In re Activision Blizzard, Inc. Stockholder Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE ACTIVISION BLIZZARD, INC. ) Consolidated
STOCKHOLDER LITIGATION ) C.A. No. 8885-VCL
OPINION
Date Submitted: March 4, 2015
Date Decided: May 20, 2015
Date Revised: May 21, 2015
Joel Friedlander, Jeffrey M. Gorris, FRIEDLANDER & GORRIS, P.A., Wilmington,
Delaware; Jessica Zeldin, ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington,
Delaware; Lawrence P. Eagel, Jeffrey H. Squire, BRAGAR EAGEL & SQUIRE, PC,
New York, New York; Attorneys for Plaintiff.
Raymond J. DiCamillo, Susan M. Hannigan, RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware; Joel A. Feuer, Michael M. Farhang, Alexander K. Mircheff,
GIBSON, DUNN & CRUTCHER LLP, Los Angeles, California; Attorneys for
Defendants Vivendi S.A., Philippe Capron, Frédéric Crépin, Régis Turrini, Lucian
Grainge, Jean-Yves Charlier, and Jean-François Dubos.
R. Judson Scaggs, Jr., Shannon E. German, MORRIS, NICHOLS, ARSHT &
TUNNELL, Wilmington, Delaware; Robert A. Sacks, Diane L. McGimsey, SULLIVAN
& CROMWELL LLP, Los Angeles, California; William H. Wagener, SULLIVAN &
CROMWELL LLP, New York, New York; Attorneys for Defendants Robert A. Kotick,
Brian G. Kelly, ASAC II LP, and ASAC II LLC.
Garrett B. Moritz, Eric D. Selden, ROSS ARONSTAM & MORITZ LLP, Wilmington,
Delaware; William Savitt, Ryan A. McLeod, Benjamin D. Klein, WACHTELL,
LIPTON, ROSEN & KATZ, New York, New York; Attorneys for Defendants Robert J.
Corti, Robert J. Morgado, and Richard Sarnoff.
Edward P. Welch, Edward B. Micheletti, Sarah Runnells Martin, Lori W. Will,
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware;
Attorneys for Nominal Defendant Activision Blizzard, Inc.
LASTER, Vice Chancellor.
Anthony Pacchia (the “Lead Plaintiff”) and his attorneys (“Lead Counsel”)
challenged a transaction in which Vivendi S.A. divested its controlling equity position in
Activision Blizzard, Inc. (“Activision” or the “Company”). The transaction restructured
Activision‟s governance profile and stockholder base, so this decision calls it the
Restructuring.
Shortly before trial, the parties entered into what this decision refers to as the
Settlement. In exchange for a global release of all claims relating to the Restructuring, the
defendants agreed to (i) pay $275 million to Activision, (ii) reduce a cap on the voting
power wielded by Activision‟s two senior officers from 24.5% to 19.9%, and (iii) expand
Activision‟s board of directors (the “Board”) to include two independent individuals
unaffiliated with the two senior officers.
When Lead Counsel sought court approval for the Settlement, three objectors
appeared. Douglas Hayes, who previously sought the lead plaintiff role, lodged the only
objection to the Settlement itself. Hayes did not argue that he could have extracted more
monetary or non-monetary consideration from the defendants. He rather complained that
the Settlement did not allocate any consideration to Activision‟s stockholders as a class,
and he complained most about its failure to provide any consideration to former
stockholders who sold their shares. Joint objectors Milton Pfeiffer and Mark Benston did
not object to the Settlement. They sought a fee award for their counsel.
This decision approves the Settlement, awards $72.5 million to Lead Counsel, and
authorizes Lead Counsel to make a $50,000 payment to the Lead Plaintiff from their
award. It denies any fee award to Pfeiffer and Benston‟s counsel.
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I. FACTUAL BACKGROUND
The facts are drawn from the allegations of the Verified Fifth Amended Class and
Derivative Complaint (the “Complaint”), which was the operative pleading at the time of
the Settlement, and from the affidavits and supporting documents submitted in
connection with the application court approval. Lead Counsel filed the Complaint two
months before trial, after completing discovery. The pleading is lengthy, detailed, and
contains quotations from the defendants‟ internal documents and depositions. The
Complaint‟s contents provide a sound basis for evaluating the Settlement, because its
allegations present Lead Counsel‟s claims in the strongest possible light. After trial, once
the defendants introduced competing evidence, Lead Counsel‟s case could only become
weaker. If the Settlement is adequate when judged against the allegations of the
Complaint, then it should compare favorably to the range of potential outcomes post-trial.
What follows are not formal factual findings, but rather how the court regards the record
for purposes of evaluating the Settlement.
A. The Parties
Nominal defendant Activision is a Delaware corporation with its headquarters in
Santa Monica, California. Its stock trades on Nasdaq under the symbol “ATVI.”
Activision is a leading player in the interactive entertainment software industry and one
of the largest video game publishers in the United States.
