investment line-up for the company’s 401(k) plan to determine whether investment options with exposure to alternative assets are permitted and/or currently held by the plan.
4. Evaluating Fiduciary Capabilities: Consider evaluating whether the 401(k) plan’s current fiduciaries (e.g., retirement committee or third-party investment advisor/manager) have the requisite expertise to select, evaluate and monitor investment options with exposure to private equity.

Looking Ahead: The 2026 Landscape

In addition to the foregoing general considerations, there are several trends that will bear watching in 2026:

1. Industry Innovation: While there have been steady developments relating to increased participation by 401(k) plans in alternative asset classes, we expect to see increased partnerships between private fund sponsors, investment managers and traditional 401(k) platform providers in this space.
2. Potential Safe Harbors: The DOL and SEC may memorialize and expand upon past guidance to provide conditions relating to a safe harbor for fiduciaries selecting investment options with exposure to alternative assets.
3. Litigation Trends: We may also see regulations from the DOL aimed at reducing the risk of ERISA litigation relating to the selection of investment options with exposure to alternative asset classes.

The Bottom Line

Boards may wish to consider (and may encounter questions from participants regarding) the inclusion of alternative assets as part of the 401(k)-plan lineup. As we await further guidance, members of boards of directors should take a measured approach in response to the Executive Order: educate yourselves on the issues, monitor regulatory developments closely and assess current plan framework and fiduciary capabilities.[3]

[1] The White House, “Democratizing Access to Alternative Assets for 401(k) Investors” (August 7, 2025), available here.

[2] The Executive Order.

[3] For more detailed analysis and information, see our August alert memo available here.

Two significant developments during 2025—one in Delaware corporate law and the other in federal securities law—could materially impact shareholder litigation in 2026 and beyond. In March 2025, following a number of controversial Delaware Court of Chancery decisions, the Delaware legislature passed S.B. 21, establishing safe harbors from litigation for certain board decisions and transactions that might otherwise be evaluated under the demanding entire fairness standard of review. Then, in September 2025, the SEC issued guidance permitting for the first time U.S. listed companies to include mandatory arbitration provisions in their bylaws or charter for federal securities law claims. S.B. 21 currently faces a constitutional challenge before the Delaware Supreme Court, and because Delaware law prohibits corporations from requiring investors to arbitrate securities claims, any Delaware corporation adopting mandatory arbitration will likely face legal challenges. While each of these developments have the potential to significantly change the legal landscape for Delaware and listed companies, their full impact remains uncertain and will likely gradually come into focus in 2026.

Below, we summarize these key developments and preview what to expect in the year ahead.

Delaware Developments: S.B. 21 Adoption and Constitutional Challenge

To address criticisms of several high-profile Court of Chancery decisions and maintain Delaware’s preeminence in corporate law, the Delaware legislature enacted S.B. 21 in March 2025. The legislation amended Section 144 of the Delaware General Corporation Law (DGCL) to provide three safe harbors exempting from legal challenge transactions or board decisions involving interested or conflicted directors or controlling stockholders when structured to meet certain conditions:

• The first safe harbor concerns transactions not involving a conflicted controlling stockholder where a majority of the directors are interested or conflicted, and is satisfied when material facts of the transaction and the directors’ interest are disclosed to, and the transaction is approved by, either a majority of disinterested directors or a majority of the disinterested stockholders.
• The second safe harbor concerns transactions involving controlling stockholders (other than go-private transactions), and is satisfied when material facts are disclosed and the transaction is approved in good faith by a majority of disinterested directors on a special committee or by a majority of the minority stockholders.
• The third safe harbor concerns go-private transactions involving a controlling stockholder; it is satisfied when material facts are disclosed and the transaction is approved in good faith by a majority of disinterested directors on a special committee and a majority of the minority stockholders.

S.B. 21 also provides statutory definitions of critical much-litigated terms, including “controlling stockholder,” “control group,” “interested” and “disinterested,” and it provides a heightened presumption of director independence for any director that the board has determined satisfies applicable stock exchange rules. The legislation further amends Section 220 of the DGCL to limit stockholders’ inspection rights to a narrow set of categories of books and records, and codifies caselaw on some procedural requirements and protections favorable to Delaware corporations providing books and records.

The Delaware legislature acted swiftly in passing S.B. 21 in order to halt the threatened exodus of Delaware companies to states perceived to be more corporate-friendly.[1] Meanwhile, amid the legislative change and ongoing uncertainty as to the ultimate impact of S.B. 21, 2025 saw a slight uptick in corporations reincorporating from Delaware to other jurisdictions, with 18 companies offering reincorporation proposals during the 2025 proxy season[2] (compared to about five reincorporation proposals per year in prior years).[3]  Still, the unusually high number of companies leaving Delaware in 2025 does not meet the predicted impending outflow of companies, which seems, in spite of the continued uncertainty may have been largely exaggerated.[4] Further, on December 19, 2025, the Delaware Supreme Court reversed the Court of Chancery’s rescission of Elon Musk’s Tesla compensation plan—a ruling many viewed as a significant impetus for S.B. 21’s passage.

Almost immediately upon its enactment, S.B. 21 was challenged on constitutional grounds. The Delaware Supreme Court took an interlocutory appeal in Thomas Rutledge v. Clearway Energy Group, et al., certifying two questions:

• Does Section 1 of S.B. 21—eliminating the Court of Chancery’s ability to award “equitable relief” or “damages” where safe harbor provisions are satisfied—violate the Delaware Constitution by divesting the Court of Chancery of equitable jurisdiction?
• Does Section 3 of S.B. 21—applying safe harbor provisions retroactively to breach of fiduciary claims arising before enactment—violate the Delaware Constitution by eliminating causes of action that had already accrued or vested?

