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Wayne County Employees’ Retirement System v. Corti, C.A. No. 3534-CC (Del. Ch. July 24, 2009)

July 24, 2009

In this memorandum opinion, the Court of Chancery dismissed claims that the board of directors of Activision, Inc. (“Activision”) failed to satisfy their Revlon duties by not conducting a pre-agreement market check prior to entering into an agreement that resulted in Vivendi S.A. (“Vivendi”) obtaining majority control of the Activision voting stock. In the decision, Chancellor Chandler reiterated that directors of Delaware corporations are not required to “carry out a perfect process in a sale of control” and that under such circumstances, there is “‘no single blueprint that a board must follow to fulfill its duties.’” Mem. Op. at 25 (citing Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 242-43 (Del. 2009)).In December 2007, Activision announced that it had entered into an agreement with Vivendi, pursuant to which Activision would combine its business with that of Vivendi Games, Inc., a subsidiary of Vivendi. The deal was structured as a two-step transaction – first Vivendi acquired 52% of the Activision shares in connection with the contribution of the assets of Vivendi Games and the purchase of newly issued Activision shares, and second, Vivendi made a tender offer for up to 50% of the remaining Activision shares. Two of Activision’s executive officers and directors (“Kotick and Kelly”) initiated discussions with Vivendi in late 2006 and informed the board of their ongoing discussions several months later. The board authorized the nominating and corporate governance committee (the “Committee”) to manage the sale process. The Committee relied on the Company’s financial and legal advisors and Kotick and Kelly, to whom the Committee vested negotiating authority.  Several months after the deal was announced but prior to the stockholder vote, plaintiff filed its first complaint alleging disclosure and breach of fiduciary duty violations. Plaintiff subsequently sought a preliminary injunction of the stockholder vote based on the alleged disclosure violations. Prior to the stockholders meeting, the Court of Chancery denied plaintiff’s motion for a preliminary injunction finding that plaintiff failed to demonstrate a reasonable likelihood of success because plaintiff “failed … to establish the materiality of the alleged [disclosure] omissions.” Thereafter, the stockholders approved the combination and Vivendi acquired 52% of the outstanding shares of Activision.

Plaintiff’s instant complaint reiterated certain purported disclosure violations. For the same reasons set forth in the Court’s earlier opinion – namely, that plaintiff failed to demonstrate the materiality of the purported omissions – the Court dismissed plaintiff’s disclosure claims. Plaintiff also raised other fiduciary duty claims. Plaintiff’s primary theory of the alleged breach of fiduciary duty was that Kotick and Kelly were subject to a disabling self-interest and favored their personal interests ahead of the interests of Activision stockholders. The Court held that the complaint failed to state a claim that Kotick and Kelly were interested in the transaction or otherwise breached their fiduciary duty of loyalty. The Court reasoned that the fact that Kotick and Kelly did not have to pursue the transaction with Vivendi to retain their positions “significantly alleviate[d] the concern that [they] were acting out of an impermissible ‘entrenchment’ motive.” In addition, the Court observed that Kotick’s and Kelly’s employment agreements were approved by the Activision board and by each of the compensation and nominating and corporate governance committees. Importantly, plaintiff failed to plead facts to rebut the presumption that the members of such committees exercised their independent business judgment.

The complaint also asserted fiduciary claims against the rest of the board of directors, alleging that the board (i) permitted Kotick and Kelly to conduct negotiations in the face of an alleged conflict of interest, (ii) failed to conduct an independent market check and (iii) failed to obtain a control premium in the sale of control. In respect of the first claim, the Court found that the Committee did not abandon its role in the sale, and received regular status updates from financial and legal advisors and Kotick and Kelly, who were not, in fact, subject to a disabling self-interest. In respect of the latter two claims, the Court found that plaintiff’s claims, although framed as purported breaches of the duty of loyalty, were not supported by the factual allegations of the complaint. To survive dismissal, plaintiff was required to plead facts to support a claim that the director defendants failed to act in good faith. Relying on Lyondell, the Court reiterated that the “relevant question is whether the Director Defendants ‘utterly failed to attempt to obtain the best sale price.’” Plaintiff’s complaint, however, failed to demonstrate that the defendants “knowingly and completely failed to undertake their responsibilities.” Similarly, the Court rejected plaintiff’s argument that the director defendants “failed to probe for alternatives,” reasoning that “Revlon does not proscribe any specific steps that must be taken by a board before selling control of the corporation.” Plaintiff’s argument that the board failed to secure a control premium likewise did not support a claim for breach of the duty of loyalty. The Court concluded that plaintiff’s allegation was, at best, an attack on the adequacy of the consideration, which is not reviewable under the business judgment rule. Accordingly, the Court dismissed plaintiff’s fiduciary duty claims.

Plaintiffs also sought a declaratory judgment that two provisions in the combined company’s charter were invalid and unenforceable. The Court concluded, however, that plaintiff’s claims were not ripe for judicial determination and therefore dismissed the balance of plaintiff’s claims.

The full opinion is available here