Activision Blizzard, Inc. v. Hayes: Delaware Supreme Court Rules that Equity Repurchase Is not a Merger, Business Combination or Similar Transaction

Sullivan & Cromwell LLP - December 5, 2013

In an order entered in October and an opinion issued on November 15, 2013, the Delaware Supreme Court, sitting en banc, unanimously reversed a decision of the Court of Chancery (V.C. Laster) that had preliminarily enjoined the repurchase by Activision Blizzard, Inc. (“Activision”) of the Vivendi, S.A. (“Vivendi”) controlling interest in Activision, effected through the purchase of a newly formed Vivendi subsidiary that held the Activision stock and certain NOLs.

Addressing the merits de novo, the Delaware Supreme Court considered whether a provision in Activision’s charter requiring approval by a majority of Activision’s stockholders other than Vivendi of “any merger, business combination or similar transaction” involving Activision and Vivendi applied to the equity repurchase. The Court found that stockholder approval of the transaction under the Activision charter provision was not required because the stock purchase was a separation of the two companies and thus, not a merger, business combination or other similar transaction. The Court reasoned that the $5.83 billion equity repurchase was “the opposite of a business combination” because it did “not involve any combination or intermingling of Vivendi’s and Activision’s businesses” and did not increase Vivendi’s interest in Activision; rather, control of Activision shifted as a result of the transaction from Vivendi to Activision’s other stockholders because Vivendi decreased its holdings from 61% to 12% and relinquished its right to appoint directors to Activision’s board. Moreover, the Court found that the fact that the repurchase was structured as a purchase of a Vivendi shell entity that held the Activision stock and NOLs and conducted no other business had no bearing on the issue of whether the transaction was a business combination; that any other approach would emphasize form over substance. Finally, the Court determined that the applicability of the Activision charter provision to the equity repurchase depended on whether it was a business combination or other similar transaction resulting in Vivendi having a greater connection with or control over Activision, not whether the transaction involved a transfer of value.

In so finding, the Court rejected the Chancery Court’s view that (1) the term “business combination” was broad enough to encompass the Activision stock purchase, which the Chancery Court found to be supported by language in Martin Marietta Materials, Inc. v. Vulcan Materials Co. interpreting a non-disclosure agreement and by reference to the breadth of the definition of “business combination” in Section 203 of the Delaware General Corporation Law, and (2) the purpose of the Activision charter provision was to give minority stockholders a vote on transactions involving Activision and Vivendi that had value-transfer implications.

Sullivan & Cromwell LLP represented ASAC II LP, an investment vehicle led by Activision’s CEO Bobby Kotick and Chairman Brian Kelly that purchased 172 million shares of Activision stock from Vivendi under the stock purchase agreement, in the Court of Chancery and on appeal before the Delaware Supreme Court.