Microsoft, Activision Ordered to Face Lawsuit Over Merger (1)

Microsoft Corp. and Activision Blizzard Inc., the video game studio it bought last year for $69 billion, lost their bid Thursday to end a pension fund’s lawsuit challenging the transaction.

A Delaware judge let the shareholder case move forward, saying it’s “reasonably conceivable” Activision’s board violated corporate laws by approving only a rough version of the merger agreement that left open key terms, including how much it could pay out in dividends during the deal’s lengthy regulatory review.

The Swedish state-owned pension fund leading the case “has adequately alleged that the merger was invalid,” Chancellor Kathaleen St. J. McCormick said in a 24-page ruling. But even if the transaction may technically have violated certain statutory provisions, “Delaware law offers solutions for missteps,” she wrote.

McCormick, chief of Delaware’s Chancery Court, is the same judge who in January struck down Elon Musk’s $55 billion pay package at Tesla Inc. She ordered the two sides of the Activision case to “meet and confer on a path forward.” The proposed class action seeks damages on behalf of former Activision stockholders.

The lawsuit, filed in 2022, initially took direct aim at what was then a stalled deal, saying Activision CEO Bobby Kotick and other corporate leaders engineered the transaction to protect themselves from the beleaguered gaming giant’s sexual harassment scandal. Microsoft, meanwhile, exploited the crisis to acquire the “weak and wounded” Activision at a fire sale price, according to the original court complaint.

Over more than a year of litigation, the case’s focus narrowed to a dispute over the technical requirements of Section 251, the Delaware statute covering mergers. In the meantime, the transaction closed in October after a nearly two-year fight with global antitrust regulators that finally signed off on it, subject to certain conditions.

‘Essentially Complete’

McCormick steered clear Thursday of allegations about Activision’s “frat house culture.” She also punted on a novel claim raised by the Swedish pension fund, Sjunde AP-Fonden, a private equity-style asset manager doing business as AP7. The fund has argued that statutory provisions mandating board approval of mergers require corporate directors to sign off on an “execution-ready” version of the agreement.

On the one hand, “highly experienced transactional attorneys negotiate and finalize disclosure schedules up until the moment a deal closes, if not beyond,” McCormick wrote. At the same time, where market practice runs afoul of Delaware’s corporate laws, “then market practice needs to check itself,” she said.

But the judge said there was no need to decide if the board has to approve a final version of the merger agreement because the allegations, if true, suggest Activision’s directors didn’t even sign off on an “essentially complete” draft.

“There is no straight-faced argument that requiring a board to approve an essentially complete version of a merger agreement is commercially unreasonable,” McCormick said. “That’s just the basic exercise of fiduciary duties, not to mention good corporate hygiene.”

AP7 is represented by Prickett, Jones & Elliott PA and Kessler Topaz Meltzer & Check LLP. Activision and its board are represented by Skadden, Arps, Slate, Meagher & Flom LLP. Microsoft is represented by Young Conaway Stargatt & Taylor LLP and Simpson Thacher & Bartlett LLP.

The case is Sjunde AP-Fonden v. Activision Blizzard Inc., Del. Ch., No. 2022-1001, 2/29/24.

—With assistance from Jennifer Kay.