Delaware Court of Chancery’s Chilly Response to Activision Blizzard Casts Doubt on Common M&A Practices

On February 29, 2024, the Delaware Court of Chancery issued an opinion in Sjunde AP-Fonden v. Activision Blizzard questioning a number of common practices for target companies in a merger, including the process for obtaining board approval of a merger agreement and the contents of the notice of the stockholders’ meeting to approve the merger agreement, and allowing a challenge to the validity of the subject merger to proceed. It is an important read for all involved in M&A and will undoubtedly have an impact on market practice.

On October 13, 2023, Microsoft closed its acquisition of Activision Blizzard in a transaction valued at $68.7 billion. An Activision Blizzard stockholder subsequently filed claims arguing that the board of directors did not comply with the technical requirements of DGCL Section 251(b) by approving a draft merger agreement that omitted certain information and by delegating authority to a subset of directors to finalize the agreement.

The Court denied the defendants’ motion to dismiss and held that the draft merger agreement presented to the target board for approval must be at least an “essentially complete version.” This, “at a bare minimum,” must include the following items that were missing in the draft merger agreement made available to the board at the time of approval: (i) the purchase price (a placeholder had been included in the draft, presumably for confidentiality reasons); (ii) the company disclosure letter (which typically contains exceptions, disclosures, and qualifications to the representations, warranties and covenants in the merger agreement); (iii) the certificate of incorporation of the surviving corporation in the merger; and (iv) all finalized key terms (the draft merger agreement had an open point on the target’s ability to pay dividends between signing and closing). The Court also found that the Activision Blizzard board improperly delegated the approval of a key open term in the draft merger agreement to an ad hoc board committee (specifically, the dividend issue), in violation of Section 141(c)(2) of the DGCL, which provides that “ ‘a committee does not have any power with respect to’ approving an agreement of merger or its terms.” Because the plaintiff alleged that these key terms were lacking in the draft merger agreement presented to the full board for approval, the motion to dismiss was denied and the case was allowed to proceed.

The Court acknowledged that it is common practice to present the target board with an incomplete but “near-final” version of the merger agreement for approval, given the realities of negotiating and executing a complex transaction. But the Court concluded that market norms do not supersede statutory terms: “Where market practice exceeds the generous bounds of private ordering afforded by the DGCL, then market practice needs to check itself.”

The plaintiff also alleged that the Activision Blizzard board violated DGCL Section 251(c), which states that the notice of the stockholders’ meeting to approve the merger agreement must include either the merger agreement in its entirety or a brief summary of the merger agreement. The Activision Blizzard notice followed the common practice of including an agenda item for a stockholder vote to approve the merger agreement and attaching a proxy statement, which contained an extensive summary of the merger agreement and a copy of the merger agreement as an annex. The Court found that the notice was defective because (i) the merger agreement annexed to the proxy statement did not include a copy of the certificate of incorporation of the surviving corporation and therefore was not compliant with Section 251(b), and (ii) the notice did not contain a brief summary of the merger agreement (taking the literal stance that the proxy statement is distinct from the notice, even where the two documents are delivered to stockholders together as part of the same file (if delivered electronically) or the same book (if delivered physically)).

The outcome of this litigation remains to be seen. But in the interim, those contemplating M&A transactions should consider the Activision Blizzard opinion carefully, particularly with respect to its lessons on the content of materials presented to a target board for approval and the content of the notice of the stockholders’ meeting to approve the merger agreement.