Defendant Vivendi is a société anonyme organized under the laws of France with
its headquarters in Paris. Vivendi is a multinational media and telecommunication
company that operates in the music, television, film, publishing, Internet, and video
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games sectors. Before the Restructuring, Vivendi owned 683,643,890 shares of
Activision common stock, representing 61% of the outstanding shares. Vivendi also had
the right to appoint six members to Activision‟s eleven-member Board.
Individual defendants Philippe Capron, Frédéric Crépin, Régis Turrini, Lucian
Grainge, Jean-Yves Charlier, and Jean-François Dubos were the Vivendi designees on
the Board who voted in favor of the Restructuring. Individual defendants Robert Kotick,
Brian Kelly, Robert Corti, Robert Morgado, and Richard Sarnoff were the other five
members of the Board who voted in favor of the Restructuring. Corti, Morgado, and
Sarnoff were outside directors. Kelly was Chairman of the Board. Kotick served as
Activision‟s CEO.
Defendant ASAC II LP (“ASAC”) is an entity that Kotick and Kelly formed to
participate in the Restructuring. ASAC is an exempt limited partnership established under
the laws of the Cayman Islands. ASAC‟s general partner is ASAC II, LLC (“ASAC
GP”), a Delaware limited liability company. Kotick and Kelly are the managers of ASAC
GP. Through ASAC GP, Kotick and Kelly control ASAC.
B. The Impetus For The Restructuring
In 2012, Vivendi was burdened with over $17 billion in net debt and needed
liquidity. Vivendi‟s CEO informed Kotick that given its financial situation, Vivendi
wanted to explore strategic alternatives for Activision.
The Board retained JP Morgan to provide advice about strategic alternatives. After
evaluating a range of possibilities, JP Morgan identified two that would be attractive to
both Vivendi and Activision‟s unaffiliated stockholders: selling Activision to a third
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party or having Activision redeem Vivendi‟s equity. JP Morgan advised that Activision
could redeem nearly 80% of Vivendi‟s stake using $1.4 billion of Activision‟s available
domestic cash plus $5.5 billion of new third-party debt. JP Morgan advised that the
balance of Vivendi‟s stake could be monetized through a secondary offering or by selling
it to a financial investor.
JP Morgan identified two strategic alternatives that would achieve Vivendi‟s
liquidity needs but would not be attractive to Activision‟s unaffiliated stockholders: a
debt-financed special dividend or a sale of Vivendi‟s shares to a third party. The former
would limit Activision‟s strategic flexibility without reducing Vivendi‟s ownership stake.
The latter would substitute one controlling stockholder for another.
C. Kotick And Kelly See An Opportunity.
In July 2012, Vivendi announced its interest in selling its Activision stake. In
August, Kotick and Kelly began pursuing a transaction that would benefit themselves.
They prepared a pitch book to raise $2-3 billion for an investment vehicle that would buy
38-44% of Activision. They presented the idea to Peter Nolan, then the Managing Partner
of Leonard Green & Partners, L.P. (“Leonard Green”). They also approached other
parties with whom Activision had relationships, including Activision‟s strategic partners
in China. The independent directors were unaware of Kotick and Kelly‟s efforts.
In December 2012, Vivendi‟s CEO informed Kotick that Vivendi‟s discussions
with third parties about its Activision stake had not panned out. Vivendi‟s CEO stated
that at the next meeting of the Board, the Vivendi representatives would propose a special
dividend of roughly $3 billion to be funded with cash on hand and new debt.
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JP Morgan prepared a presentation analyzing the special dividend. JP Morgan
opined that the special dividend “will almost certainly destroy significant value to
shareholders” and justified “increased investor concerns about potentially diverging
interests between [Vivendi] and [Activision].” JP Morgan recommended a full repurchase
of Vivendi‟s stake in three parts: (i) the majority repurchased by Activision using cash
and debt, (ii) $2-3 billion acquired by investors “supportive of management,” and (iii) a
marketed secondary offering of the balance of Vivendi‟s stake. JP Morgan stated that it
was “highly confident” that the transaction could be carried out.
On January 29, 2013, Kotick and Kelly submitted an informal proposal to Vivendi
that contemplated Vivendi selling its entire Activision stake for $9 billion (a price
representing a 15% premium to market) with Activision buying the majority and an
investor group led by Kotick and Kelly purchasing the balance. Vivendi asked for more
specifics, and on February 14, Kotick and Kelly formally proposed a two-part transaction
in which (i) Activision would repurchase two-thirds of Vivendi‟s stake for $6 billion, or
$13.15 per share, using $4.7 billion in financing provided by JP Morgan and $1.3 billion
in cash, and (ii) an investment vehicle controlled by Kotick and Kelly would purchase the
remaining third for $3 billion at the same price per share. Kotick and Kelly stated that
they were “highly confident” that they could raise the money. They attached a letter from
Leonard Green expressing its willingness to invest up to $1 billion in their vehicle.
At a Board meeting on February 14, 2013, Kotick informed the independent
directors about the proposal and asked that the Board form a special committee (the
“Committee”) to oversee the transaction process. JP Morgan delivered a presentation
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advising that Activision could support up to $5.88 billion in debt and maintain a B+ bond
rating. Activision had no debt at the time, so the full amount could be used to repurchase
shares from Vivendi.
