In Ap-Fonden v. Activision Blizzard, Inc., C.A. No. 2022-1001-KSJM, 2024 WL 863290 (Del. Ch. Feb. 29, 2024), the Delaware Court of Chancery (McCormick, C.) declined to dismiss a claim alleging that the Board of Directors of defendant Activision Blizzard, Inc. (“Activision”) violated Section 251(b) of the Delaware General Corporation Law (the “DGCL”) by approving a draft merger agreement between Activision and Microsoft, Inc. (“Microsoft”) that was not sufficiently final. The Court held that to comply with Section 251(b), the version of a merger agreement the board must consider and approve need not be “execution ready” but must be “essentially complete.” Practitioners should pay close attention to the Court’s holdings here as it may vary from what some consider customary market practice.
On January 17, 2022, the Activision Board met to approve the merger with Microsoft. Ahead of that meeting, the Board received a draft merger agreement which did not include a company disclosure letter (which was mentioned 45 times in the draft merger agreement but was still being drafted at the time of the board meeting), the disclosure schedules (which were still being negotiated) or the surviving corporation’s certificate of incorporation. The draft merger agreement also had placeholders for the consideration amount and the name of the target, and an important issue of how dividends in the post-signing period will be handled (the “Dividend Provision”) was still being negotiated by an ad hoc committee of the Board.
Section 251(b) of the DGCL provides that “the board . . . shall adopt a resolution approving an agreement of merger.” Plaintiff stockholder argued that Section 251(b) required the Board to approve a version of the draft merger agreement that is “execution ready.” In response, defendants offered a market-practice/practicality argument: “given the practical realities of negotiating merger agreements, boards commonly adopt resolutions approving a merger agreement in draft or near final draft form and declaring its advisability before the agreement has been finalized, and this is especially true with respect to ancillary documents, including disclosure schedules.”
The Court observed that the merger statutes, unlike many parts of the DGCL, are mandatory provisions, and that Delaware courts require “strict compliance” with statutory requirements governing fundamental transactions such as mergers. The Court concluded that, at bare minimum, Section 251(b) requires the board to approve an “essentially complete” version of the merger agreement, and it was reasonably conceivable here that the draft merger agreement approved at the January 17, 2022 Board meeting fell short of that standard, as “[t]here was a lot of important stuff missing from the Draft Merger Agreement.” The Court took issue with the missing consideration, the missing disclosure letter that contained information that was important to the agreement, the missing surviving corporation’s charter (which is expressly required by Section 251(b)(4)), and the open Dividend Provision issue. The Court balked at determining at this stage in the litigation whether the disclosure schedules were necessary to comply with Section 251(b), but noted that reasonable minds could reach different conclusions on this point.
Plaintiff also challenged Activision’s compliance with Section 251(c) of the DGCL. Section 251(c) provides that the agreement required by Section 251(b) shall be submitted to the stockholders and the notice of the stockholder meeting for voting on a merger “shall contain a copy of the agreement or a brief summary thereof.” Here, Activision’s notice of stockholder meeting contained a reference to an annex to the proxy statement which attached the merger agreement. The Court concluded, however, that the attached merger agreement was deficient because it was missing the surviving company’s certificate of incorporation. Defendants pointed to the summary of the merger agreement in the proxy statement, arguing that Activision complied with Section 251(c) through that summary. The Court, though, observed that the text of the Section 251(c) requires the notice of stockholder meeting to contain the merger agreement or the summary, and the proxy statement is not the notice (unlike DGCL Sections 228 and 242, which do permit such integration of the proxy in certain instances). Accordingly, the Court held it reasonably conceivable that plaintiff could state a claim that defendants did not comply with Section 251(c).
Practitioners will note that Item 601(a)(5) of Regulation S-K, 17 C.F.R. § 229.601, provides that schedules or similar attachment to exhibits (such as merger agreements) are not required to be filed with the SEC under federal securities laws provided that they do not contain information material to an investment or voting decision and that information is not otherwise disclosed in that document. In particular, it is not customary to include disclosure letters or disclosure schedules as annexes to Form S-4s or proxy-prospectuses filed with the SEC. We expect the Delaware courts will need to address this interplay in subsequent decisions.
Historically, there has been little guidance from the courts regarding the interpretation of Section 251(b), and market practice influenced what practitioners believed was acceptable under the statute. But as the Court noted, “where market practice exceeds the generous bounds of private ordering afforded by the DGCL, then market practice needs to check itself.” Practitioners should pay careful attention to the completeness of the merger agreement submitted to the board for approval and make sure the negotiations are settled, the agreement form is essentially complete, it has all essential exhibits attached, and it contains the items expressly enumerated in Section 251(b). And, in turn, because practitioners are not likely to change practice and insert a robust merger agreement summary into the notice of stockholder meeting, the Section 251(b)-compliant merger agreement must be referenced in the notice and presented to the stockholders for approval and adoption.
UPDATE:
The Court of Chancery’s decisions in Activision and in West Palm Beach Firefighters Pension Fund v. Moelis & Co., C.A. No. 2023-0309-JTL, -- A.3d --, 2024 WL 747180 (Del. Ch. Feb. 23, 2024), in which the Court held that several stockholder agreement provisions were facially invalid under the DGCL, raised concerns among practitioners. They saw the Court’s decisions as deviating from long-time common practice, thus creating uncertainty and unpredictability in Delaware corporation law. And in both cases, the Courts called on the legislature for assistance, emphasizing that their decisions were constrained by a strict reading of statutory law. In Moelis, the Vice Chancellor stated expressly in a footnote that he “would welcome additional statutory guidance.”
Responding quickly to these developments, on March 28, 2024, the Delaware State Bar Association’s Corporation Law section released proposed amendments to the DGCL aimed largely at unwinding the holdings in Activision and Moelis, among others. With respect to the Activision holdings, the proposed amendments specify that (1) the merger agreement adopted and approved by the board of directors may be in final or substantially final form (rather than “essentially complete”), (2) a surviving company’s charter is not required to be in the merger agreement for the board vote when the target corporation’s stockholders are not receiving surviving company stock, (3) disclosure letters and disclosure schedules are, by default, deemed not part of the merger agreement, and (4) any document enclosed with, annexed or appended to a notice will be deemed part of the notice. The proposed amendments would be effective August 1, 2024 and would have retroactive effect. They are currently being considered by the Delaware legislature.