Market Check: Lessons from The Activision-Microsoft Merger

A&O Shearman
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On February 29, 2024, the Delaware Court of Chancery issued an opinion on Sjunde AP-Fonden v. Activision Blizzard1 (“Opinion”) that called into question established market practices for mergers, including (i) the process for obtaining board approval of a merger agreement, and (ii) the contents of the notice of the stockholders’ meeting to approve the merger agreement.

Chancellor McCormick denied the defendants’ motion to dismiss a stockholder’s challenge to the validity of the merger, finding it reasonably conceivable that Activision’s directors violated Sections 251(b) and (c) and Section 141(c)(2) of the Delaware General Corporation Law (“DGCL”) by, among other things, approving a draft merger agreement that was not “essentially complete,” delegating the board’s approval of an unresolved dividend provision to an ad hoc committee of directors and failing to provide the merger agreement in its entirety or a summary of the final merger agreement in the notice of the stockholders’ meeting called to approve it.

The court’s rationale, complementing the Moelis opinion that we recently discussed, looks back to the plain meaning of the statutory language in the DGCL and once again enforces strict adherence to the letter of the law and compliance with the formalities of the DGCL, irrespective of common and consistent legal practice.

Background

The complaint relates to Activision Blizzard, Inc.’s acquisition by Microsoft Corporation via a merger agreement executed on January 18, 2022. An Activision stockholder, the Swedish pension fund Sjunde AP-Fonden (“Plaintiff”), filed a suit in the Delaware Court of Chancery against Activision’s board of directors (the “Board”), Microsoft, its board of directors and its merger subsidiary, alleging that the transaction’s approval process violated Sections 251(b), (c) and (d), and Section 141(c)(2) of the DGCL and claiming that its shares were unlawfully converted because of these alleged violations.

The Board reviewed and approved the merger agreement on January 17, 2022, the day before signing. Chancellor McCormick focused on six elements required by Section 251(b) to be included in the merger agreement and found that the merger agreement reviewed and approved by the Board was not essentially complete on the basis of the following omissions: (i) the disclosure schedules (which were still being negotiated at such time, as the defendants argued is typically the case), (ii) the charter of the surviving corporation (despite the reality that such surviving entity will become a wholly-owned subsidiary of the buyer and its charter is not critical nor relevant to the interests of target stockholders), (iii) “the amount of 2022 and 2023 dividends that Activision could pay while the deal was pending,”2 and (iv) the amount of the merger consideration (and reflecting only a placeholder for the amount)3. In addition, the merger agreement did not address Activision’s ability to pay dividends between signing and closing. Rather, at such meeting, the Board delegated the finalization of the dividend matter to an ad hoc committee of directors. The resulting provision, as approved by such committee (the “Dividend Provision”), along with the rest of the missing information, was included in the final version of the merger agreement that was executed the following day.

On March 21, 2022, Activision filed a proxy statement seeking stockholder approval of the merger. The transaction was approved by more than 98% of the stockholders present voting in favor on April 28, 20224 and closed on October 13, 2023.

In its complaint, the Plaintiff asserted, among other things, that:

1. The Board’s approval of the near final, but not execution version of the merger agreement violated DGCL 251(b), because it was missing information (as described above) required by the statute at the time of the approval;

2. Activision failed to (a) provide a copy of the merger agreement in its entirety and a summary of the merger agreement in its notice of the stockholder meeting to vote on the transaction (despite the fact that the notice was attached to the proxy statement, which contained a fulsome and detailed description of the merger agreement and a copy of the merger agreement as an annex), in violation of DGCL Section 251(c); and (b) include a copy of the certificate of incorporation of the surviving corporation to the merger agreement attached to the proxy statement, in violation of DGCL Section 251(b); and

3. delegating negotiations of the Dividend Provision to a committee of the Board violated DGCL Section 141(c)(2) on the theory that the Dividend Provision is a term of the Merger Agreement required to be approved by the Board.

Legal Analysis

The defendants brought a motion to dismiss each of the above claims under Rule 12(b)(6), which requires the court to consider if a claim is “reasonably conceivable.” The court held that each of these claims was “reasonably conceivable” and therefore should not be dismissed at this stage of the litigation. It is important to note that the bar for allowing a claim to proceed under this rule is fairly low. Nevertheless, while we wait for a final judgment, the court’s commentary in considering each of the claims may be instructive to deal makers and boards navigating a merger process.