The Board formed the Committee, comprising directors Corti, Morgado, and
Sarnoff. The resolution creating the Committee gave it broad authority, including the
ability to contact potential investors and to explore, initiate, and negotiate alternative
transactions. The resolution provided that the Committee would remain in existence
“until such time as the full Board concludes that no Potential Transaction is likely to
occur or the existence of the Committee is no longer required.” The Committee retained
Centerview Partners, LLC (“Centerview”) as its investment advisor.
During a meeting on March 18, 2013, the Committee resolved to
take care that in pursuing the proposed transaction to eliminate the current
control shareholder (i.e., [Vivendi]), it should not create another
shareholder or shareholder group with control or elements of control over
the Company nor should it put the Company in a position where a new
shareholder or shareholder group could exercise influence to the
disadvantage of other shareholders.
Through Centerview, the Committee learned that Vivendi was open to disposing of part
of its stake through a secondary offering and retaining a small position in Activision.
On April 3, 2013, Centerview recommended preliminarily that Activision
repurchase Vivendi‟s controlling interest. Centerview observed that if Activision
borrowed $5.9 billion and used its overseas cash, a full buyout of Vivendi would require
only $2 billion of additional capital. Centerview believed that Activision could raise $1
billion of public equity and $2 billion from convertible securities. Centerview advised
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that Kotick and Kelly‟s proposal ran the risk that “a strong minority will have
disproportionate influence in [the] Board room and [in] shareholder votes.” Vivendi‟s
willingness to pursue a secondary offering and retain a small position in Activision made
it feasible for Activision to accomplish a restructuring without Kotick and Kelly.
On April 29, 2013, the Committee approved a proposal for Activision to
repurchase $5.9 billion of Vivendi‟s stake at $13.15 per share, with the balance of
Vivendi‟s shares to be addressed by one or more of the following methods: (i) a
secondary offering, (ii) a sale to an entity controlled by Kotick and Kelly, or (iii)
retention by Vivendi under appropriate governance arrangements. On May 2, the
Committee discussed Kotick and Kelly‟s proposal and expressed the view that “a
transaction should not create a new shareholder or shareholder group with control or
substantial elements of positive or negative control over the company.”
On May 7, 2013, Kotick met with Centerview. Kotick argued that a secondary
offering would hurt Activision‟s stock price. This assertion was contrary to Centerview‟s
view. It also conflicted with what Centerview understood to be the opinion of JP Morgan,
the Company‟s financial advisor who was now assisting Kotick and Kelly, as well as the
opinions of Goldman Sachs and Barclays, who were advising Vivendi. Kotick opposed
discussing Activision‟s debt financing capacity with credit agencies, citing the risk of
leaks. Centerview disagreed. Kotick also argued that his proposal offered Vivendi the
most efficient tax structure. This was contrary to what the Committee understood
Vivendi‟s view to be. In addition to his discussions with Centerview, Kotick called the
Committee‟s legal counsel and objected to the governance terms that the Committee
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wanted, including a cap on Kotick and Kelly‟s voting power at 9.9%.
In mid-May 2013, Vivendi told the Committee that it wanted to proceed quickly
with either Kotick and Kelly‟s proposal or with a transaction involving a secondary
offering. Vivendi informed the Committee that otherwise it would “engage in self-help.”
Certain governance restrictions on Vivendi would expire on July 9, making Vivendi‟s
threat credible. Kotick contemporaneously told the Committee that a secondary offering
was not feasible, and the Committee members became concerned that Kotick might
resign if they did not support a deal on his terms. JP Morgan backed Kotick, telling
Centerview that it would not lend if Kotick resigned. JP Morgan later became a joint lead
arranger and bookrunner to ASAC.
On May 16, 2013, Kelly told the Committee that he and Kotick had dropped out of
the transaction process. Meanwhile, Vivendi told Centerview that if no deal was reached
by the end of the week, Vivendi would cause the Board to disband the Committee and
move forward with a debt-financed special dividend.
On May 25, 2013, the Committee discussed Kotick and Kelly‟s positions and
decided that a debt or equity offering “would not be actionable” without Kotick‟s
support. The Committee again discussed the risk that Kotick would resign if Activision
agreed to a transaction he did not like, as well as JP Morgan‟s refusal to finance a deal
without Kotick. To avoid a special dividend—the worst possible outcome for
Activision‟s unaffiliated stockholders—the Committee asked Vivendi to propose a
transaction that included Kotick and Kelly.
On May 30, 2013, Vivendi expressed its support for any one of three alternatives:
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● A purchase by Activision of $5.9 billion of Vivendi‟s shares at $13.60 per
share with ASAC buying the rest at $14.80 per share.
● A purchase by Activision of all but $500 million of Vivendi‟s shares at
$13.60 per share with Kotick and Kelly personally buying the remaining
$500 million at $13.60 per share.
● A debt-financed special dividend.
