During the past few months, the Delaware Chancery Court has issued a number of important corporate law decisions, including two last week. Below is a summary of the recent court decisions arising out of (i) the acquisition of Activision Blizzard, Inc. by Microsoft Corporation, (ii) certain governance arrangements between Moelis & Company and Ken Moelis, (iii) a compensation plan issued by Tesla, Inc. to Elon Musk, and (iv) certain transactions between Edward Lampert and Sears Hometown and Outlet Stores, Inc.
Sjunde AP-Fonden v. Activision Blizzard, et. al. 1
Summary. This dispute in the Delaware Court of Chancery arose from the acquisition of Activision Blizzard, Inc. by Microsoft Corporation. The plaintiff, which owned stock in Activision pre-merger, claimed that the defendants violated multiple provisions of the Delaware General Corporation Law (the "DGCL") governing board negotiation and board and stockholder approval of merger agreements. The defendants moved to dismiss these claims and, in a February 29, 2024 decision, Chancellor McCormick allowed all but one of the claims to proceed.
Factual History. Microsoft approached Activision about a business combination in November 2021 and in December 2021 the parties agreed to a tentative purchase price and entered into an exclusivity agreement. On January 17, 2022, the Activision Board met to approve the merger and the draft merger agreement. The draft merger agreement approved by the Activision Board did not include the following attachments: (i) the company disclosure schedules, or (ii) the certificate of incorporation for the surviving entity. In addition, the draft merger agreement had a placeholder for the amount of consideration and listed "Denali" (the deal code name for Activision) as the seller.
The draft merger agreement also did not address the ability of Activision to pay dividends while the merger was pending. At the January 17th Activision Board meeting, the Board delegated this issue to an ad hoc committee of the Board, which committee subsequently approved the amount of dividends permitted to be paid during the pendency of the transaction.
On January 18, 2022, the parties executed the merger agreement. In March 2022, Activision filed a proxy statement seeking shareholder approval of the merger. The merger agreement attached to the proxy statement did not contain the disclosure schedules or the certificate of incorporation for the surviving entity.
Activision stockholders approved the merger at a stockholder meeting on April 22, 2022 with more than 98% of stockholders present voting in favor. During 2023, the transaction received the requisite regulatory approvals and the merger closed on October 13, 2023.
On November 3, 2022, Sjunde AP-Fonden filed this action against the Activision Board, Microsoft, the Microsoft Board, and the merger sub, alleging violations of Sections 251(b), 251(c), 251(d) and 141 of the DGCL and defendants moved to dismiss.
Legal Analysis. Section 251(a) of the DGCL requires a board to adopt a resolution approving an "agreement of merger" compliant with Section 251(b).2 Chancellor McCormick agreed with the plaintiff that Section 251(b) requires the target board to approve "at a bare minimum" an "essentially complete" version of the merger agreement. While acknowledging that this interpretation runs counter to established market practice, the Chancellor stated that "[w]here market practice exceeds the generous bounds of private ordering afforded by the DGCL, then market practice needs to check itself." The Chancellor also cited Vice Chancellor Laster's recent Moelis decision in reaching this conclusion.
Chancellor McCormick focused on the six elements required by Section 251(b) to be included in a merger agreement, and found that given the omission of the consideration, the disclosure schedules, the certificate of incorporation of the surviving entity and the dividend provision, the merger agreement approved by the Activision Board was not essentially complete. Thus, the motion to dismiss the Section 251(b) claim was denied. However, the Chancellor did leave open the possibility that the disclosure schedules might not be required for an essentially complete merger agreement.
The Chancellor also denied the motion to dismiss the Section 251(c) claim. This section requires that a notice of the stockholder meeting to approve a merger agreement contain a copy of the merger agreement required by Section 251(b) or a summary thereof.3 The Chancellor held that the notice sent to Activision stockholders did not attach a compliant copy of the merger agreement as the certificate of incorporation of the surviving entity was not attached and the summary of the merger agreement was contained in the proxy statement and not in the notice.
The Chancellor dismissed the Section 251(d) claim; this section prohibits any amendment of any term or condition of the merger agreement if that change has an adverse effect on a class of stockholders.4 The plaintiff argued that the defendants violated this section by agreeing not to exercise the termination right in the merger agreement without Activision stockholder approval, which agreement would adversely affect stockholders since the closing would be "substantially delayed." The court found that these allegations were not reasonably conceivable at the time of filing of the amended complaint as the plaintiff alleged no facts to support the assertion.5
Finally, the Chancellor denied the motion to dismiss the Section 141(c) claim. Section 141(c)(2) provides that a board of directors may designate a committee to exercise all powers of the board, except (i) approving or recommending to the stockholders any matter (other than the election or removal of directors) expressly required by the applicable chapter of the DGCL to be submitted to stockholders for approval or (ii) adopting, amending or repealing bylaws.6 Section 251(b) discussed above imposes a duty on a board of directors to approve the terms of a merger agreement. Thus, Section 141(c)(2) does not permit a committee to approve any merger agreement or its terms.
Chancellor McCormick found that the plaintiff had adequately alleged that the Activision Board violated Section 141(c) by delegating approval of the dividend provision to a committee. She found that the dividend provision was a term of the merger and that it is reasonably conceivable that the committee alone approved the dividend provision.
Key Takeaways. M&A practitioners often do not attach the charter of the surviving entity (which will become a wholly owned subsidiary of the buyer and not be relevant to target stockholders) as an exhibit to the version of the merger agreement distributed to the target board of directors. Additionally, the Activision board would have been informed of the final merger price by the company's counsel and financial advisors at the Board meeting approving the merger agreement (this would be reflected in the applicable Board minutes and in the bankers' book presented to the Board in connection with the fairness opinion). A substantially final draft of the disclosure schedules would typically be distributed to the target board by counsel during the course of the negotiations, though these disclosure schedules would not typically be viewed as part of the merger agreement requiring approval under Section 141. Exclusion of the disclosure schedules and the charter of the surviving entity from the proxy statement relating to the transaction is also market practice. Also, the exception to the dividend restrictions in the interim operating covenants would often be contained in the disclosure
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Footnotes
1. Sjunde AP-fonden v. Activision Blizzard, Inc., et al., C.A. No. 2022-1001-KSJM (Del. Ch. February 29, 2024).
2. 8 Del. C. § 251(a).
3. 8 Del. C. § 251(c)(7).
4. 8 Del. C. § 251(d).
5. After filing of the amended complaint, Defendants executed a letter agreement agreeing to extend the outside termination date, but the plaintiff did not amend its pleading to challenge the letter agreement.
6. 8 Del. C. § 141(c)(2)
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