On November 5, 2025, the Delaware Supreme Court heard oral argument on this challenge, focusing primarily on whether the legislature exceeded its constitutional powers by restricting the Court of Chancery’s jurisdiction. As of the date of this publication, the Court’s decision remains pending. Meanwhile, other cases pending in the Delaware Court of Chancery in which S.B. 21 is implicated have been stayed until the Delaware Supreme Court issues its decision on the constitutional challenge. As a result, the Delaware courts have not yet started to grapple with how to apply S.B. 21 in practice, making it unclear exactly how much of an impact it will have on shareholder litigation in Delaware going forward. For example, will the Delaware courts apply the safe harbors as written to dismiss cases where the statutory conditions are met, or will the courts find “fact issues” as to whether those conditions were fully satisfied, thus allowing cases to proceed to discovery and potentially trial? If the latter, will S.B. 21 lead to different case outcomes, or will shareholder litigation in Delaware continue much as it looked before S.B. 21 was passed? Assuming the Delaware Supreme Court upholds S.B. 21, Delaware courts will start providing the answers to these and other questions as they decide cases in 2026.

Federal Securities Law Developments: Mandatory Arbitration Clauses

In September 2025, the SEC issued a policy statement clarifying that the inclusion of a mandatory arbitration provision for investor claims under federal securities laws in an issuer’s charter, bylaws, or securities-related agreements will not affect whether the Commission accelerates effectiveness of that issuer’s registration statement.[5] This reflects a significant policy shift, as the SEC has historically opposed provisions in governing documents that risk waiving or impairing federal securities law protections. SEC Chairman Paul S. Atkins stated the Commission was not taking a position on whether companies should adopt mandatory arbitration, but providing clarity on the SEC’s position that such provisions are not inconsistent with federal securities laws.[6]

The SEC’s revised position rests on its review of Supreme Court jurisprudence addressing the intersection of federal securities laws and the Federal Arbitration Act of 1925 (the FAA), which “establishes ‘a liberal federal policy favoring arbitration agreements.’”[7] The SEC concluded that the anti-waiver provisions of the federal securities laws, which void any provision that waives compliance with the securities laws,[8] do not preempt the FAA’s policy in favor of arbitration agreements. In support, the SEC pointed to two Supreme Court decisions from the 1980s, Shearson/American Exp., v. McMahon,[9] and Rodriguez de Quijas v. Shearson/American Exp., Inc.,[10] both of which held that the anti-waiver provisions of federal securities law do not affect agreements to arbitrate. The SEC further concluded that there was no right to proceed through a class action under the federal securities statutes that would preempt application of the FAA, relying on the Supreme Court’s decision in American Express Co. v. Italian Colors Restaurant that no such right existed under federal antitrust statutes.[11]

However, the SEC’s position does not resolve whether companies can or should implement mandatory arbitration provisions. State law generally governs a corporation’s internal affairs and stockholder relationships, and enforceability of mandatory arbitration is a state contract law question.[12] The SEC acknowledged that the interaction of the FAA and state law with respect to mandatory arbitration provisions was outside the scope of its role, but did highlight Supreme Court jurisprudence suggesting that state laws that explicitly target the enforceability of mandatory arbitration agreements, or implicitly do so by “interfering with fundamental attributes of arbitration,”[13] could “be preempted by the [FAA].”[14]

The SEC’s change in position comes amid other recent changes to Delaware law. DGCL Section 115 historically allowed forum selection clauses in charters and bylaws for internal corporate disputes, provided claims could be brought in Delaware courts.[15] As part of a separate package of reforms passed in Senate Bill 95 (S.B. 95), which became effective as of August 1, 2025, these safeguards were extended to intra-corporate claims, which would arguably include securities claims brought by investors.[16] The SEC expressly noted that these amendments “may prohibit certificates of incorporation or bylaws from including an issuer-investor mandatory arbitration provision.”[17] In an October speech, SEC Chairman Atkins expressed disappointment with these amendments and encouraged Delaware to revisit the changes to DGCL Section 115.[18] While it has not yet issues a formal statement to the effect, the SEC has also suggested that the FAA may preempt state laws limiting mandatory arbitration clauses, rendering the Delaware prohibition irrelevant.

While it is too early to say how these issues will play out, further litigation in this area over such changes seems inevitable. A November letter from the Council of Institutional Investors—representing over 135 public pension funds, corporate and labor funds, and foundations and endowments—emphasized the group’s “long-standing membership-approved policy” opposing mandatory shareholder arbitration clauses.[19] The group highlighted that arbitrations are disfavored because they place limits on the discovery of evidence, in many cases take away the right to appeal, limit class-wide actions and the proceedings rarely enter the public record.[20] Perhaps because of these issues, to date no Delaware company has tried to adopt a mandatory arbitration provision. The only company to do so is Zion Oil & Gas, a Texas corporation, which changed its bylaws without need of a shareholder vote. Texas has no prohibition like the one in Delaware. Once a Delaware corporation adopts a similar provision, we would expect litigation challenging it.

Key Takeaways:

• S.B. 21 Constitutionality and Application: The Delaware Supreme Court should issue its decision on the constitutionality of S.B. 21 shortly. We expect it will uphold the legislation. Even if upheld, future litigation will likely challenge whether companies and boards have adequately satisfied the safe harbor requirements, leading to decisions that will provide further clarity to boards, management teams and their advisors as they consider how to manage potential conflicts in various contexts.
• Mandatory Arbitration Challenges: If companies adopt mandatory arbitration provisions following the SEC’s new policy, expect investor litigation challenging whether Delaware law permits such provisions and whether Delaware law is federally preempted.
• Consider Carefully: While many corporations no doubt find the idea of adopting mandatory arbitration of federal securities claims tempting (including because it would remove any class claims), such corporations should carefully assess whether requiring arbitration of investor claims serves the company’s best interests. Arbitration, for all its upsides, also has numerous downsides for issuers, including those identified by the Council of Institutional Investors.[21] Additionally, significant opposition from institutional investors and proxy advisors could harm the company’s reputation and affect the business overall. While mandatory arbitration, if widely adopted, has the potential to fundamentally change the face of securities litigation that has existed for decades, there are numerous reasons why companies might not adopt it all.