The Committee provided these options to Kotick and told him that if he and Kelly did not
pick one of them, then the Committee would have to decide between proceeding without
them and disbanding. Kotick rejected all three and insisted on a transaction in which
ASAC would acquire 24.9% of Activision‟s outstanding shares for $13.60 per share.
Kotick stated that he would not cooperate with a debt or equity offering or any other
transaction and that the Board could fire him if they wished.
In light of Kotick‟s ultimatum, the Committee concluded that Activision‟s only
actionable choice was to give in. The Committee proposed to move forward as Kotick
wanted, but to cap ASAC‟s voting rights at 19.9%. Kotick and Kelly rejected the cap and
told the Committee that they would not participate except on their terms.
The Committee members determined that they could not support the repurchase
structure without a cap on ASAC‟s voting rights at 19.9%. They sent a letter to Vivendi
and ASAC suggesting that those parties negotiate directly between themselves.
On June 2, 2013, Vivendi sent a letter to the Committee that contemplated
Activision buying $5.4 billion of Vivendi‟s shares at $13.60 per share with Kelly and
Kotick personally buying shares worth $500 million at the same price. This reprised the
second choice from Vivendi‟s list of three options. Because Kotick and Kelly would not
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support any deal except their own, the Committee did not respond to Vivendi.
At a Board meeting on June 6, 2013, Corti proposed disbanding the Committee,
and the Board did so. Contrary to the resolution establishing the Committee, it did not
disband because “no Potential Transaction [was] likely to occur or the existence of the
Committee is no longer required.” Given Vivendi‟s liquidity needs, a potential
transaction remained a virtual certainty, just not on terms the Committee believed at the
time that it could accept.
After the disbanding of the Committee, Vivendi negotiated with Kotick and Kelly.
On July 9, 2013, they agreed on a term sheet that specified the number of shares that
Activision would buy, the number of shares that ASAC would buy, and the purchase
price—a 10% discount to market.
With the terms set, the Board reconstituted the Committee on July 11, 2013. The
revivified Committee made some slight tweaks to the deal, including obtaining a term in
a stockholders agreement between ASAC and Activision (the “Stockholders Agreement”)
that capped the voting power that Kotick and Kelly could exercise directly at 24.9%. The
Committee recommended the deal to the Board, and the Board approved it.
D. Activision, Vivendi, And ASAC Announce The Restructuring.
On July 25, 2013, Activision, Vivendi, and ASAC entered into the transaction
agreement that governed the Restructuring (the “Stock Purchase Agreement”). In one
major part of the transaction, ASAC agreed to purchase 171,968,042 shares of Activision
common stock from Vivendi at $13.60 per share. The price represented a discount of
10% from to Activision‟s closing stock price on July 25, 2013.
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In the other major part of the transaction, Activision purchased the shares of
Amber Holdings Subsidiary Co. (“Amber”), a newly formed subsidiary of Vivendi.
Through a series of mergers called for by the Stock Purchase Agreement, Amber came to
own 428,644,513 shares of Activision common stock and net operating losses (“NOLs”)
worth $676 million. In the Restructuring, Activision purchased the shares of Amber in
exchange for $5.83 billion in cash.
Activision indisputably received significant benefits from the Restructuring.
Amber brought NOLs worth $676 million, and Activision was able to purchase
428,644,513 shares of its common stock at 10% below the market price. That deal was
even better than it sounded, because everyone expected that Activision‟s stock price
would rise after the announcement of the transaction and its separation from cash-
strapped Vivendi. It did. Activision‟s stock price closed at $17.46 per share on Friday,
July 26, and at $18.27 per share on Monday, July 29. Equity analysts identified many
positive aspects of the Restructuring, including (i) earnings accretion due to the favorable
purchase price; (ii) the elimination of Vivendi‟s majority stake; (iii) the signaling effect
of Kotick, Kelly, and Activision‟s Chinese strategic partner Tencent Holdings Limited
(“Tencent”) investing in Activision; (iv) Activision‟s lowered cost of capital from issuing
debt; and (v) Activision‟s eligibility for inclusion in the S&P 500.
The problem with the transaction was not the lack of benefit to Activision, but
rather the extraordinary benefits that Kotick and Kelly extracted for themselves. On the
financial front, Kotick and Kelly invested $100 million in ASAC GP; ASAC‟s various
co-investors provided over $1.62 billion. Under ASAC‟s limited partnership agreement,
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the returns to ASAC GP were tied to the overall gains on ASAC‟s $2.3 billion investment
in Activision. ASAC‟s immediate unrealized gain at closing was $712.8 million, of
which Kotick and Kelly‟s share was $178 million. Over the potential four-year lifespan
of ASAC, Kotick and Kelly had enhanced upside and a protected downside:
● They would double their money if Activision‟s stock price remained at the post-
announcement price of $17.46 per share.
● They would make nine times their money if Activision‟s stock price doubled from
the post-announcement price to $35 per share.
● They would lose nothing if Activision‟s stock price declined by 20% from its post-
announcement price.
