Activision Blizzard Inc. Chief Executive Officer Robert Kotick must face investor claims that he improperly benefited from an $8.2 billion buyout of Vivendi SA’s stake in the video-game maker, a judge ruled.
The shareholders contend directors wrongfully let a group led by Kotick and Activision Chairman Brian Kelly buy a piece of Vivendi’s Activision stake amounting to 25 percent of the company at the same discounted price Activision paid for another block of shares. The deal allowed the executives to exert control over the maker of “Call of Duty” without paying a premium, according to filings in Delaware Chancery Court.
The shareholders properly raised questions about the directors’ willingness to let Kotick and Kelly form an investment group to buy $2.34 billion of Vivendi’s stake as part of the $8.2 billion recapitalization, Judge Travis Laster concluded today at a hearing in Wilmington, denying a bid by directors, as well as Kotick’s and Kelly’s group, to have the case thrown out.
The company argued the deal, in which Activision bought an additional $5.83 billion of the Vivendi stake, was fair to shareholders because it increased the value of their holdings and added to their voting power within the company.
“The fact that a company can show there was a benefit to shareholders doesn’t provide a license to skim or grab” a corporate opportunity such as buying shares at a discount, Laster concluded.
“The court has a high tolerance for well-intended boardroom incompetence, but not for directors holding the back door open while a CEO takes shareholder money out to his car,” Erik Gordon, a professor at the University of Michigan’s business and law schools, said in an e-mailed statement.
Maryanne Lataif, a spokeswoman for Santa Monica, California-based Activision, declined to comment on the ruling.
The investors also said Kotick used threats to quit to strong-arm directors into allowing his investment group to buy a sizeable chunk of the French conglomerate’s stake and then blocked Activision from considering alternative deals, according to court filings.
The argument comes two weeks after Paris-based Vivendi offered to sell half of its remaining Activision stake to the public for $850 million. The sale will leave Vivendi with about 41.5 million shares, or 5.8 percent of the maker of “World of Warcraft.”
In 2012, Vivendi officials told Activision’s board they wanted the company to pay a $3 billion special dividend to shareholders. That would have resulted in a $2 billion payment to Vivendi while weakening Activision’s financial strength, investors said in court filings.
Instead, Kotick and Kelly pushed directors to have Activision buy back almost $6 billion of Vivendi’s stake and allow the executives to form an investment group that would purchase almost $2.5 billion worth of shares.
Vivendi agreed to sell its Activision stock to the company and the investment group for $13.60 a share, a discount to its market price, investors said.
When some of Activision’s independent directors balked at Kotick’s and Kelly’s involvement in the deal and weighed making a public debt or equity offering, the CEO threatened to quit, according to court papers.
The board later bowed to Kotick’s demands and his investment group, which included Chinese video-game publisher Tencent Holdings Ltd., Davis Advisors and Leonard Green & Partners, wound up owning about 25 percent of Activision’s stock, making it the largest investor group.
Kotick’s and Kelly’s demands that they be allowed to participate in the Vivendi-stock buyback amounted to a “diversion of an economic opportunity” available to Activision, Joel Friedlander, an attorney for investors, told Laster today.
Lawyers for Kotick’s investment group countered that its involvement ensured the deal went through.
“The company could not buy enough shares to satisfy Vivendi’s desire” to sell most of its Activision stock, Robert Sacks, a lawyer for the investment group, argued today.
Independent directors who signed off on Kotick’s and Kelly’s involvement in the stock-buyback transaction evaluated other potential deals and found the investment group’s offer was the best option, said William Savitt, a lawyer representing the board members.
The case is In re Activision Blizzard Inc. Stockholder Litigation, 8884, Delaware Chancery Court (Wilmington).