This article was prepared with contributions from Cleary trainee solicitor, Davawn Hartz.

[1] Jai Ramaswamy, Andy Hill and Kevin McKinley, “We’re Leaving Delaware, And We Think You Should Consider Leaving Too” (July 9, 2025), available here; see also Madlin Mekelburg, “Musk Shifts Tesla Incorporation to Texas After Investor Vote” (June 14, 2024), available here.

[2] Companies mostly contemplated reincorporating to other U.S. jurisdictions, with the majority proposing relocating to Nevada (12), followed by Florida (2), Texas (1), and Indiana (1). See Sam Nolledo, Sarah Wenger and Aaron Wendt, “The State of US Reincorporation in 2025: The Growing Threat and Reality of ‘DEXIT’” (October 9, 2025), available here; see also ISS Insights “The U.S. Reincorporation Race: Who’s in the Lead?” (July 16, 2025), available here.

[3] See Stephen M. Bainbridge “DExit Drivers: Is Delaware’s Dominance Threatened?,” pgs. 18-19, available here.

[4] Lora Kolodny, “Despite the highly publicized departure of Coinbase, only 28 companies have left Delaware this year” (November 14, 2025), available here; Gaurav Jetley and Nick Mulford, Analysis Group, Inc., “DExit: Reincorporation Data Seem to Support the Hype” (September 23, 2025), available here.

[5] SEC “Acceleration of Effectiveness of Registration Statements of Issuers with Certain Mandatory Arbitration Provisions, Securities Act Release No. 33-11389, Exchange Act Release No. 34-103988 90 Fed. Reg. 45125” (September 19, 2025), available here (Policy Statement).

[6] Id.

[7] CompuCredit Corp. v Greenwood, 565 U.S. 95, 98 (2012).

[8] 15 U.S.C. 77n contains the Securities Act’s anti-waiver provision, and reads “Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this title or of the rules and regulations of the Commission shall be void. 15 U.S.C. 78cc(a) contains the Exchange Act’s anti-waiver provision, and reads “Any condition, stipulation, or provision binding any person to waive compliance with any provision of this title or of any rule or regulation thereunder, or of any rule of a self-regulatory organization, shall be void.”

[9] 482 U.S. 220, 220 (1987).

[10] 490 U.S. 477, 482 (1989).

[11] 570 U.S. 228.

[12] See, generally, Meyer v. Uber Technologies, Inc., 868 F.3d 66, 73 (2d Cir. 2017)

[13] Epic Systems Corp. v. Lewis, 584 U.S. 497, 498 (2018).

[14] Policy Statement, at 6.

[15] 80 Del. Laws, c. 40, § 5.

[16] 85 Del. Laws, c. 48, § 4.

[17] Policy Statement, at 3.

[18] Paul S. Atkins, “ Keynote Address at the John L. Weinberg Center for Corporate Governance’s 25th Anniversary Gala” (October 9, 2025), available here.

[19] Jeffrey P. Mahoney, General Counsel of the Council of Institutional Investors, “Letter to Chairman Atkins” (November 6, 2025) at 2, available here.

[20] Id. at 4-5.

[21] For additional information on mandatory arbitration, see our September blog post available here.

Proxy advisory firms—principally ISS and Glass Lewis—and large institutional investors, such as Blackrock, Vanguard, State Street and Fidelity, have long played a central role in shaping shareholder voting outcomes at U.S. public companies.

Historically, for a significant portion of U.S. public company shares, especially retail holders and mutual fund and ETF investors, shareholder voting decisions are not made by the beneficial owners of the stock, but rather their investment advisers, who often follow the voting recommendations of proxy advisory firms and may use the voting principles of large institutional investors as guidance.

Recent backlash targeting proxy advisory firms and large institutional investors, like the executive order issued by President Trump in December 2025, as well as a litany of committee hearings in the House of Representatives scrutinizing the influence and power of proxy advisory firms and various state Attorneys General investigations and lawsuits against ISS and Glass Lewis may result in a shift in how voting decisions may be made going forward. Against the backdrop of these developments, the key question for U.S. public companies and their boards is, “who will be driving voting outcomes—and how should companies respond?”

The Traditional Framework

ISS and Glass Lewis have historically dominated the proxy advisory industry: according to statements made at a hearing before the Subcommittee on Capital Markets of the Committee on Financial Services of the House of Representatives on April 29, 2025 (the April Committee Hearing), ISS and Glass Lewis collectively “control 97 percent of the proxy advisory market.”[1] Their voting recommendations have had significant influence over shareholder voting decisions in connection with director elections, say-on-pay advisory proposals, shareholder proposals and contested matters. They are viewed as a primary input for many institutional investors, which own an overwhelming majority of outstanding shares of publicly traded companies in the United States and have significantly higher rates of voting participation than their retail investor counterparts.[2] According to statements made at the April Committee Hearing, “when ISS or Glass Lewis recommend voting against a director, their clients are over 30 percent more likely to follow suit than nonclients.” Furthermore, according to a sample of voting records from 2017:

“95 percent of institutional investors vote in favor of a company’s ‘say on pay’ proposal when ISS recommends a favorable vote while only 68 percent vote in favor when ISS is opposed (a difference of 27 percent). Similarly, equity plan proposals receive 17 percent more votes in favor; uncontested director elections receive 18 percent more votes in favor; and proxy contests 73 percent more votes in favors when ISS also supports a measure. . . . Glass Lewis favorable votes are associated with 16 percent, 12 percent, and 64 percent increases in institutional investor support for say on pay, equity plan, and proxy contest ballot measures. Furthermore, some individual funds vote in near lock-step with ISS and Glass Lewis recommendations, correlations that suggest that the influence of these firms is substantial.”[3]

As a result of their influence over voting outcomes for proposals presented at a shareholder meeting, ISS’s and Glass Lewis’ voting guidelines and principles have had lasting impacts on public company governance profiles, as companies regularly tailor their governance decisions after considering how ISS and Glass Lewis may view such decisions.