An illustration prepared by Kotick and Kelly‟s bankers for ASAC‟s outside investors
projected that if ASAC liquidated on the third anniversary after the Restructuring, and
ASAC sold its Activision shares for $27 per share, then Kotick and Kelly would receive
profits of $586 million, or 5.9 times their invested capital for an IRR of 80.3%. Their co-
investors in ASAC would receive 2.1 times their invested capital for an IRR of 28.4%.
On the control front, Kelly continued after the Restructuring as Chairman, and
Kotick continued as CEO. They also served as managers of ASAC GP, giving them
control over ASAC‟s entire block of shares. Kotick beneficially owned approximately 5.5
million shares, or roughly 0.8% of Activision‟s stock, and Kelly beneficially owned
approximately 3.3 million shares, or roughly another 0.5%. Kotick and Kelly thus had
direct control over shares representing 26% of Activision‟s voting power, although the
Stockholders Agreement capped what they could exercise directly at 24.9%. Two of the
principal investors in ASAC were funds affiliated with Davis Selected Advisors, L.P.
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(“Davis”), which invested $350 million, and Fidelity Management & Research Co.
(“Fidelity”), which invested $542 million. As of September 30, 2013, funds affiliated
with Davis owned over 21 million shares of Activision stock, representing a 3.1% stake,
and funds affiliated with Fidelity owned approximately $52 million shares, for a roughly
7.4% stake. Consequently, upon the closing of the Restructuring on October 11, the co-
investors in ASAC and their affiliates controlled approximately 35.4% of Activision‟s
voting power.
Kotick and Kelly also enhanced their control at the Board level. Section 3.01(a) of
the Stockholders Agreement imposed a series of standstill restrictions on ASAC. In
addition to specific limitations in other subsections, subsection 3.01(a)(iv) stated that
ASAC shall not, directly or indirectly,
otherwise act, alone or in concert with others, to seek representation on or
to control or influence the management, Company Board or policies of the
Company or to obtain representation on the Company Board of Directors
(other than with respect to the nomination of Mr. Kotick and Mr. Kelly to
the Company Board, as determined by the Company Board in the ordinary
course).
The Stockholders Agreement only became effective upon the closing of the
Restructuring, which was not expected to occur until the end of September.
After the Stockholders Agreement was finalized but before it became effective,
Kotick arranged for Nolan and Elaine Wynn to join the Board. As noted, Nolan was the
Managing Partner of Leonard Green, whom Kotick and Kelly had approached privately
about their bid and who had backed their original offer to Vivendi. Leonard Green
invested in ASAC. Nolan‟s colleagues at Leonard Green objected to him joining the
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Board, because one of the premises of Leonard Green‟s involvement in the Restructuring
had been that the firm could trade in Activision stock and hedge their investment in
ASAC. Having Nolan on the Board limited Leonard Green‟s ability to trade and hedge,
but Leonard Green valued its relationship with Kotick and Kelly. One of Nolan‟s partners
observed that the “[m]ain reason to even consider [joining the Board] is if Bobby/Brian
really want it.” Nolan agreed to join.
Wynn was a longtime friend of Kotick whose personal relationship with Kotick
rose to the level of an immediate family member. Kotick‟s relationship with Wynn dated
back to 1982, when Kotick was a college sophomore trying to launch a computer
company. Kotick pitched his business venture to Wynn and her then-husband, casino
mogul Steve Wynn, at a social event in Dallas. The Wynns invited him to their home and
then flew him back to the east coast on their private plane. Steve Wynn viewed Kotick as
a “potential son-in-law” and protégé. He financed Kotick‟s startup without signing a
written contract, telling Kotick, “We‟re family now.” Although the startup failed,
Kotick‟s relationship with the Wynns deepened. In a 2008 interview, Kotick stated:
Of all the things that could have happened in my life, meeting the Wynns
was probably about the most fortunate. Not just in the way you get a second
set of parents—my parents were divorced, so the Wynns came with none of
the guilt—but watching what he accomplished.
Kotick refers to Wynn as “Uncle Steve” and has said Wynn is “like my dad.” Kotick
makes a point of buying a Mother‟s Day gift for Elaine Wynn, just as he does for his
mother and his wife. Wynn agreed to join the Board.
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By securing Nolan and Wynn‟s service on the Board, Kotick and Kelly increased
their influence in the boardroom. Without Nolan and Wynn, the post-Restructuring Board
would have consisted of Kotick, Kelly, and the three individuals who served on the
Committee, resulting in a 3-2 majority of independent directors. Nolan and Wynn added
two directors with close ties to Kotick who could be viewed as not independent and who
might be expected to favor management, giving Kotick and Kelly a 4-3 majority.
E. Pacchia Obtains Books And Records, Then Files A Derivative Action.
Pacchia learned of the Restructuring through Activision‟s public filings and was
disturbed by Kotick and Kelly‟s role in the transaction. He contacted Bragar Eagel &
Squire, P.C. (“BE&S”) and used Section 220 of the Delaware General Corporation Law
(the “DGCL”) to obtain books and records relating to the Restructuring.
