Statement Regarding the Activision Amendments

In 2024, Delaware enacted extensive amendments to the Delaware General Corporation Law to overrule three recent opinions by the Delaware Court of Chancery. Many of these hurriedly written amendments attack the Court’s February 29, 2024 Activision opinion.

In Activision, the Delaware Court of Chancery held that the plaintiff, a former Activision stockholder, had stated a claim that Activision and its board of directors had not complied with the requirement of Delaware’s merger statute, 8 Del. C. § 251, which requires that the board approve an agreement of merger that contains specified items, such as the merger consideration and the terms of the certificate of incorporation of the surviving corporation.[1] Because a merger is such a fundamentally important transaction affecting the ownership of the corporation, Section 251 imposes mandatory steps for the protection of the stockholders.[2]

The Activision opinion was preliminary. There had been no discovery, trial, final decision or appeal. However, within days, rushed efforts began, not only to overturn the Court’s Section 251 analysis of a draft merger agreement, but also to drastically diminish the standards for other board approvals and actions. Unlike the careful process and consideration Delaware usually employs for DGCL amendments, the multiple statutory changes directed at Activision were hastily concocted. As a result, the Activision Amendments are overbroad, imprecise and undermine the Court of Chancery and the DGCL’s protection of stockholders.

I. BUSTING THE MYTHS UNDERLYING THE ACTIVISION AMENDMENTS

The Activision Amendments are based on a series of myths. First, Section 147 was supposedly necessary because Activision “considered competing interpretations of § 251.”[3] Second, the amendments purportedly were necessary to “align the DGCL with market practices.”[4] Third, the amendments were characterized as a product of the “Delaware Way.” These myths are unfounded.

A. Mythbuster No. 1: There Were No “Competing Interpretations” of Section 251

Respect for the Court of Chancery requires that amendments overruling a judicial interpretation of the DGCL should be based on a careful and accurate reading of the Court’s opinion. The Synopsis to the Activision Amendments represents that there were “competing interpretations of § 251 of Title 8” in Activision. [5] That is not correct.

The Court’s opinion analyzed the plain, mandatory language of Section 251 and concluded:

Interpreting Section 251(b) to require a board to approve an execution version thus finds support in: the plain language of Section 251(b); the unique status of mergers within the DGCL; the essential role of the agreement of merger within Section 251; a board’s nondelegable authority with respect to mergers; and the aura of mandatory provisions and strict adherence that engulfs the statutory scheme.[6]

Given these factors, the Court’s decision was hardly “unpredictable,” at least not to someone who read Section 251 carefully.

What the Synopsis dubs a “competing” interpretation of Section 251 was not a construction of the statute, but an argument that it was “market practice” for boards to approve near final drafts of merger agreements.[7] The Court refused to rewrite Section 251 to conform to supposed market practice, observing that where market practice exceeds the generous flexibility the DGCL allows, “then market practice needs to check itself.”[8]

The Court held that:

At bare minimum, Section 251(b) requires a board to approve an essentially complete version of the merger agreement (the “essentially complete interpretation”). This is so because, absent an essentially complete draft, the board-approval requirement of Section 251(b) would make no sense.[9]

The Court stated that “requiring the board to approve an essentially complete version of a merger agreement” is “just the basic exercise of fiduciary duties” and would not inject uncertainty into transactional practice.[10]

Consistent with accepted principles of statutory interpretation, the Court of Chancery held that the statutory language controls, not what lawyers say is their market practice.[11] In the 2024 DGCL amendments, however, Delaware has essentially decided that Delaware corporate law should be controlled by what some large out-of-state law firms claim is “market practice.” Moelis said “market practice is not the law;”[12] the 2024 amendments say market practice is the law. In Delaware, the inmates are now running the asylum.[13]

A former Chancellor chastised the judges who decided Activision and Moelis because they did not “stay in their lane,” telling the General Assembly that “judges need to be judging cases in the courtroom, applying the law you gave them.” [14] That is exactly what the judges in Activision and Moelis were doing. As Moelis stated, it is the Court’s job to enforce the DGCL.[15] The Court stayed in its lane. It was the up-in-arms lawyers insisting any decision that does not conform to their preferred practice must be reversed who strayed from their lane.

B. Mythbuster No. 2: There Was No Evidence of So-Called “Market Practice”

The Activision Amendments purport to “align the DGCL with market practices” where (supposedly) boards of directors commonly approve incomplete versions of merger agreements.[16] The Activision opinion, however, was on a motion to dismiss so there was no factual record concerning market practices.