What Is Changing?

Scrutiny of proxy advisory firms is not new and has been contentious. The SEC’s attention on proxy advisory firms and related regulatory oversight has been building for the past two decades, culminating in rules and interpretive guidance published in July 2020 that imposed moderate additional requirements on proxy advisory firms.[4] This guidance was later vacated by the U.S. Court of Appeals for the D.C. Circuit affirming a lower court’s decision in July 2025. More recently, scrutiny over the influence of proxy advisory firms has moved from the SEC to the executive and legislative branches of the U.S. federal government—and with it, we are seeing reactionary changes from proxy advisory firms, institutional investors and companies alike.

Executive Orders

On December 11, 2025, President Trump issued an Executive Order, “Protecting American Investors From Foreign-Owned and Politically Motivated Proxy Advisors,” to “increase oversight of and take action to restore public confidence in the proxy advisor industry, including by promoting accountability, transparency, and competition.”[5] The Executive Order mandates the Chairman of the Securities and Exchange Commission to “review all rules, regulations, guidance, bulletins and memoranda relating to proxy advisors . . . and consider revising or rescinding . . . [any] that are inconsistent with the purpose of th[e] order, especially to the extent that they implicate ‘diversity, equity, and inclusion’ and ‘environmental, social, and governance’ policies.” The Executive Order follows a series of committee hearings in the House of Representatives that have heightened scrutiny on proxy advisors, including the April Committee Hearing, which described ISS and Glass Lewis as “the proxy advisory cartel” and was intended “to shine a light on how the proxy of [sic] process is functioning and, in many ways, failing today’s markets.”

Investigations and Lawsuits

Various state Attorneys General, including from Texas, Florida and Missouri, have initiated investigations, launched enforcement actions and filed lawsuits against ISS and Glass Lewis, alleging that the proxy advisory firms have been misleading investors by pushing ESG and DEI agendas instead of basing voting recommendations on impartial factors relating to financial performance and principles.[6] ISS and Glass Lewis have also been facing antitrust/regulatory pressure as the U.S. Federal Trade Commission is investigating them for potential antitrust concerns—namely whether their dominant market positions and their influence over shareholder votes constitute anti-competitive behavior. Of particular concern to the FTC are conflicts of interest where a firm might both (1) advise a company’s shareholders on how to vote, and (2) simultaneously provide consulting services to the company (e.g., say-on-pay, equity plans)—raising “pay-to-play” or vote-influence issues.

Policies and Business Model Changes

ISS, Glass Lewis and certain institutional investors have recently pared back their voting principles and guidelines relating to ESG shareholder proposals and DEI proposals in response to the current political climate. For example, in response to President Trump’s executive order, “Ending Radical And Wasteful Government DEI Programs And Preferencing,” from January 20, 2025, and to the rise of anti-ESG shareholder proposals in recent years, these firms and institutional investors have changed previous brightline guidelines to more nuanced case-by-case analyses on many ESG and DEI related proposals.

Furthermore, business model changes are underway for proxy advisor services, driven by a mix of factors, including investor demand for tailored voting strategies, regulatory/legislative scrutiny of the proxy advisor model over recent years and profit incentives (the ability to command premium pricing for customized reports). For example, Glass Lewis is moving away from its longstanding “benchmark” or “house policy” voting recommendation model. Starting in 2027, it will offer customizable perspectives (e.g., management-oriented, governance-oriented, activism-oriented, sustainability-oriented) instead of a one-size-fits-all recommendation. We expect the business model and custom services to continue to evolve, with many mechanical details still to come. For example, ISS has already introduced services (e.g., “Gov360,” “Custom Lens”) that decouple pure voting recommendations from its research, shifting toward more customizable client offerings rather than default advice.

Institutional Investor Voting Practices and Engagement

In recent years, institutional investors like Blackrock and Vanguard have expanded their in-house governance and stewardship teams. Where historically voting guidelines and recommendations came from ISS and Glass Lewis, many institutional investors now have their own voting guidelines and are becoming less reliant on and more skeptical of proxy advisor recommendations.

Taking this one step further, on January 7, 2026, JPMorgan Chase’s asset management unit announced that it would be “cutting all ties with proxy advisory firms, effective immediately” and is purported to be “the first large investment firm to entirely stop using external proxy advisors.”[7] JPMorgan’s asset management unit is one of the largest investment firms in the world, with more than $7 trillion in client assets, and had previously stopped using proxy advisors for voting recommendations in favor of using its own internal stewardship team.  

In tandem with investors becoming more sophisticated and evaluating proposals on their own merits instead of fully relying on ISS and Glass Lewis for recommendations, companies are increasing direct shareholder engagement off-season and in proxy season with institutional and key investors. The increase in shareholder engagement has resulted in enhanced governance and compensation disclosure, as well as higher rates of withdrawn shareholder proposals during the proxy season.