On September 11, 2013, Pacchia filed a derivative action. Rosenthal, Monhait &
Goddess, P.A. served as Delaware counsel. BE&S served as forwarding counsel. Because
Pacchia‟s complaint relied on confidential information obtained using Section 220, it was
filed under seal.
Pacchia‟s complaint alleged that the individual defendants and Vivendi breached
their fiduciary duties to Activision, committed acts of waste, and caused Kotick, Kelly,
and Vivendi to become unjustly enriched. Based on the Section 220 production, the
complaint alleged that Kotick vetoed a transaction structure in which Vivendi would sell
any shares that Activision did not buy in a secondary offering, rather than to ASAC. The
complaint also alleged that the Board dissolved the Committee on June 8, 2013, clearing
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the way for Kotick and Kelly to negotiate terms directly with Vivendi. Pacchia did not
file an injunction application or seek an expedited schedule.
F. Hayes Files A Class And Derivative Action.
Also on September 11, 2013, Hayes filed a separate action. Prickett, Jones &
Elliott LLP served as Delaware counsel. Kessler, Topaz, Meltzer & Check, LLP, served
as forwarding counsel. Hayes framed his lawsuit as both a derivative action and a class
action. Hayes had not used Section 220 to obtain books and records from Activision, so
his complaint relied solely on publicly available information. He included claims similar
in form to Pacchia‟s, including (i) breach of fiduciary duty against Vivendi and the
Activision directors, (ii) usurpation of a corporate opportunity by Kotick, Kelly, and
ASAC, and (iii) aiding and abetting against various other defendants.
What distinguished Hayes‟ complaint was a theory that the Restructuring required
a stockholder vote. Section 9.1(b) of Activision‟s certificate of incorporation stated:
Unless Vivendi‟s Voting Interest (i) equals or exceeds 90% or (ii) is less
than 35%, with respect to any merger, business combination or similar
transaction involving the Corporation or any of its Subsidiaries, on the one
hand, and Vivendi or its Controlled Affiliates, on the other hand, in
addition to any approval required pursuant to the DGCL and/or the
Corporation‟s by-laws, the approval of such transaction shall require the
affirmative vote of a majority in interest of the stockholders of the
Corporation, other than Vivendi and its Controlled Affiliates, that are
present and entitled to vote at the meeting called for such purpose.
Hayes alleged that the Restructuring constituted a “merger, business combination or
similar transaction involving [Activision] or any of its Subsidiaries, on the one hand, and
Vivendi or its Controlled Affiliates, on the other hand,” bringing it within the ambit of
Section 9.1(b). This decision refers to that theory as the Voting Right Claim.
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G. The Injunction Ruling
Simultaneously with the filing of his complaint, Hayes moved for a temporary
restraining order that would prevent the defendants from consummating the Restructuring
until the court had an opportunity to hear an application for preliminary injunction. Hayes
sought injunctive relief solely on the Voting Right Claim. Hayes moved for an expedited
hearing in light of Activision‟s public disclosure that the Restructuring would close by
the end of September 2013. After Hayes filed suit, the defendants advised Hayes that they
planned to close on September 19.
On September 18, 2013, the court heard the TRO application. At the conclusion of
the hearing, the court issued a thirty-six-page bench ruling granting the application. To
facilitate prompt appellate review, the court indicated that it would certify the ruling for
interlocutory appeal. The defendants‟ prepared the pertinent papers, and this court
certified its order. The Delaware Supreme Court accepted the appeal.
H. The Case Almost Settles.
While the parties were briefing the interlocutory appeal, Hayes pursued settlement
discussions with the defendants. On October 7, 2013, Hayes circulated a draft
memorandum of understanding for a proposed settlement (the “Draft MOU”). In return
for a global release of all claims relating to the Restructuring, (i) Activision would make
a special distribution to its public stockholders of shares of common stock with a market
value of $70 million and (ii) Vivendi would pay $15 million to the public stockholders.
The Draft MOU also contemplated therapeutic relief in the form of nineteen cosmetic
changes to Activision‟s bylaws. None constituted a meaningful benefit for purposes of
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the settlement. The Draft MOU likewise included a commitment by Activision to propose
charter amendments. The proposals eliminated provisions tailored to Vivendi‟s majority
ownership which no longer made sense after the Restructuring. None of those constituted
a meaningful benefit either.
Hayes invited Pacchia to sign onto the Draft MOU. Pacchia elected not to sign. On
October 8, 2013, Hayes circulated a draft emergency motion to consolidate the pending
actions, appoint Hayes as lead plaintiff, and designate his lawyers as lead counsel. The
purported exigency was the need to finalize the Draft MOU.
On October 9, 2013, the day before oral argument before the Delaware Supreme
Court, Hayes told Pacchia that the defendants would not sign unless he did. Hayes
implored Pacchia to reconsider, reasoning as follows:
If we lose [the appeal], the settlement will be off, our leverage will
dissipate, and we will move forward with the litigation. If we win [the
appeal], the settlement will be off, the company will hold a shareholder
vote, and we believe the shareholders may well approve the transaction.