Defendants’ support for their market practice argument was a treatise by non-Delaware lawyers that claims “disclosure schedules are often negotiated up until a merger agreement is signed and are sometimes delivered after signing.”[16] The treatise does not address the other components that were missing from the draft merger agreement.[18]

The market practice theory postulates that lawyers and others regularly fail to complete their tasks in time for boards to approve complete agreements of merger. The proponents of the Activision Amendments did not provide compelling evidence, and there were no legislative findings, that the supposed market practice exists. I believe a factual investigation would uncover evidence, consistent with my training and experience, that many practitioners and boards comply with Section 251’s straightforward and clear requirements. The need to have the DGCL conform to “market practice” is a myth. As Activision pointed out:

In all events, there is no reasonable argument that requiring a board to approve and declare the advisability of an essentially complete merger agreement would inject uncertainty into transactional practice or stifle mergers generally. The talented bar of transactional attorneys can surely achieve this requirement without much exertion.[19]

Instead of simply complying with the clear requirements of Section 251, the talented bar of transactional attorneys (and corporate defense attorneys) has caused multiple, convoluted amendments to the DGCL for their own protection.

C. Mythbuster No. 3: The Delaware Way Is Dead

The “market” that established the supposed “practice” to which the recent amendments purportedly conform is not Delaware, but large law firms based outside Delaware. Within weeks of the Moelis and Activision opinions, such firms began issuing client advisories and blog posts pushing for the amendments.[20]

The Delaware corporate law bar now includes numerous lawyers, including former Chancery judges, who work for out-of-state firms that have opened Delaware offices. Some former Chancery judges employed by such offices were prominent supporters of the amendments, co-authoring their firm’s pieces supporting the amendments, lobbying legislators and even personally attacking the judges who wrote Moelis and Activision. [21]

Delaware has long touted the Chancery judges for their corporate law expertise.[22]Indeed, Delaware rarely resorts to DGCL amendments to address developments in the mergers and acquisition market, leaving it to the Delaware Court of Chancery and Delaware Supreme Court to develop the law on a case-by-case basis.[23] The hasty amendments and related attacks, however, undermine the credibility of the Court of Chancery. Apparently, Chancery judges are only experts when their opinions comply with the alleged practices of transactional lawyers at national or international firms, most of whom are not members of the Delaware bar.

Like other members of the Delaware judiciary, the current Chancellor and Vice Chancellor, who were singled out as “just two judges,” are expected to appear on corporate law panels, write articles and otherwise provide their perspectives on Delaware law developments, including potential DGCL amendments.[24] Such activities are in their “lane.”[25] However, they were condemned on the floor of legislative hall for having suggested that abrupt multiple amendments to the DGCL to reverse opinions in still pending cases did not reflect the Delaware Way.[26]

The rapid overruling of opinions in still pending cases and the harsh criticism of the two members of the Court of Chancery sends an intimidating message to all members of the Court that any opinion interpreting the DGCL that goes against counsel to corporations will result in legislative reversal and scathing attacks. So long to “the Delaware Way.”

II. SECTION 147: AN OVERBROAD STATUTE WITH A PROBLEMATIC STANDARD

A. The Unnecessary, Unexplained and Uncertain Scope of Section 147

As the Synopsis to Section 147 admits, Activision was limited to interpretation of Section 251, the merger provision of the DGCL.[27] The opinion was based on applying the highly specific language and mandatory requirements of the statutory scheme governing mergers and Delaware law’s requirement of strict compliance with the DGCL’s merger provisions to a particular draft merger agreement.[28] The market practice argument defendants’ made was that the board should only have to approve an essentially complete draft of the agreement of merger, rather than A final execution version.[29]

Though Activision only considered board approval of an agreement of merger, Section 147 is not limited to merger agreements. It applies “[w]henever this chapter expressly requires the board of directors to approve or take other action with respect to any agreement, instrument or document.”[30] The statute and Synopsis provide no reason why a response to a specific interpretation of Section 251’s requirements for board approval of an agreement of merger should apply to (i) any agreement of any kind, and also to any document or instrument, and (ii) not just to board approvals, but also whenever the board takes any action.

Neither Section 147 nor the Synopsis identify the sections of the DGCL that meet Section 147’s criteria. The Synopsis only explains taking “other action” as including actions “such as making an advisability determination or a recommendation to stockholders.”[31] It does not identify which DGCL sections expressly require boards to take “other action.”

B. The Unworkable Synopsis Definition of Substantially Final

The “substantially final form” standard of Section 147 is different from the Activision opinion’s “essentially complete interpretation,” which requires an “essentially complete draft.” [32] Section 147 and the Synopsis do not explain why.

Section 147 does not define “substantially final.” The Synopsis essentially attempts to rewrite the statute to say that “substantially final” means that “at the time of board approval, all of the material terms are either set forth in the agreement, instrument or document or are determinable through other information or materials presented to or known by the board.”[33] While a supposed purpose of the amendments is certainty,[34] the vagueness of this definition creates, not eliminates, uncertainty. Moreover, the Synopsis indicates that in applying the “substantially final” standard only “material terms” are considered. Neither Section 147 nor the Synopsis defines what constitutes the “material” terms of an agreement, instrument or document.

