On February 29, the Delaware Chancery Court declined to dismiss claims that the process followed in obtaining board and stockholder approval of the merger of Activision Blizzard, Inc. with a subsidiary of Microsoft failed to comply with the requirements of the Delaware General Corporation Law (DGCL). Parties to Delaware mergers should always adhere strictly to the statutory requirements. But in light of the Activision opinion, participants in Delaware mergers would be well-advised to review carefully the materials provided for board approval and the notice of the stockholder meeting.
Background
On January 18, 2022, Microsoft Corporation, a merger subsidiary of Microsoft Corporation and Activision Blizzard, Inc., a gaming and entertainment company, signed a merger agreement providing for the US$69 billion acquisition of Activision by Microsoft. One day prior, the Activision Board of Directors met to approve the then-current draft of the merger agreement, which did not include (1) the Activision disclosure letter, (2) the Activision disclosure schedules, (3) the certificate of incorporation for the post-merger corporation, (4) the purchase price, (5) the target company name, or (6) the finally agreed terms governing Activision's ability to declare dividends while the merger was pending. At the meeting, the Activision Board delegated the authority to negotiate and finalize the dividend payment terms to an ad hoc board committee. The final merger agreement reflected the completion of these omitted items, but Activision's Board did not review and approve the final execution version of the merger agreement.
Although Activision's stockholders approved the merger with more than 98% of stockholders voting in favor, a stockholder sued the parties and their boards, claiming that Activision's approval process violated Sections 251 and 141 of the DGCL. Specifically, the plaintiff alleged violations of Section 251(b), Section 251(c), Section 251(d), and Section 141 of the DGCL, and the defendants moved to dismiss these claims.
The Court's Analysis
Section 251(b). Plaintiff alleged that defendants violated Section 251(b) because the draft merger agreement approved by the Activision Board of Directors did not include terms required by Section 251(b), while the defendants argued that Section 251(b) does not require that the form of merger agreement approved by the board contain all information required under Section 251(b). The Chancery Court discussed plaintiff's contention that Section 251(b) should be interpreted to require approval of the execution version of the merger agreement, as well as concerns of defendants that such a standard would disrupt market practices. The court held that, “at a bare minimum,” the board must approve an “essentially complete” merger agreement, which it described as a form of merger agreement that includes all “essential” elements. While not needing to make a specific determination as to what is essential, and suggesting that reasonable minds may disagree on whether disclosure schedules are essential, the Chancery Court nevertheless determined that, based on the facts alleged by plaintiffs, the form approved by the Activision Board of Directors did not include all essential items, as it omitted party names, the purchase price, resolution of a material commercial point, and the statutorily required form of post-merger certificate of incorporation for the surviving corporation.
Section 251(c). Plaintiff alleged a violation of Section 251(c), which requires that a notice of the stockholder meeting called for purposes of acting on a merger agreement include either the merger agreement required by Section 251(b) or a brief summary thereof. The Chancery Court determined that defendants had not included a summary of the merger in the notice, but instead referenced an attached merger agreement, which the court determined did not satisfy the requirements of Section 251(b) because it did not include the surviving corporation's charter. The court further rejected defendants' argument that the merger agreement summary in the proxy statement satisfied the requirement of Section 251(c) because, as the court explained, Section 251(c) requires that such a summary (or an appropriate merger agreement) be included in the notice itself.
Section 251(d). Plaintiff alleged a violation of Section 251(d), which prohibits any amendment of any term or condition of a merger agreement without stockholder approval if that amendment has an adverse effect on a class of stockholders. This claim was based on plaintiff's conjecture that Activision's Board of Directors had determined to amend the merger agreement to extend the termination date beyond the date set forth in the original agreement. Subsequently, Activision entered into a letter agreement to waive enforcement of the termination date for three months, authorized an increase in the permitted dividend, and increased the termination fee. This claim was dismissed on procedural grounds and the court did not reach the merits.
Section 141. Plaintiff alleged that Activision's Board of Directors violated Section 141(c) by delegating approval of the dividend provision to an ad hoc board committee. Under Section 251(b), the board has a statutory duty to approve the terms of a merger agreement and, where a board has a statutory duty, it may not delegate that duty to a committee unless Section 141(c) permits it to do so. Under Section 141(c)(2), a committee does not have any power with respect to approving an agreement of merger or its terms. The Chancery Court determined that the dividend provision is a term of the merger agreement, which cannot be delegated to a committee, and therefore the court determined that plaintiff had adequately alleged a delegation of authority in violation of Section 141(c).
Procedural Posture and Remedies
The court directed the parties to meet and confer with respect to curing the deficiencies. It is not obvious how they can do that with the merger having closed and the stockholders having been paid. The next phase of this litigation may provide an interesting analysis of the remedial power of DGCL Sections 204 and 205.
Takeaways
The Chancery Court's strict interpretation of statutory requirements means that parties to a merger agreement involving a Delaware target corporation should consider carefully the contents of materials provided to the parties' boards and the notice of stockholder meeting to approve the merger. In particular, the issues with the board approval process described in the Activision opinion could have been avoided by holding a brief, final telephonic meeting of the board immediately prior to execution of the merger agreement (the board having been provided with and asked to approve the merger agreement and disclosure schedules in final execution form, including copies marked to show changes from the most recent drafts approved by the board). And given the lack of clarity in the Activision opinion as to whether a disclosure letter is an essential part of the merger agreement, merger parties may wish to consider including a summary of the merger agreement in the notice of meeting itself in addition to the proxy statement.
Originally published by The CLS Blue Sky Blog.
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