In Re Activision Blizzard, Inc. Stockholder Litigation

Facts

Nominal defendant Activision is a Delaware corporation. Vivendi (D) is a société anonyme organized under the laws of France. D is a multinational media and telecommunication company that operates in the music, television, film, publishing, Internet, and video games sectors. Before the Restructuring, D owned 683,643,890 shares of Activision common stock, representing 61% of the outstanding shares. D also had the right to appoint six members to Activision's eleven-member Board. Individual defendants were the D designees on the Board who voted in favor of the Restructuring. Individual defendants Robert Kotick, Brian Kelly, Robert Corti, Robert Morgado, and Richard Sarnoff were the other five members of the Board who voted in favor of the Restructuring. Corti, Morgado, and Sarnoff were outside directors. Kelly was Chairman of the Board. Kotick served as Activision's CEO. In 2012, D had over $17 billion in net debt and needed liquidity. JP Morgan identified two strategic alternatives that would achieve D's liquidity needs but would not be attractive to Activision's unaffiliated stockholders: a debt-financed special dividend or a sale of D's shares to a third party. The former would limit Activision's strategic flexibility without reducing D's ownership stake. The latter would substitute one controlling stockholder for another. D announced its interest in selling its Activision stake. Kotick and Kelly began pursuing a transaction that would benefit themselves. They raised $2-3 billion for an investment vehicle that would buy 38-44% of Activision. D's CEO informed Kotick that D's discussions with third parties about its Activision stake had not panned out. D was going to propose a special dividend of roughly $3 billion to be funded with cash on hand and new debt. JP Morgan opined that the special dividend 'will almost certainly destroy significant value to shareholders' and  justified 'increased investor concerns about potentially diverging interests between [Vivendi] and [Activision].' JP Morgan opined that the special dividend 'will almost certainly destroy significant value to shareholders' and justified 'increased investor concerns about potentially diverging interests between [Vivendi] and [Activision].' JP Morgan recommended a full repurchase of D's stake using Activision cash and debt, $2-3 billion acquired by investors 'supportive of management,' and a marketed secondary offering of the balance of D's stake. Kotick and Kelly offered $9 billion for D's entire stake (a price representing a 15% premium to market) with Activision buying the majority and an investor group led by Kotick and Kelly purchasing the balance. JP Morgan delivered a presentation advising that Activision could support up to $5.88 billion in debt and maintain a B+ bond rating. The Board formed the Committee, and they retained Centerview Partners, LLC as its investment advisor. Centerview recommended that Activision repurchase D's controlling interest, all of it. Centerview believed that Activision could raise $1 billion of public equity and $2 billion from convertible securities. The Committee approved a proposal for Activision to repurchase $5.9 billion of D's stake at $13.15 per share, with the balance of the shares by either a secondary offering or a sale Kotick and Kelly. On May 7, 2013, Kotick and Centerview argued over of whether a secondary offering would hurt Activision's stock price. On May 16, 2013, Kelly told the Committee that he and Kotick had dropped out of the transaction process. D told Centerview that if no deal was reached by the end of the week, D would cause the Board to disband the Committee and move forward with a debt-financed special dividend. No deal was reached and the Committee disbanded. D negotiated with Kotick and Kelly. They agreed on a deal. The Board reconstituted the Committee and made changes including obtaining a term in a stockholders agreement between ASAC and Activision that capped the voting power that Kotick and Kelly could exercise directly at 24.9%. The Committee recommended the deal to the Board, and the Board approved it. ASAC agreed to purchase 171,968,042 shares of Activision common stock from Vivendi at $13.60 per share. The price represented a discount of 10% from Activision's closing stock price on July 25, 2013. Activision purchased the shares of Amber Holdings Subsidiary Co. because Amber came to own 428,644,513 shares of Activision common stock and had net operating losses worth $676 million. In the Restructuring, Activision purchased the shares of Amber in exchange for $5.83 billion in cash. Everyone expected that Activision's stock price would rise after the announcement of the transaction and its separation from cash-strapped D. It did. Activision's stock price closed at $17.46 per share on Friday, July 26, and at $18.27 per share on Monday, July 29. Kotick and Kelly invested $100 million in ASAC GP; ASAC's various co-investors provided over $1.62 billion. Under ASAC's limited partnership agreement, the returns to ASAC GP were tied to the overall gains on ASAC's $2.3 billion investment in Activision. ASAC's immediate unrealized gain at closing was $712.8 million, of which Kotick and Kelly's share was $178 million. Kotick and Kelly would double their money if Activision's stock price remained at the post-announcement price of $17.46 per share,  make nine times their money if Activision's stock price doubled from the post-announcement price to $35 per share, and lose nothing if Activision's stock price declined by 20% from its post-announcement price. Kelly continued after the Restructuring as Chairman, and Kotick continued as CEO. They also served as managers of ASAC GP, giving them control over ASAC's entire block of shares. Kotick and Kelly had direct control over shares representing 26% of Activision's voting power, although the Stockholders Agreement capped what they could exercise directly at 24.9%. The co-investors in ASAC and their affiliates controlled approximately 35.4% of Activision's voting power. By securing Nolan and Wynn's service on the Board, Kotick and Kelly increased their influence in the boardroom. Without Nolan and Wynn, the post-Restructuring Board would have consisted of Kotick, Kelly, and the three individuals who served on the Committee, resulting in a 3-2 majority of independent directors. Nolan and Wynn added two directors with close ties to Kotick who could be viewed as not independent and who might be expected to favor management, giving Kotick and Kelly a 4-3 majority. Pacchia (P) used Section 220 to obtain books and records relating to the Restructuring. P filed a derivative action. Rosenthal, Monhait & Goddess, P.A. served as Delaware counsel. BE&S served as forwarding counsel. Because P's complaint relied on confidential information obtained using Section 220, it was filed under seal.  P alleged that the individual defendants and D breached their fiduciary duties to Activision, committed acts of waste, and caused Kotick, Kelly, and Vivendi to become unjustly enriched. Hayes (P) filed a separate action. Prickett, Jones & Elliott LLP served as Delaware counsel. Kessler, Topaz, Meltzer & Check, LLP, served as forwarding counsel. Hayes (P) framed his lawsuit as both a derivative action and a class action. The complaint relied solely on publicly available information. He included claims similar in form to P's, including (i) breach of fiduciary duty against D and the Activision directors, (ii) usurpation of a corporate opportunity by Kotick, Kelly, and ASAC, and (iii) aiding and abetting against various other defendants. Hayes' (P) complaint claimed that the Restructuring required a stockholder vote. Simultaneously with the filing of his complaint, Hayes (P) moved for a temporary restraining order. It was granted and certified for interlocutory appeal. The Delaware Supreme Court accepted the appeal. Hayes (P) pursued settlement discussions. Activision would make a special distribution to its public stockholders of shares of common stock with a market value of $70 million and D would pay $15 million to the public stockholders. Nineteen cosmetic changes were made to Activision's bylaws. None constituted a meaningful benefit for purposes of the settlement. Pacchia (P) elected not to sign at first but relented just before the case was heard at the Delaware Supreme Court. The Delaware Supreme Court reversed holding that there is no possibility of success on the merits. The Stock Purchase Agreement here contested is not a merger, business combination, or similar transaction. A settlement was eventually reached. Hayes (P) refused to sign.  He advanced the numerous arguments that are the principal subject of this decision. Others joined and petitioned for an award of fees and expenses on the theory that their counsel contributed to the Settlement.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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