1. Board Approval of the Merger Agreement

The Plaintiff interpreted the statute as requiring a board to approve an “execution version” of a merger agreement, while the defendant put forth a policy argument that this interpretation does not align with market practice. The court acknowledged the reality of market practice, but indicated that market practice is still subject to the limitations imposed by the DGCL: “[w]here market practice exceeds the generous bounds of private ordering afforded by the DGCL, then market practice needs to check itself.”5

Ultimately, the court declined to dismiss the Plaintiff’s claim, because even if, for the sake of analysis, the defendants are correct that the “market practice” approach should govern, the court opined that: “[a]t bare minimum, Section 251(b) requires a board to approve an essentially complete version of the merger agreement […]. This is because, absent an essentially complete draft, the board approval requirement of Section 251(b) would make no sense.”6 The court found that it is “reasonably conceivable” that the Board did not satisfy the minimal requirement of approving an “essentially complete” agreement in light of the fact that the Merger Agreement failed to include the purchase price, the disclosure schedules, the surviving company’s charter and the Dividend Provision. According to the court, Section 251(b) “expressly provides that the board […] shall adopt a resolution approving an agreement of merger. It does not say that the board can get away with approving the gist of the merger.”78

2. Stockholder Meeting Notice

The Plaintiff alleged that the notice of the stockholder meeting set for the purpose of acting on the Merger Agreement did not contain either a compliant agreement or a summary of the terms thereof, as required by DGCL Section 251(b). The defendants argued that the notice did annex the agreement, but the court found that the exhibit did not satisfy the statutory requirement because it wasn’t the full merger agreement, as it was missing the surviving company’s charter, which is mandated by the statute to be included. The defendants said that they also provided a brief summary of the merger agreement in the proxy statement, but the court found that such approach was not sufficient, as “[t]he [p]roxy [s]tatement is not the notice.”9 The court concluded that it was “reasonably conceivable” that the defendants failed to follow the exact steps in DGCL 251(b) and, accordingly, the claim was not dismissed.

3. Board Committee Approval of Dividend

The Plaintiff argued that the defendant improperly delegated negotiations over the Dividend Provision to an ad hoc committee of the Board, which did not have power under the DGCL over such matter. The court noted that “[u]nder Section 141(c)(2), ‘a committee does not have any power with respect to’ approving an agreement of merger or its terms”10 and reasoned that, as a result, a board cannot delegate the determination of merger consideration to a committee and the Dividend Portion was a term of the merger. As it was “reasonably conceivable” that the Board delegated negotiation of a “term of the merger” to a committee, the Plaintiff’s claim was not dismissed.

Key Takeaways and Observations

Until such time, if any, as the Delaware Supreme Court adjusts the Opinion, or Delaware lawmakers amend Sections 141 and 251 of the DGCL, deal makers should pay careful attention to common processes surrounding the approval and finalization of mergers, and adhere to the following best practices:

  1. ensure that the board of directors of the selling corporation receives and approves, following an appropriate time to review and digest, a merger agreement that is “essentially complete” - that is, a final execution version of the merger agreement, including the disclosure schedules and exhibits that are referenced therein, and containing all critical elements of the deal, such as the purchase price and any key terms deemed material by the parties involved;
  2. attach the certificate of incorporation of the surviving entity to the execution version of the merger agreement that is attached to the proxy statement;
  3. summarize the key terms of the merger agreement in the notice to stockholders of the meeting to approve same (irrespective of repetition in the proxy statement);
  4. attach a compliant copy of the merger agreement to the proxy statement, including the disclosure schedules and the certificate of incorporation of the surviving entity; and
  5. have the entire board of directors, and not a subset thereof, ratify or adopt any action taken by a committee of the board with respect to the merger agreement.

For deals that have been announced but remain pending, a look back at approvals received is warranted, particularly where committees were delegated powers of approval, or key financial or other material terms were not included in the approved draft merger agreement.

In a post-Trulia11world, where the Delaware Court of Chancery frowns upon derivative suits alleging insufficient proxy disclosure and their resultant disclosure-only settlements, this type of claim may represent a tactical evolution in the ubiquitous stockholder litigation that crops up after a public transaction is announced. Activision Blizzard, like Moelis, alleges failure to comply with the DGCL, and the Delaware Court of Chancery is interested in hearing the argument.

The outcome of this case remains to be seen. For a comprehensive understanding of this decision’s impact and potential actions, we recommend consulting with your contacts at Allen & Overy LLP.

Footnotes

1. Sjunde AP-Fonden v. Activision Blizzard, Inc., C. A. 2022-1001-KSJM (Del. Ch. Feb. 29, 2024).

2. Id., at 3.

3. The Opinion also notes that the merger agreement referred to the target only by its code name “Denali” (presumably to protect against the damaging effect of potential leaks in the market).

4. Source: https://www.businesswire.com/news/home/20220428005998/en/Activision-Blizzard-Stockholders-Approve-Proposed-Microsoft-Transaction/

5. Opinion, at 8.

6. Id. at 15.

7. Id. at 12.

8. It is worthy of note that the Opinion seems to acknowledge that the key financial terms of the merger, including purchase price, had been resolved and discussed with the Board prior to the meeting on January 17. Moreover, the court left open the argument that disclosure schedules may not be required for an “essentially complete” merger agreement in compliance with Section 251(b), but observed that it was premature to make such a determination at this stage of the litigation process. We note that this would be in keeping with the SEC’s guidance regarding disclosure for publicly filed mergers, which does not require public companies to attach disclosure schedules or immaterial exhibits to publicly filed merger agreements.

9. Opinion, at 18.

10. Id. at 21.

11. In re Trulia, Inc., 129 A.3d 884 (Del. Ch. 2016).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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