The Influence of Proxy Advisors is Evolving, Not Disappearing

For all the reasons noted above, the market has seen reduced automatic reliance on proxy advisor recommendations, and a growing divergence between proxy advisor recommendations and investor voting outcomes. In recent years, there has been a greater emphasis on a company’s shareholder engagement history and responsiveness to shareholder feedback in the evaluation of whether to vote with management.

On the other hand, while proxy voting recommendations may not be as influential as they once were, ISS and Glass Lewis continue to be relevant as sophisticated research tools for their clients. Their new products and business strategies, as discussed above, focus on customizable research support and resources, rather than on strict voting recommendations. Over time, we expect that proxy advisors will become one data point for consideration in investors’ evaluations of proposals instead of the final decision-maker.

Key Takeaways for U.S. Public Companies and Boards

With this evolution, individual company shareholder engagement will become more crucial in persuading shareholders to support the recommendations of management and work with the company on governance and other changes that stakeholders believe to be beneficial. In fact, shareholder engagement should be considered by U.S. public companies as a core governance function, and engagement strategies should keep in mind that proactive engagement can shape voting outcomes before the proxy season even begins. Shareholders may request engagement with members of the board in certain circumstances, and we may see directors playing a more visible role in shareholder dialogue going forward.

Investors have differing priorities, policies and decision-making frameworks, and they are increasingly exercising greater independent judgment. As such, a company’s engagement strategies should focus on key holders, not just proxy advisors, and disclosure and engagement presentations should be customized to focus on key issues for individual investors, including retail investors. Companies that invest in thoughtful, credible engagement will be better positioned for the proxy season, instead of solely relying on shaping their governance and other practices around one-size-fits-all voting recommendations of proxy advisors.

[1] House Financial Services Committee, “Exposing the Proxy Advisory Cartel: How ISS & Glass Lewis Influence Markets” (April 29, 2025), available here.

[2] See David F. Larcker, Brian Tayan and James R. Copland, “The Big Thumb on the Scale: An Overview of the Proxy Advisory Industry” (June 14, 2018), available here.

[3] Id.

[4] For more information, see our July 2020 alert memo available here.

[5] The White House, “Protecting American Investors From Foreign-Owned and Politically Motivated Proxy Advisors” (December 11, 2025), available here.

[6] See Ken Paxton, Attorney General of Texas, “Attorney General Ken Paxton Investigates Proxy Advisors Glass Lewis and ISS for Misleading Public Companies to Push Radical Agenda” (September 16, 2025), available here; James Uthmeier, Attorney General of Florida, “Attorney General James Uthmeier Sues Proxy Advisory Giants for Deceiving Investors and Manipulating Corporate Governance” (November 20, 2025), available here; Missouri Attorney General, “Attorney General Bailey Leads Fight Against Hidden ESG And DEI Agendas In Corporate America” (July 11, 2025), available here.

[7] Jack Pitcher, Wall Street Journal, “JPMorgan Cuts All Ties With Proxy Advisers in Industry First” (January 7, 2026), available here.

A number of changes to executive compensation disclosure may occur in 2026, reflecting potential Securities and Exchange Commission (SEC) rulemaking previewed during a July 2025 roundtable discussion as well as separate updates to guidance from ISS and Glass Lewis.

Executive Compensation Roundtable: SEC Signals Potential Future Changes to Compensation Disclosure Rules

On June 26, 2025, the SEC hosted an Executive Compensation Roundtable[1] (the Roundtable) to conduct a retrospective review of its executive compensation disclosure rules. Roundtable panelists included representatives from public companies, investors, compensation advisors and other experts in the field. The discussion focused on the question of whether the current disclosure regime accomplishes its intended goal of providing investors with material information related to executive compensation.

The SEC has stated that the Roundtable is an initial step in its review of the existing executive compensation disclosure framework, and the Staff has solicited public comment on the disclosure requirements.[2]

Roundtable Discussion Highlights

The Roundtable discussion primarily examined the impact of the current executive compensation disclosure rules and suggested several potential areas for improvement. While some panelists emphasized the importance of these disclosures, the majority expressed the opinion that much of the required compensation disclosure is overly complex, expensive and burdensome, especially in light of the minimal benefit it provides investors. Relatedly, panelists expressed an overarching concern that the disclosure rules are dictating and distorting company decisions on executive compensation and most indicated that some level of reform would be welcome. The SEC Chair and Commissioners generally agreed that the existing executive compensation disclosure rules are ripe for review, acknowledging that the current regime is complex and financially burdensome for public companies.[3]

• Say-on-Pay. Panelists acknowledged say-on-pay as a useful tool in promoting shareholder engagement.
• Compensation Discussion & Analysis (CD&A). Panelists noted that disclosure reforms have resulted in increasingly lengthy CD&A disclosure and indicated that it is unclear whether these additional disclosures actually provide investors a more comprehensive understanding of a company’s compensation practices.
• Summary Compensation Table. Panelists generally expressed the view that the Summary Compensation Table (SCT) could benefit from simplification to address only what a company is targeting to pay their executives and what they actually paid their executives, particularly with respect to the disclosure of equity awards. Some panelists suggested limiting disclosure to the CEO and CFO, on the basis that existing disclosure rules tend to impact compensation decisions and strategy as companies try to avoid certain individuals’ inclusion in the SCT and vice versa.
• Perquisites. Panelists generally agreed that SEC guidance on what qualifies as a perquisite should be updated. While executive security was widely considered to be improperly classified as a perquisite, the panelists also acknowledged that companies are unlikely to be making decisions as to whether to provide security benefits to their executives based on the need to disclose these benefits, and investor representatives suggested they would not penalize a company for providing and disclosing such security benefits.
• Pay vs. Performance. Panelists agreed that providing disclosure that maps a company’s performance against CEO pay is appropriate, but raised issues with the burden of preparing this disclosure, the excess measures the rule requires and the inclusion of NEOs other than the CEO in the table.
• Clawbacks. While panelists did not object to the clawback rules in principle, there was a general consensus that it remains too early to assess the full scope of issues arising from their implementation. Panelists expressed particular concern regarding the unexpected extension of the rules to “little r” restatements, noting that these restatements often involve judgment-based, non-material accounting corrections and may trigger mandatory clawbacks even in the absence of misconduct. As a result, panelists cautioned that the rules could lead to unnecessary compliance costs, more complex disclosure judgments and a significant chilling effect on executives and executive compensation programs, given the uncertainty and long-term personal exposure associated with the potential recovery of incentive compensation years after it is awarded.
• Pay Ratio. Panelists noted that comparing pay ratios across companies is not a useful data point for investors. Instead, it is more meaningful to have this data over time for one company or to limit the employee population to workers in the United States. Company representatives also indicated that this disclosure is burdensome to prepare.

