DealLawyers.com Blog

Microsoft’s acquisition of Activision Blizzard has already generated one highly controversial Chancery Court decision & a legislative response, and now the parties are back in the Chancery Court for round two.  In round one, Chancellor McCormick refused to dismiss claims that the parties violated multiple provisions of the DGCL in approving the merger.  This time around, in Sjunde Ap-Fonden v. Activision Blizzard, (Del. Ch.; 10/25), Chancellor McCormick allowed the plaintiff to move forward with fiduciary duty claims against Activision’s board and its CEO, Bobby Kotick.

The impetus for the Microsoft deal was provided by a sexual harassment scandal at Activision. Adding fuel to the fire was a WSJ article that alleged the CEO knew about the sexual harassment issues at the company for years. That article prompted an employee walkout in an effort to oust the CEO. Shortly after these events, Microsoft indicated an interest in acquiring Activision to the CEO, and he, along with a small group of directors, set in motion the chain of events that culminated in the deal.

The plaintiff’s fiduciary duty claims arose out of the CEO’s role in the transaction and the board’s decision to enter into the merger agreement with Microsoft and a subsequent letter agreement extending the transaction’s “drop dead” date. This excerpt from the Chancellor’s opinion summarizes her decision with respect to the claims related to the merger agreement:

This decision denies the motion to dismiss plaintiff’s core claim. Under the enhanced-scrutiny standard of review, which the defendants themselves advocate for, the plaintiff has stated a claim against Kotick and Activision’s board for breaching their fiduciary duties. The plaintiff alleges that Kotick rushed Activision into a transaction with Microsoft to keep his job, secure his change-of-control payments, and insulate himself from liability, and that he tainted the sale process to secure these outcomes. All of these allegations are reasonably conceivable.

So too are the plaintiff’s allegations against each director. As to the small group of directors who Kotick brought into the process before informing the board, it is reasonably conceivable that: Each knew of [the WSJ article] and the employee protests, and that the company’s stock was depressed as a result; each knew that the timing of the deal with Microsoft was bad for the company and good for Kotick; and each knew that the board-approved plan contemplated a value of $113 to $128 per share. Yet none paused to question the wisdom of rushing into a deal with Microsoft. This makes it reasonably conceivable that the small group members placed Kotick’s interests ahead of value maximization, and so the plaintiff has stated a non exculpated claim against each of them.

The plaintiff also states a claim against the other directors who let Kotick run the process. Ultimately, only twelve days after first learning of Microsoft’s overture, the board authorized Activision’s sale at $95 per share. Given the board’s awareness of Kotick’s conflicts and the company’s higher standalone value, these allegations make it reasonable to infer that they too approved a hasty sale of Activision at $95 per share to serve Kotick’s interests rather than the best interests of the stockholders. That too would constitute bad faith, thus stating a non-exculpated claim.

Chancellor McCormick allowed the plaintiff’s fiduciary duty claims with respect to the letter agreement to proceed as well, for the same reasons. In addition to extending the drop dead date, that agreement eliminated a $3 billion termination fee, narrowed the circumstances under which Activision’s had the right to terminate the merger agreement, and eliminated or waived certain closing conditions.

The Chancellor characterized the board’s decision to authorize the letter agreement as “doubling down” on their prior breaches and said that it was conceivable that this decision was even worse than the decision to enter into the original merger agreement, since they were aware of Activision’s strong financial performance during the period following the execution of the merger agreement.

Chancellor McCormick dismissed a handful of statutory claims made by the plaintiff, as well as aiding and abetting claims made against Microsoft.  In dismissing the aiding and abetting claims, she pointed to the Delaware Supreme Court’s recent Mindbody and Columbia Pipeline decisions, which narrowed the circumstances under which a third party buyer could be held liable for aiding and abetting fiduciary breaches by the target’s fiduciaries.

– John Jenkins