Vivendi and Activision Blizzard have been tripped up on their new deal by their old one, creating a possible “wreck,†as one participant representing Activision put it.
Earlier this week, Vice Chancellor J. Travis Laster of Delaware Chancery Court ruled that the two could not complete a sale by Vivendi of most of its stake in Activision Blizzard. Under the current sale plan, Activision would buy back 429 million Activision shares from Vivendi for $5.83 billion. A company owned in part by Activision’s chief executive, Robert Kotick, and its co-chairman, Brian Kelly, would purchase the rest of the stake being sold for $2.34 billion. Upon the completion of the transaction, the management investor group would own 24.9 percent of Activision and Vivendi would still hold about 21 percent.
The judge halted the sale because he found that it violated a provision in Activision’s certificate of incorporation. This provision states that any “merger, business combination or similar transaction†involving Vivendi and its affiliates requires “the affirmative vote of a majority in interest of the stockholders†of Activision other than Vivendi.
A shareholder sued in Delaware court contending that this provision required Activision Blizzard’s shareholders to vote on the transaction. Not only that, but the provision required that the transaction be approved by a majority of the minority shareholders, that is a majority of stockholders who were not affiliated with Vivendi.
Activision and the other defendants argued that this provision was not applicable. It was negotiated by Activision and Vivendi when Vivendi first acquired its stake in 2008. The provision was put in to protect minority shareholders if Vivendi tried to squeeze them out. The defendants argued that under this reading, the language was inapplicable. Activision contended that a “business combination†was a transaction “wherein two businesses come together (i.e., combine) to form a new single operation.†But this was nothing of the sort, instead it was “akin to two companies divorcing each other â€" which no case law, or common sense, suggests is a ‘business combination’ or something ‘similar.’â€
In his ruling, the vice chancellor disagreed.
He examined this provision focusing on what a “business combination†means and found that the sale of stock here could be a business combination or something “similar.†The primary reason was that this provision was intended to pick up a case where “you’re worried about potentially value-transferring business transactions.†But he also found that this transaction was similar to the 2008 one and that the language in at least one previous Delaware case that considered the meaning of “business combination†contemplated that the term business combination could potentially include a stock purchase.
To be honest, the defendants were probably not helped by the unusual structure of the transaction. Vivendi held its Activision shares in a shell subsidiary, the Amber Holding Subsidiary Company. Importantly, Amber also holds about $676 million in net operating losses that Activision can use to offset future profits. In the transaction, Activision is buying the Amber subsidiary, not the shares directly, likely to also allow it to transfer the losses. But the combination of two companies rather than a direct share purchase arguably looks more like a business combination.
So where does this leave the parties?
The word “wreck,†which was the comment made by one of Activision’s lawyers at the hearing on this matter, was probably apt.
The transaction was scheduled to close this week, but now the parties will have to delay closing for several months to hold a shareholder vote. Alternatively, Activision can also appeal, something that will likely take several weeks.
At the hearing, the lawyers for Activision and the other defendants seemed to be focused on making an appeal. But this is an uncertain venture. The Delaware Supreme Court, the court that would review this case, does sometimes overrule the Chancery Court on significant issues involving policy. But the court prefers to leave intact individual cases with less impact. This is probably one of those cases. I’ve been wrong about this court before, particularly in the Airgas decision, but this is a situation where you are likely south of a 50 percent chance of winning on appeal.
That would leave Activision holding a shareholder vote. 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. In fact, the defendants could probably get institutions to provide affidavits attesting to this.
The real question, though, is whether the deal blows up if the parties try to renegotiate it to include a stockholder vote.
The reason is that $1 billion increase in value and Activision’s new share price. Vivendi agreed to sell for $13.60 a share. But Activision’s shares are now trading above $17. If this $8 billion deal is renegotiated over the shareholder vote, then all of the other terms are also up for renegotiation. Vivendi may now try to recut the deal and capture some of that value. Not only that, but if the deal is delayed for a shareholder vote, the financing will have to be redone, creating risk that costs will increase substantially if interest rates move.
Regardless of whether the ruling is right or not, its effect may be to blow up this transaction. Or perhaps something even worse for shareholders: they end up having to pay more to buy back Vivendi’s stake. And if the deal blows up completely, Vivendi may decide just to flood the market and sell its shares. All of these events are not certainties, and there is clearly a will on all parties to reach a deal, but the situation is at best in flux.
In this light, it may very well be that Activision appeals rather than risk a renegotiation with Vivendi. The fact that an appeal hasn’t been filed yet or a quick shareholder vote already announced is evidence of the difficult conversation and hypotheticals being played out now by the parties.
It’s an $8 billion drama better than any video game, at least for deal junkies.
