Voting Formalities Around Merger Agreements

Delaware Court Ruling in Ap-Fonden v. Activision Blizzard, Inc. and Implications for Corporate Law

In Ap-Fonden v. Activision Blizzard, Inc., the Delaware Court of Chancery, under Judge McCormick, ruled on the adequacy of a merger agreement approved by Activision Blizzard’s Board of Directors. The decision has significant implications for how merger agreements must be presented for board approval under Delaware law.

 Case Background and Court Ruling

On January 17, 2022, Activision’s Board approved a draft merger agreement with Microsoft. However, the draft was incomplete, lacking crucial components like a company disclosure letter, disclosure schedules, and a final surviving corporation's certificate of incorporation. Additionally, key issues such as the Dividend Provision were still under negotiation.

The plaintiff argued that Delaware General Corporation Law (DGCL) Section 251(b) requires the board to approve a version of the merger agreement that is “execution ready,” meaning it should be fully finalized. The defendants countered that, given market practices, it was common to approve a draft or near-final version of such agreements.

The Court held that while the merger agreement need not be "execution ready," it must be “essentially complete” to satisfy Section 251(b). This includes having all significant components and being sufficiently detailed to allow the board to make an informed decision. The Court found that the draft approved by the Board lacked essential elements and thus might not meet the “essentially complete” standard. This highlights the need for boards to ensure that merger agreements are substantially complete before approval.

 Compliance with Section 251(c) of the DGCL

The plaintiff also challenged Activision’s compliance with DGCL Section 251(c), which requires the notice of the stockholder meeting to include either the merger agreement or a summary. Activision’s notice referenced an annex to the proxy statement with the merger agreement but omitted the surviving company's charter. The Court ruled it was reasonably conceivable that this omission violated Section 251(c), as the statute requires the notice to include the agreement or a summary directly.

 Impact on Market Practice and Future Guidance

The Court's decision in Activision represents a shift from customary market practices, where boards often approve draft agreements and ancillary documents. The ruling indicates that Delaware law demands a higher level of completeness for merger agreements at the board approval stage, potentially impacting how boards and practitioners approach merger transactions.

Update and Legislative Response

In response to the Court’s rulings, including Activision and the case of West Palm Beach Firefighters Pension Fund v. Moelis & Co., the Delaware State Bar Association’s Corporation Law section proposed amendments to the DGCL. These proposed changes aim to address the concerns raised by the Court’s strict interpretations:

1. Merger Agreement Completeness: The amendments would allow the board to approve merger agreements in final or substantially final form, rather than requiring them to be “essentially complete.”

2. Surviving Company’s Charter: The proposed amendments would eliminate the requirement for the surviving company’s charter to be included in the merger agreement for board approval, provided that stockholders of the target corporation are not receiving stock in the surviving company.

3. Disclosure Letters and Schedules: The amendments would default to not requiring disclosure letters and schedules as part of the merger agreement.

4. Notice Integration: Documents enclosed with, annexed, or appended to a notice will be deemed part of the notice.

These proposed amendments, effective from August 1, 2024, and potentially retroactive, seek to align Delaware law more closely with prevailing market practices and address the Court’s recent interpretations.

Conclusion

The Activision decision underscores the importance of ensuring that merger agreements are substantially complete and well-documented before board approval. Practitioners should prepare for possible changes to the Delaware General Corporation Law (DGCL) that may modify these requirements and adjust their practices accordingly. The proposed amendments reflect an effort to reconcile statutory requirements with market realities, aiming to provide greater clarity and flexibility in corporate governance.

If you are in need of legal assistance with your merger agreement, contact Lars Soreide, Esq., at Soreide Law Group:  888-760-6552.