Additional Consequences of the Current Disclosure Framework

The discussion as to unintended consequences of the compensation disclosure rules has been ongoing even prior to the SEC’s Roundtable. These conversations and supporting evidence have focused on how the rules have impacted decisions on executive compensation.

• Rate of Executive Pay. Median CEO pay, as measured by actual total direct compensation, increased year over year from 2012 to 2019; though median pay remained flat in 2020 during the COVID-19 pandemic, there were significant increases in 2021, no increase for 2022, and another significant increase in 2023.[4] Even more notable is the fact that, in the years since outsized CEO pay compensation packages have come to light, the number of CEOs of S&P 500 companies who received pay packages valued at $50 million or more increased from nine to thirty-six.[5] This may suggest that publicity around large CEO pay packages, driven in part by the disclosure rules, has impacted and, somewhat paradoxically, increased executive pay more generally.
• Harmonization of Executive Pay Programs. Since 2006 (which marked a shift in disclosure requirements), CEO compensation has become more similar across public firms, regardless of company size, strategy or sector, by 24%, according to a measure that tracks pay structure, including salary, bonus, stock awards and other incentives.[6] Analysis of this data points to pressure on boards from institutional investors and proxy advisors to standardize their compensation programs rather than to design a strategy that aligns with their business goals.[7] This trend is also one that was raised at the Roundtable by public company representatives, who pointed to the pressure to standardize as a factor in compensation decisions.
• Shift Toward Equity Compensation and Resulting Dilution.Stock awards accounted for 71.6% of the median pay package for CEOs in 2024 and the median value of stock awards rose 14.7%.[8] CEO pay growth is largely being driven by increases in the value of stock and option awards—as median base salaries saw a modest increase of 2.7% from the prior filing period, the median stock award and median option award saw increases of 6.9% and 6.0%, respectively, from award values in the previous year.[9] This topic was also raised at the Roundtable, specifically by investor representatives who noted the current difficulties in determining target pay from existing disclosures and in tracing an equity award through its entire lifecycle.
• Prevalence of “Status Symbol” Perquisites. Perquisites have also increased in recent years, both in value and in terms of public scrutiny. The exclusivity offered by perquisites, like the use of private planes, can result in these benefits serving as status symbols for executives. Particularly as the COVID-19 pandemic realigned norms regarding remote working and travel, and as companies focus more on security measures for their executives, the value of benefits granted under this category has continued to balloon.[10]
• “Noise” in the Proxy. As companies attempt to explain how their executive compensation programs align with their corporate strategy through the mandatory disclosures, the average word count of the CD&A of a sample of 100 companies increased every year from 2013 to 2017 for a total of a 3.7% increase.[11] This data echoes the opinions voiced among many of the Roundtable panelists, who noted that it has become difficult for investors to glean material information from often lengthy, repetitive disclosures.

An Opportunity for Change

While the SEC has not yet taken action in the wake of the Roundtable, its willingness to reflect on the existing executive compensation disclosure regime, together with the consensus among panelists that there is room for improvement in the rules, suggests that a rulemaking proposal or additional SEC guidance may be forthcoming, though the timing and substance of any such proposal remains unclear. 

ISS and Glass Lewis Benchmark Policy Updates – What Boards and Compensation Committees Need to Know

On November 25, 2025, ISS Governance (ISS) announced updates to its 2026 benchmark proxy voting policies, effective for shareholder meetings that take place on or after February 1, 2026.[12] This update included key changes to guidelines for certain compensation items described below, which boards and compensation committees should be aware of moving into 2026.

Glass Lewis also made updates to its guidelines, effective beginning with shareholder meetings in 2026, with the most significant changes for compensation coming in the form of changes to its quantitative pay-for-performance methodology, which serves as one part of its say-on-pay analysis.[13] Whereas Glass Lewis previously conducted this evaluation using letter grades, their updated format uses a 0-100 numerical scorecard with each company being evaluated by up to six weighted tests, the intent of the change being to eliminate confusion created by the prior scoring system.[14] While the weighting of the tests is not disclosed, Glass Lewis has provided information on what each of these tests are intended to measure, as summarized below.

ISS Policy Updates

Say-on-Pay Responsiveness.

ISS amended their guidelines on say-on-pay responsiveness to remove certain disclosure requirements, such as specific documentation of engagement efforts or itemized shareholder concerns.[15] The updated guidelines take a more nuanced approach, adding that “if the company discloses meaningful engagement efforts, but in addition states that it was unable to obtain specific feedback, ISS will assess company actions taken in response to the say-on-pay vote as well as the company’s explanation as to why such actions are beneficial for shareholders.” This update acknowledges the reality that, despite best efforts, companies may be unable to obtain detailed feedback from shareholders.

