Unless unhappy shareholders make a really strong case, Delaware courts appear reluctant to issue injunctive relief against proposed transactions in a weak M&A market.

Wayne County Employees' Retirement System v. Corti et al.

Court of Chancery (Delaware)

July 1, 2008 . Civil Action No. 3534-CC

Chancellor Chandler

This ruling was part of what was essentially a battle over the popular "massively multiplayer" online role-playing game World of Warcraft. The plaintiffs were shareholders of Activision, Inc., whose board had recommended a merger with the Vivendi Games (VG) unit of the giant multinational Vivendi S.A. Among the affiliates of VG are well-known electronic gaming brands Sierra and Blizzard, the owner of World of Warcraft.

The deal

Under the deal, Vivendi S.A. would purchase new shares of Activision at $27.50 per share, would contribute Vivendi Games to the new "Activision Blizzard" entity (AB) and, upon closing, would commence a tender offer at the $27.50 price for up to 50% of the shares of the current Activision shareholders. This would give Vivendi a controlling interest in AB. The $27.50 price represented a 25% premium on the closing price the day before the announcement.

Shareholders seek to prevent vote on merger

The plaintiff shareholders were attempting to obtain an injunction that would prevent a July 8, 2008 shareholder meeting called to approve the transaction. They argued that the board had failed to disclose information material to the shareholders' decision about how to vote. Their complaint seems to have been based in suspicions that Activision's CEO and Co-Chairman had engineered an improvident deal to save their own jobs, an analysis confirmed (in their minds) by the failure of the board to reconsider the deal when the company's share price rose sharply (to $35/share in June 2008). But for the purposes of the injunction they sought, they based their argument entirely on disclosure issues.

The decision

Chancellor Chandler rejected their claim in its entirety, holding that the omissions complained of "would not significantly alter the mix of information that is already available in the nearly 300-page definitive proxy released by the Company." Thus there was little likelihood of success on the merits and no preliminary injunction.

Not every document seen by the board needs to be disclosed as "material"

The first of the shareholders' three specific disclosure complaints had to do with an April 29, 2008 meeting at which the Activision board decided to reaffirm its December 1, 2007 recom¬mendation of the deal. The shareholders argued that the board should have to disclose the VG internal projections on which it allegedly relied (ahead of the December 2007 fairness opinion from its financial advisor) in coming to this decision.

Chancellor Chandler rejected this argument, both on the ground that there was no evidence the board had relied on the VG internal projection or that the 2007 fairness opinion was in any way stale just seven months later. In Lewes v. Leaseway Transp. Corp., C.A. No. 8720, 1990 WL 67383 (Del. Ch. 1990), the Chancery had ruled that there is no "per se rule that such documents must be updated after a certain time". Moreover, even if the Activision board had looked at the VG internals, "not every document reviewed by the board is material". Finally, because the plaintiffs themselves had admitted that the VG internal projections were in line with those relied on for the 2007 fairness opinion, it could not meet the basic test of materiality under Delaware (and U.S. federal) law, i.e. that they would "significantly alter the total mix of information already provided" (Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1174 (Del. 2000)). There is no requirement under Delaware law to "inundate" shareholders with information. (Arnold v. Society for Savings Bancorp, 650 A.2d 1270, 1280 (Del. 1994).

Board reaffirming earlier recommendation need not offer new justification

The second complaint was that the Activision board had omitted to disclose the reasons and bases for its continued recommendation. Chancellor Chandler held that it was enough to state that upon examination of the proposed transaction the board "determined that there was no need to change its December 1, 2007 recommendation."

"Fixed ratio" valuation issues

The plaintiffs' final complaint had to do with the parties' agreement to employ a fixed ratio to simplify the valuation process. In other words, the agreement deemed VG to have a value of 47.5% of that of Activision so that the mechanics of the transaction could be worked out to ensure that Vivendi ended up with the controlling interest it was paying for. When Activision had better than anticipated results for 2007, the original $24.75 price was renegotiated to the $27.50 figure mentioned above. The plaintiffs noted that because of the fixed ratio, this adjustment implied a $1 billion increase in the valuation of VG. They then argued, first, that this should have been mentioned in the proxy statement, and second, that the basis of the financial advisors' (and Activision management's) acceptance of the billion-dollar increase should have been disclosed. Chancellor Chandler rejected both arguments, stating that while it might have been "helpful" to have disclosed the billion-dollar figure, there is no rule that everything helpful is material, particularly where, as in this case, "a middle school algebra student could plug in the numbers and determine precisely how the November 2007 increase in Activision's valuation affected the implied value of [VG]." As for the second and more serious issue, the Chancellor held as follows:

In an exchange utilizing a fixed valuation ratio, it is implicit that an increase in the valuation of one company will necessarily lead to a corresponding increase in the value of the other company.

Therefore, the fairness statement appended to the proxy statement, which disclosed the basis for adopting the fixed ratio in the first place, constituted acceptable disclosure. This was especially true here, where even the increased value of VG lay at the low end of a valuation range that had been prepared by the financial advisor. The increased valuation did not affect the "total mix" of information available to share¬holders.

Weak M&A market makes a difference

Perhaps the most noteworthy aspect of the ruling is Chancellor Chandler's stated reluctance to disrupt a deal and prevent shareholders from exercising "a potentially value-maximizing opportunity" in a "decidedly unstable market". Where an injunction is sought, a "particularly strong showing" that the plaintiff has a reasonable likelihood of success will be required in light of "current market conditions". He noted that no other bid had emerged in the interim despite the absence of any substantial deal protection mechanisms and that leading invest¬ment advisors have urged shareholders to vote in favour of the deal.

It is also worth noting that Chancellor Chandler rejected the argument that the CEO and Co-Chairman were simply protecting their own jobs, both on the basis of a lack of evidence for the claim and because they were also owners of 7.5% of Activision's stock, "thereby aligning their interests with those of the shareholders."

M&A as a massively multiplayer game?

We would be remiss not to mention the court's comparison of M&A to World of Warcraft:

In some ways, perhaps, the world of Mergers and Acquisitions is a massively multiplayer role playing game as well. Like in World of Warcraft and other games, the participants in the M&A field take on certain roles, interact in their own community, hone specialized skills, and even develop a unique, somewhat curious vernacular. One particular quest in the world of M&A is disclosure litigation..

In this case, despite the fact that "both sides have played the game well", Chancellor Chandler ended the proceedings by telling the plaintiffs that it was unfortunately "Game Over" for their quest.