July 27, 2009
Activision Litigation – Game Over
Last week Chancellor Chandler dismissed Wayne County
Employees’ Retirement System v Corti (the Activision litigation). The plaintiffs in the case made a number of
claims – you can probably guess what they were.
What caught my eye in the opinion was how the court dealt with the Revlon claims against the board. FYI: The business combination agreement in
question is here. The opinion can be found over at AmLawDaily.com along with commentary.
The court dismissed claims that the directors of Activision failed in the obligations under Revlon by not conducting an independent market check before agreeing to a sale of control. By the way, the transaction is slightly out of the ordinary in that it’s a two step deal. In the first step, Activision issued new shares to Vivendi giving them 52% control of the stock, then Vivendi engaged in a tender offer for the outstanding shares of Activision that it did not control.
In dismissing the claims against Activision’s board, the court reiterates what is by now settled Delaware law – directors are not liable for failing to carry out a perfect process during in a sale of control. There is “no blueprint” for meeting one’s duties under Revlon. Indeed, citingthe Delaware Supreme Court's decision in Lyondell v. Ryan, the court noted that “the relevant question is whether the Director Defendants ‘utterly failed to attempt to obtain the best sale price’” and not whether the process was perfect.
“Utterly failed to attempt” now that’s not an active auction or even much of a market check. In fact, that’s a pretty low bar when it comes to assessing whether directors have met their obligations under Revlon. Whatever happened to the board as auctioneer. If that’s not low enough, the court offers up Lyondell’s “knowingly and completely failed to undertake their responsibilities” language.
It’s hard to imagine what kind of inaction by directors can be the product of ‘utterly failing to attempt’ and ‘knowingly and completely failing’. I mean, it's really got to be bad. I imagine that if the facts of Revlon re-appeared in 2009 post-Lyondell that the case might even come out a different way given these standards. In Revlon, court struck down a lock-up granted to a favored bidder. That’s hardly an utter failure to attempt to obtain the best sale price.
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I did not find the decision surprising in its outcome, since it was a fairly straight forward application of the Supreme Court's decision in Lyondell. When the Court distinguished a failed or flawed process from what is in effect no process, it meant what it said. It is analogous it seems to me of what the Court requires for a Caremark claim (which is the setting for most of the litigation involving bad faith claims)- a total abdication of the Board's duties. If the facts in the McPadden case did not give rise to a bad faith claim, the Activision fact pattern surely would not.
What is more interesting to me is the absence of any discussion about an "intermediate" or "heightened" scrutiny under Revlon. Notwithstanding the "change in control", the Court spoke about the need for the plaintiffs to rebut the presumption of the business judgment rule. That seems right to me in the absence of any "discrimination" against a competing bidder and is consistent with a number of cases involving change of control (see eg Compucomp). Nevertheless, it is always nice to see a decision reaffirming that the starting point for analysis of a board's duties in the context of a merger is the presumption of the business judgment rule.
Posted by: ESW | Jul 28, 2009 12:52:26 PM