The updated guidelines also expand the factors to be considered when evaluating compensation committee actions, including recent mergers, proxy contests and other compensation developments.

Non-Employee Director Compensation.

ISS will generally recommend against responsible directors where there is a pattern of excessive or otherwise problematic non-employee director compensation and the company fails to disclose a compelling rationale or other mitigating factors. Problematic compensation includes performance awards, retirement benefits or certain perquisites, though the type of perquisites that would be considered problematic is not specified. The updated guidelines specify that adverse recommendations may be made in response to a pattern, even if the pattern does not appear in consecutive years, to address issues in which problematic pay is granted non-consecutive years. The update also clarifies that adverse recommendations may be made in the first year of occurrence if a pay practice is considered especially problematic.

Pay-for-Performance Evaluation.

The updated guidelines extend the time period over which pay-for-performance is evaluated. The measurement periods for evaluating (1) the degree of alignment between a company’s annualized total shareholder return rank and the CEO’s annualized total pay rank within their peer group and (2) the ranking of CEO total pay and company financial performance within a peer group are both extended from three to five years. Additionally, the multiple of CEO total pay relative to the peer group median will now be measured over one and three years, rather than only the most recent year.

Time-Based Equity with Extended Vesting.

ISS maintains a list of qualitative factors relevant to the analysis of how various pay elements may support or undermine long-term value creation and alignment with shareholder interests. ISS updated its policy to include the addition of a factor for vesting and/or retention requirements for equity awards that demonstrate a long-term focus.

Equity Plan Scorecard.

ISS maintains a scorecard against which it evaluates equity plan proposals in order to make case- by-case voting recommendations. ISS has modified the scorecard by (1) adding consideration of whether there are cash-denominated award limits for non-employee directors within the Plan Features pillar and (2) providing that plans should generally receive an against vote if the plan lacks sufficient positive features under the Plan Features pillar. ISS indicated that it considers award limits to be best practice, and noted that the second change was driven by the fact that historically, plans could receive an overall passing score despite receiving a poor or zero Plan Features pillar score.

ISS Governance – Frequently Asked Question Updates

In addition to its benchmark policy updates, ISS also updated its U.S.-specific Frequently Asked Questions (FAQs) for Executive Compensation Policies on December 9, 2025.[16] A few key takeaways include:

Company Responsiveness to Say-on-Pay.

Corresponding to the ISS Benchmark Policy Updates described above, the updated ISS FAQs address how ISS will assess board actions taken in response to a say-on-pay vote that receives low support (less than 70% or less than 50%, respectively). For companies whose say-on-pay proposal receives less than 70% support, ISS will conduct a qualitative review, considering factors such as: the disclosure of details on the breadth of engagement, disclosure of specific feedback received, actions taken to address issues that contributed to low support, whether the issues are recurring, the company’s ownership structure, significant corporate activity, and any other recent compensation action or factor that could be relevant. In situations where the proposal receives less than 50% support, ISS notes that this would warrant the highest degree of responsiveness, using the same determining factors. If a company discloses meaningful engagement efforts but also discloses that it was unable to obtain specific negative feedback, ISS will still assess the company actions taken in response to the vote. ISS will generally recommend a vote against the say-on-pay proposal and against the compensation committee members of companies who demonstrate poor responsiveness. In the event of multiple years of poor responsiveness, ISS may recommend a vote against the full board.

These updates demonstrate ISS’s focus on say-on-pay responsiveness and, more specifically, how they evaluate responsiveness and related disclosure. While this guidance acknowledges that companies may be unable to garner specific negative or constructive feedback, it maintains that they have the obligation to disclose their specific efforts and continue to meaningfully engage with investors on this issue.

Time-Based Equity Awards.

ISS has updated its approach to evaluating equity pay mix for regular long-term incentive programs, such that a mix consisting primarily or entirely of time-based awards will not in itself raise significant concerns, so long as the time-based award design uses a sufficiently long time horizon (at least five years). A five year time horizon can be demonstrated several ways, including a five-year vesting period, a four-year vesting period with at least a one-year post-vesting share retention requirement covering at least 75% of net shares, or a three-year vesting period with at least a two-year post-vesting share retention requirement covering at least 75% of net shares. ISS continues to consider well-designed and clearly disclosed performance-based equity awards as a positive factor.

Security-Related Perquisites.

Given the increased focus on security-related perquisites in the past year, ISS has indicated that it is unlikely that high value security-related perquisites will raise significant concerns, as long as a reasonable rationale for such costs is disclosed. ISS notes an internal or third-party assessment or a broad description of the security program and its connection to shareholder interests as examples of a reasonable rationale. However, ISS confirms that extreme outliers in security-related perquisite costs could still raise concerns, particularly if there is inadequate disclosure in the proxy.

Glass Lewis New Pay-for-Performance Methodology.

Glass Lewis introduced an updated series of tests that will be used in its pay-for-performance methodology, summarized below.

Granted CEO Pay vs. Total Shareholder Return (TSR).

This test is intended to evaluate the difference between granted pay and TSR performance by comparing against a company’s Glass Lewis peers, using the percentile rank of five-year weighted average granted CEO pay to percentile rank of five-year weighted average of annualized TSR growth.[17] The intent is to evaluate whether a company’s CEO pay aligns with the company’s relative TSR performance. A low score on this test would result if a company’s performance ranking was significantly lower than their ranking for pay—meaning companies will score poorly here if they pay more than their peers but do not perform better.

CEO Granted Pay vs. Financial Performance.