This will give defendants a potential ratification defense in the litigation
moving forward, and we believe will make it very hard to extract any
consideration through settlement or trial.
Pacchia reluctantly signed on.
Hayes‟ counsel also tried to convince the law firms of Levi & Korsinksy LLP and
Smith Katzenstein & Furlow LLP to sign the Draft MOU. They represented Pfeiffer, who
had sent Activision a Section 220 demand in September 2013, after Hayes and Pacchia
filed suit. Pfeiffer‟s demand remained outstanding when Hayes‟ counsel circulated the
Draft MOU. Pfeiffer later would file a Section 220 action, only to dismiss it after
Activision disputed whether he actually owned any stock.
18
On October 10, 2013, the Delaware Supreme Court heard argument in the
interlocutory appeal. Later that day, the court entered the following order:
IT IS HEREBY ORDERED that the Court unanimously concludes that the
Court of Chancery‟s judgment must be REVERSED. We hold that there is
no possibility of success on the merits. The Stock Purchase Agreement here
contested is not a merger, business combination or similar transaction. An
Opinion will follow in due course.
Activision-Blizzard, Inc. v. Hayes, No. 497, 2013 (Del. Oct. 10, 2013). The Delaware
Supreme Court‟s ruling established that there was no merit to the Voting Right Claim. As
Hayes predicted, the defendants‟ victory rendered the Draft MOU a dead letter.
I. The Leadership Fight
On remand, both Hayes and Pacchia filed amended complaints. Both pleadings
asserted class and derivative claims. Both complaints were considerably more detailed
than their original efforts, because during the short time that this court‟s injunction
remained in effect, Activision filed a preliminary proxy statement with the SEC. The
proxy statement provided insight into the background of the Restructuring, and both
Hayes and Pacchia relied on its contents. Pacchia continued to rely on additional, non-
public information that he obtained by using Section 220.
The court consolidated the two actions, and a leadership fight ensued. To bolster
his litigation team, Pacchia hired what was then the firm of Bouchard, Margules &
Friedlander, P.A., subsequently Friedlander & Gorris, P.A. (“F&G”). After hearing
presentations from both sides, the court found little to distinguish between the named
plaintiffs or their legal teams. Neither Hayes nor Pacchia owned a significant equity
stake. Pacchia was marginally more qualified by profession and experience to serve as a
19
fiduciary in representative litigation, but not to a dispositive degree. Both sets of law
firms were highly competent and capable. Both legal teams had track records
demonstrating their ability to obtain excellent results in representative litigation.
As a tiebreaker, the court turned to the Delaware Supreme Court‟s ruling on
appeal. That decision taught that Hayes had pursued the wrong legal theory and acted to
the detriment of Activision and its stockholders by pursuing the Voting Right Claim.
Because the Delaware Supreme Court had determined that the claim was meritless,
Hayes‟ efforts erroneously placed the closing of the Restructuring at risk. Pacchia, by
contrast, had followed what the Delaware Supreme Court had determined was the correct
course by not seeking injunctive relief and permitting the Restructuring to close. Given
the implications of the Delaware Supreme Court‟s ruling, the court designated Pacchia as
the Lead Plaintiff and his counsel as Lead Counsel.
This ruling did not sit well with Hayes or his counsel—and understandably so.
From their perspective, they were on the verge of a settlement worth $85 million that
could have supported a fee award of $10-20 million. A month later, they found
themselves empty handed and on the sidelines. Revealing how they perceived the events,
their brief remonstrates that “Hayes and his counsel were essentially thrown out of the
case.” Dkt. 352 at 14.
J. Lead Counsel Press Forward.
Immediately after the leadership hearing, Lead Counsel filed a second amended
class and derivative complaint. Lead Counsel served document requests and subpoenas
and proposed a scheduling order that would allow the case to be tried in 2014. Two
20
disputes immediately arose. The defendants did not want trial to occur until April 2015 at
the earliest, and Vivendi argued that its electronic documents were exempt from
discovery. Pacchia prevailed on both issues. These rulings allowed the case to proceed on
a prompt schedule with trial set for December 8-12, 2014.
K. Smith Katzenstein And Levi & Korsinsky Try Again To Carve Out A Role.
On March 14, 2014, Smith Katzenstein and Levi & Korsinsky filed a complaint on
behalf of Benston. This was their second try, having first appeared with Pfeiffer. After
using Section 220 to obtain books and records, Benston filed a lengthy complaint which,
in substance, resembled the publicly available Hayes complaint. Benston‟s principal
contribution was to reframe the core breach of fiduciary duty allegations as a claim for
insider trading under Brophy v. Cities Service Co., 70 A.2d 5 (Del. Ch. 1949). Lead
Counsel had not pled a Brophy claim. Lead Counsel believed the theory was meritless
given that the Restructuring was negotiated by Activision fiduciaries with equivalent
access to confidential information.
Benston‟s counsel sought to be added to the leadership structure for the limited
purpose of pursuing the Brophy claim. The court consolidated the new action and held a
second leadership hearing. The court declined to give Benston‟s counsel a role, finding
no reason to balkanize control over the case and concluding that Lead Counsel was
capable of providing adequate representation and asserting the Brophy claim if warranted.
