Trending in Transactions - Q1 2026

Employee benefits

Section 125 cafeteria plan in diligence

 By: Luyao Zhang

Companies seeking to sell their businesses are encouraged to ensure that they have or can access a copy of their “cafeteria plan” document before the due diligence process related to the sale transaction begins.

The term “cafeteria plan” refers to a written plan document that, pursuant to Section 125 of the Internal Revenue Code (IRC), must be adopted to permit an employee to elect to pay for certain benefits – such as group medical, dental, vision, and life insurance, as well as flexible spending and dependent care costs – on a pre-tax basis, rather than receiving the money as taxable cash compensation.

The plan is referred to as a “cafeteria plan” because employees can select the benefits they want from a menu of options, like choosing food in a cafeteria. The Internal Revenue Service may require employers without a compliant Section 125 plan document to retroactively reclassify premium payments as taxable wages – resulting in backup withholding for employees and payroll tax liability, interest, and potential penalties for the employer for failing to report and withhold taxes appropriately.

As a result, representations and warranties insurance (RWI) carriers frequently focus on Section 125 plan compliance during underwriting and due diligence. To avoid these risks, companies are encouraged to proactively coordinate with their payroll provider, benefits consultant, or benefits attorney to ensure a compliant Section 125 plan is in place and that the plan document can be produced early in the diligence process.

Executive compensation

Change in control considerations for performance-based equity awards

By: Becca Xu and Michelle Lara

Award agreements for performance-based equity awards should address what happens if a change in control occurs prior to settlement of the award. In particular, the award agreement should specify the performance vesting level that will apply in the event of a change in control, as it may be impractical to continue administering the performance conditions following the close of the transaction.

In addition, the terms of the award agreement should specify the applicable payout level (ie, whether the payout level will be limited to actual performance attained through the change in control or set at a minimum of the target level). If an additional retention incentive for continued service through the change in control is desired, the latter provision should be included in the award agreement.

Because it is typical to provide post-closing involuntary termination protection when vesting conditions continue after the close, another key consideration is whether any continued service vesting conditions will automatically accelerate at the closing. Employers are encouraged to allow for flexibility to settle awards that vest upon closing within a specified number of days following the closing, rather than immediately upon or prior to closing – which may prove impracticable.

The award agreement should also address the treatment of awards that provide tax-deferred compensation, as accelerated payout at closing may not be possible without prompting adverse tax consequences. Addressing these issues when drafting award agreements can help employers avoid ambiguities and administrative hurdles later on.

Employment

Bonus blind spots: Hidden liabilities buyers and sellers should consider

By: Jessica Jackson and Amanda Rooney

Employers should be aware that nondiscretionary bonuses – including those tied to employee safety, attendance, punctuality, and performance metrics – must be accounted for when calculating overtime for non-exempt employees under wage-and-hour laws. Discretionary bonuses – where both the fact and amount of payment remain within the employer's control and are not promised or tied to specified criteria – are excluded from this requirement.

Companies preparing for a sale are encouraged to evaluate their incentive compensation plans and overtime practices to get ahead of any potential noncompliance. Likewise, buyers – particularly those acquiring a company with many overtime-eligible employees – may consider scrutinizing the target’s wage-and-hour practices to determine whether the target has material liability for unpaid overtime. This is especially important given that employees frequently bring overtime claims as class or collective actions, and penalties for underpayments can include back wages and liquidated damages over a two- to three-year statutory period, plus costs and attorneys’ fees under federal law (state laws vary and can be more generous). Buyers that identify widespread noncompliance in due diligence may consider seeking a specific indemnity in the operative agreement or implementing other remedial measures.

Tax

Opportunities abound for private equity sponsors in structuring for QSBS investment

By: Matt Servies

Private equity sponsors are increasingly recognizing the substantial tax advantages available under Internal Revenue Code (IRC) Section 1202, which allows eligible investors to exclude up to 100 percent of the gain on the sale of eligible qualified small business stock (QSBS).

The One Big Beautiful Bill Act (OBBBA) enhanced the QSBS provisions substantially. The legislation introduced a tiered gain exclusion system that allows investors to realize QSBS benefits earlier, with a 50-percent gain exclusion available after just three years, 75 percent after four years, and the full 100-percent exclusion after five years. This was a notable improvement for sponsors whose typical investment horizons may not have aligned with the previous rigid five-year requirement. Additionally, the gross asset test threshold for qualifying investments increased from $50 million to $75 million, and the per-issuer gain exclusion cap was raised from $10 million to $15 million per taxpayer. Both thresholds are indexed for inflation beginning in 2027.

Given IRC Section 1202’s technical complexity and numerous requirements, structuring considerations are key. Accordingly, sponsors are encouraged to engage tax and legal counsel early in the process. Because QSBS should be considered for each potential acquisition, sponsors can deliver meaningful after-tax value enhancement to their limited partners by thoughtfully designing acquisition structures and monitoring ongoing compliance with IRC Section 1202 requirements.

Insured transactions

RWI and W&I considerations in cross-border M&A

By Matthew Flug and Taylor Harris

As cross border mergers and acquisitions (M&A) deals continue to accelerate, it is increasingly important for teams to understand how differences between European warranties and indemnities (W&I) and US-style representations and warranties insurance (RWI) impact risk allocation in multinational transactions.

As more buyers transact between jurisdictions, mismatches between the purchase agreement’s warranty framework and the applicable insurance product can create unintended coverage gaps, particularly given the divergent disclosure regimes in Europe and the United States (eg, data rooms and diligence reports are deemed disclosed in Europe but not in the US).

These structural differences also extend to economics, with W&I generally offering lower premiums and retentions compared to the broader, higher priced RWI coverage typically used in US deals.
Given the continued increase in global dealmaking, ensuring that representations are drafted to align with the governing coverage style is key to preserving expected protection across borders. Ultimately, effective cross border execution requires aligning the representations, disclosure framework, and insurance mechanics at the outset of the transaction so the parties can maintain consistent and reliable protection across differing market practices.