This test measures the gap between granted pay and financial performance, comparing against Glass Lewis peers using the percentile rank of five-year weighted average granted CEO pay to the percentile rank of five-year weighted average of several financial metrics. Similar to the first test, the intent is to determine whether a company’s CEO pay aligns with the company’s relative financial performance. The financial metrics Glass Lewis uses include: all sector metrics (revenue growth, return on equity and return on assets) and certain sector-specific metrics.

CEO Short-Term Incentive (STI) Payouts vs. TSR.

This test compares CEO STI payout percentage with TSR over five one-year periods measured against broad market benchmarks. Unlike the two tests described above, this test is not mandatory to receive a pay-for-performance score, and excluding the test, whether due to non-disclosure of target or actual STI payout for the CEO or the CEO’s non-participation in a STI plan, does not negatively impact a company’s overall score.

Total Granted Named Executive Officer (NEO) Pay vs. Financial Performance.

This test evaluates the gap between total pay granted to NEOs and financial performance relative to Glass Lewis peers by comparing the percentile rank of the five-year weighted average of granted NEO pay to the percentile rank of the five-year weighted average of several financial metrics. The intent of this test is to confirm whether executive pay aligns with the company’s financial performance.

CEO Compensation Actually Paid (CAP) vs. Reported Cumulative TSR.

Applicable only to companies in the United States, this test compares the five-year aggregate CEO CAP-to-TSR ratio against a company’s market capitalization peers, as determined using Glass Lewis bands. The peer group for this test is based on market capitalization. The calculation takes into account CAP from the past five years, as disclosed in the company’s proxy statement. A poor score on this test results when a company’s ratio is above median of its peers, with penalties implemented, increasing the likelihood of a negative recommendation from Glass Lewis, when a company is more than 50% above median. Like the CEO STI Payouts vs. TSR test, this test is not mandatory to receive a pay-for-performance score, and excluding the test does not negatively impact a company’s overall score.

Realized CEO Pay vs. TSR.

Applicable only to companies in Canada, this test evaluates the gap between realized CEO pay and TSR performance, using a comparison to a company’s Glass Lewis peers. The intent of this test is to determine whether a CEO pay is aligned with the company’s TSR performance relative to its peers. As with the above test, this is not a mandatory test, and its exclusion does not negatively impact a company’s overall score.

Qualitative Factors.

Functioning only as a downward modifier, meaning it can only serve to reduce a company’s score, this test includes a series of questions, answering yes to which results in penalties to varying degrees for the company. This list includes questions such as “were there any one-time awards granted?” and “was upward discretion exercised?” and “is fixed pay greater than variable pay?”, each of which are intended to evaluate various factors Glass Lewis deems significant to evaluating whether company pay practices are aligned with long-term shareholder interest.

Next Steps for Boards and Compensation Committees.

In light of these developments, boards and compensation committees should begin evaluating how the updated ISS and Glass Lewis policies may affect their executive compensation programs and related proxy disclosures for the 2026 proxy season. In particular, companies should assess pay-for-performance alignment under the revised methodologies, review the use and disclosure of perquisites—especially those that may draw heightened scrutiny—and consider whether existing CD&A disclosures clearly and concisely communicate the rationale for compensation decisions. Given the increased emphasis on responsiveness to say-on-pay outcomes and the evolving expectations around disclosure quality, early engagement with advisors and a proactive review of compensation practices and proxy narratives may help mitigate adverse voting recommendations and enhance investor understanding.

[1] SEC Press Release, “SEC Announces Roundtable on Executive Compensation Disclosure Requirements” (May 16, 2025), available here.

[2] SEC, “Submit Comments on 4-855” (May 15, 2025), available here.

[3] See Paul S. Atkins “Remarks at the Executive Compensation Roundtable” (June 26, 2025), available here; Hester M. Peirce, “Spare the Trees So Investors Can See the Forest: Remarks before the Executive Compensation Roundtable” (June 26, 2025), available here; Caroline A. Crenshaw “Statement at the Executive Compensation Roundtable” (June 26, 2025), available here; Mark T. Uyeda “Remarks at the Executive Compensation Roundtable”  (June 26, 2025), available here.

[4] Aubrey Bout, Perla Cuevas, and Brian Wilby, Pay Governance LLC “S&P 500 CEO Compensation Trends” (January 28, 2025), available here.

[5] The Wall Street Journal, “Musk Effect Drives Spread of Supersize CEO Pay Packages” (May 20, 2024), available here.

[6] Whitney Slightham, “Executive Pay is Starting to Look the Same Everywhere: That Could Hurt Performance, Study Suggests” (May 16, 2025), available here.  

[7] Id.

[8] Amit Batish, “S&P 500 CEO Compensation Saw a Near 10% Rise in 2024” (May 29, 2025), available here. 

[9] Subodh Mishra, “2025 Filings Show Robust CEO Pay Increases at U.S. Large Cap Companies” (May 8, 2025), available here.  

[10] Krishna Shah, “The Resurgence of Executive Perquisites”(May 7, 2025), available here.  

[11] Equilar, “Executive Compensation Filings Grow to Nearly 10,000 Words on Average” (February 7, 2018), available here.

[12] ISS Governance, “ISS Governance Announces 2026 Benchmark Policy Updates” (November 25, 2025), available here.

[13] See Glass Lewis, “Pay-for-Performance Methodology Overview” (2025), available here.

[14] See Compensation Advisory Partners, “Glass Lewis Releases Updates to 2026 Pay-for-Performance Model & Methodology” (July 16, 2025), available here.

[15] See ISS Governance, “Americas: Proxy Voting Guidelines” (November 25, 2025), available here.

[16] ISS Governance, “Executive Compensation Policies – Frequently Asked Questions” (December 9, 2025), available here.

[17] See Glass Lewis “Pay-for-Performance Methodology Overview” (2025), available here.