March 1, 2024

Del. Chancery Refuses to Dismiss Claims Questioning Board Approval of Merger Agreement

Yesterday, in Sjunde AP-fonden v. Activision Blizzard, Inc., (Del. Ch.; 2/24), Chancellor McCormick refused to dismiss a plaintiff’s claims that the Activision Blizzard board of directors “violated multiple provisions of the Delaware General Corporation Law (the “DGCL”) governing board negotiation and board and stockholder approval of merger agreements” when it authorized the company’s merger agreement with Microsoft.  In doing so, she also called into question decades of market practice surrounding the process of obtaining board approval of merger agreements.

The plaintiff alleged that the board violated various provisions of Section 251 and Section 141 of the DGCL by, among other things, approving a late-stage draft of the merger agreement instead of a final execution copy, by delegating authority to a board committee to finalize a key term of the merger agreement, and by failing to provide a summary of the merger agreement in the notice of the stockholders’ meeting called to approve it.

The plaintiffs argued that Section 251(b) of the DGCL requires the board to approve the final execution copy of the merger agreement. The defendants countered that asking the board to approve a near final draft of the agreement is standard market practice, and that adopting an interpretation of Section 251(b) contrary to that practice would create uncertainty about the validity of mergers generally as well as uncertainty for third parties who deal with Delaware corporations.

Chancellor McCormick noted that the plaintiff’s position was supported by Delaware’s statutory scheme, but also acknowledged that it was not consistent with market practice. However, she also observed that the version of the merger agreement submitted to the board for approval was missing several key provisions, including the merger price, disclosure schedules and the surviving corporation’s charter.  As a result, she concluded that she didn’t need to resolve the tension between the plaintiff’s and defendants’ positions to resolve the motion to dismiss:

At bare minimum, Section 251(b) requires a board to approve an essentially complete version of the merger agreement (the “essentially complete interpretation”). This is so because, absent an essentially complete draft, the board approval requirement of Section 251(b) would make no sense. What good would board approval of a merger agreement serve if the ultimate merger agreement was altered in essential ways? And how could a board declare the advisability of the merger absent a review of essential terms?

Under the essentially complete interpretation, Defendants’ market-practice gripe falls away. There is no straight-faced argument that requiring a board to approve an essentially complete version of a merger agreement is commercially unreasonable. That’s just the basic exercise of fiduciary duties, not to mention good corporate hygiene.

Citing Vice Chancellor Laster’s decision in Moelis, she also observed that the Court couldn’t disregard the public policy reflected in the statute and that “there is no reasonable argument that requiring a board to approve and declare the advisability of an essentially complete merger agreement would inject uncertainty into transactional practice or stifle mergers generally.”

The Chancellor refused to dismiss the plaintiff’s claims that the board’s delegation of authority to a board committee to finalize a key term of the agreement without final approval of the whole board violated the Delaware statute:

Section 251(b) imposes a statutory duty on the Board to approve the terms of an agreement of merger. Where a board has a specific 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.

Chancellor McCormick also refused to dismiss the plaintiff’s claims that the notice of the stockholders meeting was deficient because it did not comply with Section 251(c)’s requirement that the notice set forth either a copy of the merger agreement or a brief summary of it. She reached this conclusion despite the fact that the notice was attached to a proxy statement that contained both an extensive description of the merger agreement and a copy of the agreement itself as an annex.

There’s a lot to digest in Chancellor McCormick’s decision, which, remarkably, is only 23 pages long. But it’s worth noting that the opinion suggests that most of the key financial terms of the deal had been worked out long before the board acted on the merger agreement, and that its financial advisor was present at the meeting at which the merger agreement was approved. It seems likely that the agreed upon deal terms were addressed extensively at this meeting, and that the resolutions approving the merger agreement also covered them – as well as any remaining loose ends – in some fashion.

If so, then when the case moves beyond the pleading stage, maybe there’s room for a more flexible approach toward what Section 251(b) requires when it says that the board “shall adopt a resolution approving an agreement of merger or consolidation” as well as toward the board’s ability to delegate its authority to finalize a merger agreement consistent with that resolution.  Perhaps the same is true for the claim regarding the alleged deficiencies in the notice, which plainly fly in the face of market practice when it comes to public company mergers.

If not, then this decision may ultimately be known as “the case that launched a thousand Section 220 requests”, because plaintiffs are likely to find a target rich environment if they get a chance to flyspeck the way most public company deals get approved and finalized.

John Jenkins