January 21, 2022

Poking Around the Microsoft-Activision Blizzard Merger Agreement

Activision Blizzard recently filed the merger agreement for Microsoft’s proposed $70 billion acquisition that the two companies announced earlier this week.  Since Activision is the current poster child for workplace harassment issues & because the deal was announced on the same day that antitrust regulators promised to revamp their merger guidelines to tighten the screws on mega deals, I thought it might be interesting to poke around the agreement to see how it addressed these issues.

If Activision Blizzard were a private company, you might expect detailed reps, covenants, closing conditions & maybe even special indemnification terms to address the risks associated with the company’s high-profile workplace harassment legal problems.  But it’s a public company – and public company deals are different.  Here’s the relevant rep, which is included in Section 3.19 of the merger agreement:

No Allegations of Sexual Harassment, Sexual Misconduct or Retaliation. To the Knowledge of the Company, the Company and each of its Subsidiaries have not been party to a material settlement agreement entered into since January 1, 2018 with a current or former officer or employee resolving material allegations of sexual harassment, sexual misconduct or retaliation for making a claim of sexual harassment or sexual misconduct, in each case, that was alleged to have occurred on or after January 1, 2018 in the United States, by either a current (i) officer of the Company or any of its Subsidiaries; or (ii) employee of the Company or any of its Subsidiaries holding a position at or above the level of Senior Vice President. There are no, and since January 1, 2018, there have not been any, material allegations of sexual harassment, sexual misconduct or retaliation for making a claim of sexual harassment or sexual misconduct, in each case, that was alleged to have occurred on or after January 1, 2018 in the United States, by or against any current director, officer or employee holding a position at or above the level of Senior Vice President, in each case, of the Company or any of its Subsidiaries.

This is a subsection of a broader labor & employment matters rep, and as is typical in a public company deal, the rep is qualified by any disclosures made in Activision’s SEC filings & in the agreement’s disclosure schedules.  There’s also a customary bring-down condition to closing in Section 7.2(a) that requires the reps made in the agreement to be true and correct at closing, “except for such failures to be true and correct that would not have or reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.”

So, assuming Activision has come clean on all of those issues, then unless there’s a development that makes the rep false and has a MAE on Activision, the risk associated with that particular hot mess falls squarely into Microsoft’s lap. That means that Microsoft has essentially priced that risk into its valuation of Activision, which is usually how it works in public company deals.

Antitrust issues are addressed in a mutual covenant on regulatory approvals set forth in Section 6.2 of the agreement. Some deals facing challenging antitrust issues include “hell or high water” language that essentially compels the buyer to take whatever actions the FTC or DOJ insists on to clear their deal. This isn’t one of those deals. Paragraph (a) of the covenant obligates the parties to use their “reasonable best efforts” to take “all actions necessary” to obtain required clearances, but paragraph (b) makes it clear that there are significant limits to what Microsoft will be obligated to do:

 Regulatory Remedies. In furtherance and not in limitation of the foregoing, if and to the extent necessary to obtain clearance of the Merger pursuant to the HSR Act and any other Antitrust Laws or Foreign Investment Laws set forth in Section 7.1(b) and Section 7.1(c) of the Company Disclosure Letter, each of Parent and Merger Sub (and their respective Affiliates) will and, solely to the extent requested by Parent, the Company and its Affiliates will: (i) offer, negotiate, commit to and effect, by consent decree, hold separate order or otherwise, (A) the sale, divestiture, license or other disposition of assets (whether tangible or intangible), rights, products or businesses of the Company and its Subsidiaries; and (B) any other restrictions on the activities of the Company and its Subsidiaries; and (ii) contest, defend and appeal any Legal Proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the Merger. Notwithstanding the foregoing, Parent will not be required, either pursuant to this Section 6.2(b) or otherwise, to offer, negotiate, commit to, effect or otherwise take any action would reasonably be expected to (i) have a material adverse impact on the Company and its Subsidiaries, taken as a whole, (ii) have a material impact on the benefits expected to be derived from the Merger by Parent or (iii) have a more than immaterial impact on any business or product line of Parent (any of clauses (i), (ii) or (iii), a “Burdensome Condition”).

That “Burdensome Condition” carve makes this covenant pretty far from being a hell or high-water clause.  On the other hand, Microsoft has billions of reasons to try to obtain antitrust clearance. That’s because under Section 8.3(c) of the merger agreement, if the deal is terminated because of an antitrust injunction or the failure to obtain required antitrust clearances by the drop-dead date, then Microsoft could be obligated to pay a reverse termination fee to Activision that starts at $2 billion and ratchets up to a maximum of $3 billion depending on when the deal is terminated.

By the way, the parties pretty clearly understand that they may be in for a long battle when it comes to antitrust clearance.  That’s because the agreement includes a mechanism for extending the drop-dead date by up to six months past its original January 18, 2023 date in order to satisfy antitrust regulatory approval requirements.

John Jenkins