Delaware Requires Compliance With DGCL Provisions Governing Board Negotiation And Board And Stockholder Approval Requirements For Merger Agreements
M&A and Corporate Governance Litigation
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  • Delaware Requires Compliance With DGCL Provisions Governing Board Negotiation And Board And Stockholder Approval Requirements For Merger Agreements


    On February 29, 2024, Chancellor Kathaleen St. J. McCormick granted in part and denied in part defendants’ motion to dismiss claims seeking to invalidate the acquisition of a gaming company (“Target”) by a large technology company under Delaware General Corporation Law (“DGCL”) Sections 251 and 141 and asserting claims of conversion. Sjunde Ap-Fonden v. Activision Blizzard, Inc., C.A. No. 2022-1001-KSJM (Del. Ch. Feb. 29, 2024), as corrected (Mar. 19, 2024). The Court ruled that plaintiffs adequately alleged violations of (i) Section 251(b) of the DGCL, which requires a board to approve an “essentially complete” version of the merger agreement; (ii) Section 251(c), which requires that the notice of the stockholder meeting contain either a copy or a summary of the complete merger agreement; and (iii) Section 141(c), which requires the full board to approve a merger agreement. The Court also sustained the conversion claim but dismissed the claims under Section 251(d), which prohibits any amendment of a merger agreement having an adverse effect on stockholders.

    Plaintiff alleged that defendants violated Section 251(b) because the Target board failed to approve an “execution-version” of the merger agreement. While the Court rejected that theory as imposing an unrealistic requirement inconsistent with “the generous bounds of private ordering afforded by the DGCL,” the Court warned that the “market practice” of permitting negotiations to continue well after board approval may well violate Section 251(b). The Court emphasized that the at-issue agreement omitted “a lot of important stuff,” including the amount of consideration, the company disclosure letter, the certificate of incorporation for the surviving corporation, and the dividend provision of the agreement.

    Plaintiff alleged that defendants violated Section 251(c) because the copy of the merger agreement attached to the notice omitted the charter of the surviving corporation, which Section 251(b) requires. The Court found this allegation sufficient to survive dismissal and rejected defendants’ argument that the proxy’s summary of the agreement satisfied Section 251(c), pointing out that “the [p]roxy [s]tatement is not the notice.” The Court also sustained plaintiff’s conversion claims based on the alleged statutory violations of Section 251, which (if successful) would invalidate the merger.

    Plaintiff also claimed that the Target’s board improperly delegated negotiation of a provision governing the issuance of a dividend to an ad hoc committee in violation of Section 141(c). The Court found, based on the allegations, that it was reasonably conceivable the committee approved the dividend on its own, without board approval.

    Finally, the Court granted defendants’ motion to dismiss claims under Section 251(d), holding that plaintiff had not alleged facts supporting its assertion that defendants in fact agreed to amend the merger agreement to extend the termination date. Although defendants did agree to extend the termination date after plaintiff filed the amended complaint pursuant to a letter agreement waiving enforcement of the termination date for three months, the court said that plaintiff could have amended its pleadings to challenge this agreement but failed to do so and dismissed the claim without leave to replead.

    Category: Deal Disputes

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