Activision Shareholders Win Suit to Quash Fantastic Deal

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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If you like swashbuckling high-stakes M&A battles, you should read the transcript of Wednesday's Delaware Chancery Court hearing on Activision Blizzard's share buyback, it's a treat. If you like the sound of the words "swashbuckling high-stakes M&A battles" but don't know what they're actually like, you should also read the transcript, at least as a test of your interest. If you read it and are all, "wait this is what?" then maybe M&A swashbuckling is not the swashbuckling for you. There is no shame in that.

Also the transcript begins with the chancellor thanking everyone for giving up their weekends to work on the case, which is informative.

The deal is that, since 2008, Vivendi has owned about 61 percent of Activision, the video game company. In July it reached an agreement to sell most of its stake, as follows:

  • Activision will buy back about 429 million shares;
  • Activision's co-chairman, Brian Kelly, and chief executive officer, Bobby Kotick, will collectively buy about 172 million shares, representing about 25 percent of the then-outstanding shares; and
  • Vivendi will keep about 83 million shares, or about 12 percent of the company.

Now a fun thing to think about here is: What is the right price for Vivendi's shares in that series of transactions? (The deal was finalized on July 25, when Activision closed at $15.18.) Your choices are:

  • more than $15.18, in which case Vivendi, which controls Activision, is selling its shares at a higher price than regular public shareholders can get, which seems unfair;
  • less than $15.18, in which case Activision's chairman and CEO are buying shares at a lower price than regular public shareholders can get, which seems unfair; or
  • $15.18, which is an arbitrary quasi-solution to those problems that's hardly worth discussing.*

There's no particular way to win!** Activision dutifully set up a special committee which approved the deal at a price of $13.60, a 9 percent discount to last sale. The market liked the deal, which makes sense, since Activision was basically buying back $6.5 billion worth of stock for $5.8 billion, so free money etc.; the stock closed at $17.46 (up 15 percent) the day after the announcement and is still trading in the $17's. So Vivendi is getting kinda suckered, and Activision -- and its bosses -- are getting a great deal.

Some Activision shareholders nonetheless sued to stop that great deal because, and I cannot emphasize this enough, some shareholders sue to stop every deal, great or awful, because there is money in it for their lawyers. This is especially true of deals, like this one, that are loaded with conflicts of interest, though it's also true of every deal. On Wednesday, the suing shareholders won.

They won because when Vivendi bought its stake in Activision, Activision's charter was changed to require approval of the non-Vivendi shareholders for "any merger, business combination or similar transaction" between Activision and Vivendi. Activision argued that this share buyback transaction was just a share buyback, not a "business combination or similar transaction." Chancellor Travis Laster, the Delaware judge, disagreed, basically on the theory that it's a big important value-transferring deal so, though it's not a merger, it's close enough.***

So he stopped the deal, which was scheduled to close yesterday. Now Activision has to either appeal (and win), kill the deal, or get a shareholder vote. The problem with appealing is that you might not win. The problem with killing the deal is, um, the deal is a great deal.

The problem with getting a shareholder vote is not that it would be hard -- as Steven Davidoff says, "Given the fact that Activision's market value went up by a billion dollars on the announcement of the deal and did not fall in the wake of the transaction, shareholder approval seems a certainty" -- but that it would take time to mail a proxy and hold a meeting. Activision's agreement with Vivendi provides that, if the deal doesn't close by Oct. 15, it's off. It's not possible to get a vote done by then, and as Davidoff points out, renegotiating the drop-dead date and voting provisions also gives Vivendi an opportunity to renegotiate other provisions. Such as the price. The market has said that this deal is a good one for Activision, which suggests that it's a bad one for Vivendi. Now they know. And now they have a chance to change the deal.

There's an obvious procedural rightness in putting this deal to a vote of unaffiliated shareholders. Someone is, like, by definition, putting one over on shareholders: Either the controlling shareholder is selling too high, or the controlling executives are buying too low. That's the sort of thing that shareholders should get to approve. The problem is that they do approve! Judging by the stock price they do anyway. But since the procedures went wrong, there's a decent chance that the deal they approve will get away from them. If it does, maybe they should sue the shareholder who sued to lose them this deal.

* Quasi-solution because (1) it's just one day's closing price; the previous day the stock closed at $15.39 so you could still make the case that $15.18 falls on the "too low" side of the line, and (2) there are good substantive reasons for a lower (Vivendi would need to take a discount to sell this much stock in the market) or higher (value of control, Activision would need to pay a premium to buy this much stock in the market) than market price. So you could still have all the arguments you'd have about a too-high or too-low price; $15.18 is not magically the just-right price. No price is magically the just-right price; any price could be debated.

** I guess you could have Vivendi sell to Activision at a discount and to the CEO and chairman at a market-ish price. I suppose that would feel a little harsh to the CEO and chairman: if Vivendi will sell at $13.60 why should they pay 10 percent more just to keep up appearances?

*** As he says, "the provision just doesn't extend to business combinations; it extends to things similar to business combinations. It extends to things that resemble business combinations. I think, therefore, it has to mean something more than just business combinations. It has to be read as a protective provision designed to give stockholders, the disinterested stockholders, a vote on something like this."

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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Matthew S Levine at