Delaware Court: Corporation’s Own Stock Purchases not a “Business Combination”

Allen M. Terrell, Jr. is a director at Richards, Layton & Finger. This post is based on a Richards, Layton & Finger publication, and is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Activision Blizzard, Inc. v. Hayes, No. 497, 2013 (Del. Nov. 15, 2013), the Delaware Supreme Court addressed the question of whether the purchase by Activision Blizzard, Inc. (“Activision”) of shares of its own stock, as well as net operating loss carryforwards (“NOLs”), from Vivendi, S.A. (“Vivendi”) constituted a “merger, business combination or similar transaction” under Activision’s amended certificate of incorporation and, as a result, required the approval of stockholders. The Court held that, despite its form as the combination of two entities, the transaction at issue did not require the approval of stockholders. “Indeed,” observed the Court, “it is the opposite of a business combination. Two companies will be separating their business connection.”

The dispute reached the Court as an interlocutory appeal from entry of a preliminary injunction by the Court of Chancery, halting consummation of the stock purchase agreement (“SPA”) between Activision, a global developer, publisher and developer of video games, and Vivendi, a French digital entertainment company, with video game and other businesses. On July 25, 2013, Vivendi, which before the transaction at issue had owned 62% of Activision’s stock, entered into the SPA with Activision, under which Activision agreed to pay Vivendi $5.83 billion for 429 million shares of Activision stock, as well as $675 million for NOLs. This part of the SPA was to be effectuated through the acquisition of a newly created and wholly owned subsidiary of Vivendi, New VH (referred to as “Amber”), whose only purpose was to hold the Activision stock and NOLs. Activision would acquire Amber, and the stock acquired would be treated as treasury shares, reducing the total number of Activision shares outstanding. Further, the SPA provided that Vivendi would sell an additional 172 million shares of Activision stock to ASAC II, LP, a limited partnership owned in part by two Activision directors.

Following the announcement of the stock purchase, Douglas Hayes, an Activision stockholder, filed a class action and derivative complaint in the Court of Chancery on September 11, 2013, alleging, inter alia, that Section 9.1(b) of Activision’s certificate of incorporation, which required approval of the holders of a majority of stock unaffiliated with Vivendi “with respect to any merger, business combination or similar transaction,” was triggered by the SPA.

In a bench ruling on September 18, 2013, the day before the scheduled closing of the SPA, the Court of Chancery entered a preliminary injunction enjoining consummation of the SPA. See Hayes v. Activision Blizzard, Inc., 2013 WL 5293536 (Del. Ch. Sept. 18, 2013) (TRANSCRIPT). Relying on Martin Marietta Materials, Inc. v. Vulcan Materials Co., 56 A.3d 1072 (Del. Ch. 2012), the trial court held that the term “business combination” was inherently ambiguous and should be interpreted “expansively,” including within its meaning the purchase of the stock of a wholly owned subsidiary. Further, the Vice Chancellor maintained that the proposed transaction fell “squarely within Section 9.1” of Activision’s certificate of incorporation because the purchase was a “value-transfer transaction,” which was bound to impact minority stockholders. “This is an $8 billion reorg. of Activision. Value is moving. Value is moving to the former controller. Value is moving to management,” the Vice Chancellor reasoned.

The Delaware Supreme Court vacated the preliminary injunction entered by the Court of Chancery and remanded for further action. The Supreme Court held that the phrase “business combination” in Section 9.1(b) was not ambiguous and clearly did not apply to the transactions contemplated in the SPA. The Court observed that, “technically, Activision would combine with Amber” and the size of the transaction would be considerable, but the Court reasoned that “[n]either the form of the transaction nor its size changes its fundamental nature.” That fundamental nature, the Court found, was of the two businesses (Activision and Vivendi) “separating”—not of “Vivendi having a greater connection with and/or control over Activision’s business,” as the Court concluded would happen in a “business combination or similar transaction.”

Moreover, Amber could not be considered a business, the Court found. It was merely a company created to effectuate this transaction. Therefore, its acquisition by Activision was not a “business combination.” Additionally, the Court found nothing in the language of Section 9.1(b) to suggest that a transaction qualified as a “business combination or similar transaction” simply based on its magnitude. Finally, the Court pointed out that the general protection of minority stockholders, which was a concern of the Court of Chancery, was addressed elsewhere in Activision’s bylaws, not in Section 9.1(b) of the certificate of incorporation.

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