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

With the lapse in appropriations, federal agencies are currently operating at limited capacity, and the antitrust agencies — the FTC and the DOJ’s Antitrust Division — are no exception. While the agencies remain open to accept HSR filings, the Premerger Notification Office is working on a reduced schedule, as detailed on its website and in the FTC’s shutdown plan. Specifically:

PNO staff will be online from 9 am to 1 pm ET each business day

During this time, the PNO will not respond to questions or requests for information or provide filing advice

Waiting periods will be unaffected and run as usual, but the PNO will not grant early termination 

This Cooley alert discusses implications for merger reviews. With the FTC and DOJ Antitrust Division staffed at about half the normal levels, the alert says it’s going to take longer for filings to be reviewed for completeness and compliance and forwarded to staff for substantive analysis and the staff is going to be more likely to encourage parties to “pull and refile.” 

This procedure allows the acquirer to withdraw its filing and refile within two business days without paying an additional fee. A “pull and refile” restarts the HSR waiting period, providing the agencies more time to evaluate the competitive implications of a transaction.

If the parties don’t refile, the alert says the reviewing agency may issue a second request for a transaction (presumably even one that normally wouldn’t result in a second request) to ensure it does not close before review is completed.

– Meredith Ervine 

This Sullivan Cromwell alert says special board committees are the exception, not the rule, and argues that they should be treated as such, because using them comes with costs and risks. As of earlier this year, the circumstances under which a special committee may be necessary have been further narrowed, at least in Delaware. That’s because the DGCL now includes a new statutory presumption of disinterestedness and offers “safe harbor” protections for controlling stockholder transactions if they are either approved by an independent committee or approved or ratified by disinterested stockholders (not both, except in take private transactions).

So when are special committees necessary or appropriate? Not surprisingly, when there are material conflicts of interest or where the market or a court might question the board’s independence for other reasons. For example:

Potential material conflicts include a director having particularly close personal or business relationships with an interested party.

An executive director investing in the private equity fund taking a company private, such that he or she becomes part of the buyer group, for example, could give rise to a material conflict.

However, directors merely owning equity awards in the company or being the target of an activist’s criticism would not, absent other factors, constitute a material conflict requiring the formation of a special committee. Moreover, a more efficient and less problematic approach may be to recuse the director.

However, top executives simply benefiting from change-of-control payments, retention bonuses or accelerated equity awards as a result of an M&A transaction would not create a disabling conflict.

Sometimes, recusal of the conflicted director or an executive session that excludes management participants may be a better approach. For example,

In the activist defense context, special committees can do more harm than good since they divide boards by design – the very dynamic activists seek to exploit. When faced with an activist threat, Delaware courts do not impose heightened fiduciary duties on boards beyond the traditional duties of care and loyalty. Since all directors have an inherent interest in the outcome of an activist attack, there is typically no conflict that warrants establishing a special committee.

[Forming a special committee] can burden the company with an inefficient decision-making process and even risk jeopardizing a proposed transaction that could otherwise be in the best interests of stockholders.

It can also cause serious rifts among board members as to who serves on the special committee and who does not.

[Forming a special committee] can increase transaction expenses, increase the risk of leak, create conflicting advice among external advisors and slow down the transaction process.

Forming a special committee unnecessarily may also signal vulnerability to the market and create an inaccurate appearance of material conflicts, which can, paradoxically, attract more litigation.

Finally, the article suggests a few other methods of handling conflicts:

Where management has a conflict, management will typically still play a role in creating the projections, but the board will take an active role in reviewing the projections (including, on occasion, asking management to run “sensitivities”). On very rare occasions where management’s conflicts are material, a special committee or board may engage an independent advisor to develop separate projections or review management’s projections.

Boards can always consider establishing transaction or ad hoc working groups, which may include the CEO and select directors particularly suited for the role (such as directors with more M&A experience and availability), to receive more frequent updates. These informal working groups (sometimes referred to as committees) typically do not have independent decision-making authority, but rather serve to facilitate the full board’s transaction oversight without incurring unnecessary costs and burdens.

Activists also tend to make requests for the creation of special committees to oversee a strategic corporate review. The working group alternative could satisfy these requests while leaving the ultimate determination on the outcome of the strategic review with the full board.

– Meredith Ervine 

On Friday, the Chancery Court issued a magistrate’s report in Miller v. Menor (Del. Ch.; 09/25) refusing to find that defendants waived the right to post-closing adjustments because of their failure to timely deliver a closing statement. The statement was due 90 days after closing, and any objections statement was due 30 days after delivery of the closing statement.

The closing statement was delivered late, and communications ensued. But an official objections statement was also ultimately delivered late. The parties were unable to resolve their disagreements, and the issues were submitted to arbitration. Plaintiffs filed suit to vacate the arbitration award partly on the basis of the untimely closing statement, which was not one of the issues raised in the objections statement and addressed in arbitration.

The court distinguished Hallisey v. Artic Intermediate LLC (Del. Ch.; 10/20) and Schillinger Genetics, Inc. v. Benson Hill Seeds, Inc. (Del. Ch.; 02/21), which “stand for the general assertion that failure to timely deliver a closing statement can waive post-closing adjustment procedure.” In both Hallisey and Schillinger, the court said that the failure to timely deliver a Closing Statement meant that the Post Closing Adjustment process could not proceed, which hindered sellers’ ability to respond and have a reasonable opportunity to object.

In this case, the court found that, despite the untimely delivery, plaintiffs had “sufficient time to defend their rights within the Post-Closing Adjustment procedure, and availed themselves of that right by submitting their Objection Statement and engaging in the process to obtain an arbitrator to resolve the objections.” It also noted that “Plaintiffs took an abundance of time, more than the originally allotted 30 days, to submit their objections to the closing statements and proceeded to engage willingly in the Post Closing adjustment procedure with the Arbitrator.” Because of that, it found “there is no underlying reasoning to stop, or in this case retroactively invalidate, the Post-Closing Adjustment procedure.”

Given this reasoning, it seems the outcome would have been different if the plaintiffs had immediately sought relief as soon as the closing statement was untimely or had delivered a timely objections statement that addressed the lateness of the closing statement (which would have then been one of the issues in arbitration). So, this may actually be a good reminder that contractual deadlines DO matter. After working collaboratively to close, it can be easy to just continue asking for support and negotiating when an issue comes up. But, if you’re on the receiving side of a late notice, ignoring it is risky — and it shouldn’t be an indication that you can be late too.

– Meredith Ervine