C. There Is No Need for a Third Statutory Ratification Procedure

As the Synopsis to Section 147 admits, the DGCL already contains two statutory procedures for ratification of corporate actions, 8 Del. C. §§ 204–205, in addition to common law ratification.[35] Neither the statute nor the Synopsis explains why a third statutory do-over is necessary. It appears the intention is to give the board a power of self-help ratification that is not subject to review by (or even notice to) the stockholders or the Court.

The Synopsis incorrectly implies that ratification or validation under Sections 204 or 205 automatically relates back to the time of original board approval.[36] Under Section 205(b)(1), (2) and (8), however, the Court determines whether the effective time relates back to the original defective corporate act.

III. SECTION 232(g): INCORPORATION OF EVERYTHING BUT “SOLELY” FOR NOTICE

Section 232(g) provides that each and every document enclosed with or annexed or appended to a notice is automatically deemed part of the notice. Thus, a “notice” may consist of multiple documents including a proxy statement and agreements that may be hundreds of pages long.

The statute is one-sided. The incorporation of documents is “solely” for purposes of determining the sufficiency of notice. Stockholders are on “notice” of everything contained in all the various incorporated documents. However, the Synopsis says information in the incorporated documents is “not intended to be deemed ‘per se’ material to stockholders.”[37] Section 232(g) is basically an attempt at a “have your cake and eat it too” provision for directors and their lawyers. They give themselves credit for providing “notice” of everything in the incorporated documents, while preserving their ability to deny that any and all of the information constitutes material disclosure.

IV. SECTION 268: SLOPPY DRAFTING AND HIDING TERMS

A. Section 268(a)

Section 268(a)(i) provides that in a merger where all shares are converted into consideration other than stock of the surviving corporation, the agreement of merger as approved by the board “need not include any provision regarding the certificate of incorporation of the surviving corporation.” The statute incorrectly assumes that if the stockholders are not going to be stockholders of the surviving corporation, they will not care what provisions are in the survivor’s certificate.

Section 268(a)(ii) provides that the board “or any person at the direction thereof” may adopt any amendment or amendment and restatement of the certificate of incorporation of the surviving corporation.” Section 268 does not state that the amendments it authorizes must only take effect if and when the merger becomes effective.

The statute indicates it governs certificate amendments made before the merger closes. Section 268(a) (iii) provides that “no alteration or change of such certificate of incorporation shall be deemed to constitute an amendment to the agreement of merger.” An agreement of merger can only be amended before the merger has occurred. Section 268(a) applies when an agreement of merger provides that the target’s shares “shall be converted into” something other than shares of the surviving corporation. “Shall” and “to be converted” connote the future. Thus, Section 268(a) indicates that during the pendency of the agreement of merger, the certificate of the “surviving corporation” can be unilaterally amended by the board or anyone acting at the board’s direction.

The target corporation is often designated the “surviving corporation” where a subsidiary of the acquiring corporation is merged into the target corporation. Thus, Section 268 appears to authorize the target’s board or anybody it authorizes to amend the target’s certificate before the merger occurs, without requiring that the amendment not take effect until the merger becomes effective.

B. Section 268(b): An Open Invitation to Hide Terms

Section 268(b) states that unless a merger agreement expressly provides otherwise, “any disclosure letter, disclosure schedules or similar documents or instruments” . . . shall not be deemed part of the agreement for purposes of any provision of this title but have the effects provided in the agreement.” The language is awkward and its meaning is unclear.[38] The various documents are supposedly not part of the agreement, but they have the effects provided in the agreement, so they effectively are part of the agreement.

Neither the statute nor the Synopsis defines “similar documents or instruments.” The Synopsis admits that the purpose of the statute is so the disclosure letter, schedules and “similar documents” will not be part of the agreement of merger that is approved by the board and submitted to the stockholders [39] Section 268 essentially “turns one agreement into two agreements:” an agreement of merger the board and stockholders see and a set of documents they do not see.[40] Section 268(b) is an open invitation to hide terms from the stockholders by putting them in other documents that the statute says are not part of the agreement of merger.

C. Section 268: Limited Disclaimer of Effects on Fiduciary Duties

The Synopsis to Section 268 does not contain a full disclaimer that the statute does not limit fiduciary duties. Instead, it only states that Section 268 does not alter the fiduciary duties of directors “with respect to the delegation of authority” to approve the survivor’s certificate and disclosures schedules “or the fiduciary duties of officers” in exercising delegated authority or informing “the directors of material provisions.” [41]

Section 268 and the Synopsis do not disclaim any intention to alter the fiduciary duty of directors and officers to inform stockholders of material provisions of the survivor’s certificate, disclosure schedules and “similar documents.” Therefore, it will probably be argued that Section 268 allows Delaware corporations and their directors and officers to avoid disclosing the full merger terms to stockholders.

CONCLUSION

The hastily thrown together Activision Amendments are a flawed and largely unnecessary overreaction to the preliminary opinion in Activision. They are poorly drafted and create uncertainty, not certainty. Their primary purpose appears to be protecting lawyers who fail to follow plain requirements of the DGCL.

This post reflects my own views, see disclaimer.

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