Activision and Delaware

Last week, Chancellor McCormick decided Sjunde AP-Fonden v. Activision Blizzard, which held that former shareholders of Activision had stated a claim that Activision’s board failed to comply with DGCL 251(b) when it approved the merger agreement with Microsoft.  The draft agreement that the board reviewed was missing key details, such as consideration, the disclosure letter, and a plan to handle dividend payments between signing and closing.  Those details were obviously filled in later, but the full board never formally approved the revised merger agreement – dividends, for example, were handled by committee.  McCormick held that while a board need not review a formal, final version of the agreement, Section 251(b) requires that they at least review a version that includes essential terms, and plaintiffs had for pleading purposes alleged that the Activision board failed to do so.  Due to the statutory violations, McCormick ultimately concluded, the plaintiffs had stated a claim for unlawful conversion of their shares.

So, here’s the thing.  Of course boards should formally review the essential terms of a merger agreement before declaring the deal’s advisability for statutory purposes.  How could it be otherwise?  But at the same time, it seems, you know, likely, that the individual Activision board members eventually came to learn the full essential terms and approved them, at least in practice if not through formal action.  Or, to put it another way, I think it’s unlikely there will be evidence that if the board had called a formal meeting to formally approve the final final merger, signed with a quill pen on a vellum scroll, the deal terms would have been any different. 

So the shareholders would have gotten the same deal regardless.  Meanwhile, the deal’s done; no way McCormick is going to unwind it.  (One case even held there can be no conversion claims post-merger because of the impossibility of unwinding, see Arnold v. Soc’y for Sav. Bancorp, Inc., 1995 WL 376919 (Del. Ch. June 19, 1995), though I am not sure that makes sense; conversion claims can be maintained when property is destroyed or transformed.). 

But, absent unwinding, the only remedy available to shareholders will be the fair value of their pre-merger shares.  And there are some precedents about determining fair value of a tradeable asset – giving the victim the benefit of the higher price when there are fluctuations in value after conversion – but here, the asset itself disappeared from the market after conversion.  Even if you looked to the pre-conversion price, Activision traded consistently below the deal price.  And if nothing else, I imagine that McCormick might conclude the fair value in this context should be calculated the same way it would be in an appraisal action, which probably means deal price.  Any way you slice it, I’m not sure what damages the shareholders can obtain, beyond nominal plus attorneys’ fees.  So it seems like an awful lot of running around for something that doesn’t really provide much benefit. 

And that, I think, was kind of the spirit of the grumblings about Delaware law I heard at the Delaware Developments panel at the Tulane Corporate Law Institute on Thursday.  (I missed the Activision discussion that I gather occurred in the prior panel; anyone know if they talked about remedies?)  Anyway, at Delaware Developments, mostly, corporate attorneys were complaining about new cases like Activision or Moelis that upset settled expectations and subjected corporations to unpredictable liabilities, but I think the spirit of the objection, and there’s some truth to this, is that it feels like formalities being enforced without a corresponding shareholder benefit.  There may be a systemic benefit from adhering to the technicalities - governance restrictions in the charter, not a shareholder agreement, and of course boards should have the details of a merger agreement when approving it - but it’s hard to see the benefit to shareholders by enforcing them ex post in individual cases.

But that’s the weakness of relying entirely on a system of private litigation.  Activision, for example, very much smacks of the kind of thing that should be handled with a regulatory fine and a stern warning to others.  But that’s not on the table.