L. The Third Amended Complaint
Meanwhile, Lead Counsel obtained leave to file a third amended and supplemental
complaint that took into account the early fruits of document discovery. The defendants
21
moved to dismiss pursuant to Rule 12(b)(6). On June 6, 2014, after full briefing and oral
argument, the court denied the motion. The only exception was a derivative claim for
breach of the Stockholders Agreement, which the court dismissed without prejudice. On
June 20, Lead Counsel filed an amended complaint that re-pled that count. A motion to
dismiss the re-pled claim remained under submission when the case settled.
During fact discovery, Lead Counsel obtained and reviewed over 800,000 pages of
documents and deposed twenty-three fact witnesses. To assist in case analysis and to
serve as a potential expert, Lead Counsel retained J.T. Atkins of Cypress Associates
LLC, an investment banking firm that provides litigation consulting services. After the
close of fact discovery, Atkins submitted a lengthy expert report supporting Lead
Counsel‟s damages claims.
The damages report focused on feasible transactional alternatives that faithful
fiduciaries should have pursued in lieu of the Restructuring. The alternatives were
mutually exclusive, presented different risks, and implied different forms of relief.
The leading alternative (labeled the Over-the-Wall Transaction) was for Activision
to solicit direct equity investments, use the funds to repurchase additional shares from
Vivendi at $13.60 per share, and then sell the newly repurchased shares at a higher price
per share to the participating investors in a simultaneous closing. Atkins opined that the
investors should have been willing to pay Activision more than $13.60 per share, and
perhaps as much as $17 per share, because (i) Activision‟s stock price was expected to
rise above $17 per share upon announcement; (ii) limited partners in ASAC deemed mid-
teen internal rates of return to be satisfactory; (iii) limited partners in ASAC effectively
22
paid more than $13.60 per share, given that a portion of ASAC‟s returns went to ASAC
GP; and (iv) Activision could demand a higher effective price per share than could
ASAC, because limited partners in ASAC had to lock up their shares for four years.
Atkins identified precedents for the Over-the-Wall Transaction, including a transaction in
2012 when Alibaba Group repurchased a block of its shares from Yahoo! at $13.54 per
share, financed in part by a simultaneous sale of shares to investors at $15.50 per share.
A second alternative was a series of secondary offerings by Vivendi, similar to
what Vivendi had proposed. Activision would not profit from this alternative. The
unaffiliated stockholders, however, would benefit, since Vivendi‟s control block would
become widely dispersed.
A third alternative was a hybrid between the Over-the-Wall Transaction and
secondary offerings, consistent with the three-part transaction structure outlined by JP
Morgan in January 2013. Activision would solicit direct investment for some shares and
facilitate a series of smaller secondary offerings by Vivendi.
A fourth alternative was a backstopped rights offering to Activision‟s then-public
stockholders (the “Rights Offering”). Atkins opined that at $13.60 per share, the Rights
Offering would be fully subscribed, and new stockholders would enjoy the benefits of the
expected stock price increase.
Additionally, Atkins opined that Activision could have safely incurred another
$500 million in debt to purchase additional shares from Vivendi, which would have
increased the earnings-per-share accretion and Activision‟s stock price. This in turn
23
would lead to greater damages from the failure to pursue the Over-the-Wall Transaction,
a hybrid alternative, or the Rights Offering.
The defendants contested Atkins‟ opinions and relied on experts of their own. Paul
Gompers opined that Kotick and Kelly‟s potential returns from ASAC GP were not
excessive compared to returns made by general partners in private equity funds (a
different industry and different context). Daniel Fischel opined on the largely undisputed
ways in which the Restructuring benefitted Activision. Fischel further opined that Kotick
and Kelly‟s investment in ASAC better aligned senior management‟s interests with those
of Activision and signaled management confidence in Activision‟s prospects. Fischel also
questioned the feasibility of Atkins‟ transactional alternatives. Bradford Cornell opined
that borrowing $500 million to buy additional shares from Vivendi would raise
Activision‟s cost of equity.
M. The Settlement
The Settlement arose out of a mediation conducted by former United States
District Court Judge Layn Phillips. The first session was held in Newport Beach,
California on July 11, 2014, after the denial of the motion to dismiss, the production of
documents by parties and non-parties, and several depositions. Lead Counsel had not yet
undertaken any damages analysis, but knew the extent of ASAC‟s immediate and
subsequent gains. The mediation ended without a settlement.
The mediation resumed on October 28, 2014, in Newport Beach, with another
session planned for November 6, and a potential follow-up session on November 8. The
November 6 session ended without sufficient progress to justify the follow-up session.
24
On November 10, 2014, Judge Phillips made a series of telephone calls about a
potential global resolution. On November 13, the parties agreed to the principal terms of
the Settlement. Lead Counsel and Activision publicly announced the basic terms after the
markets closed on November 19. Media outlets picked up the news.
On December 19, 2014, the parties filed a stipulation of settlement. Dkt. 333 (the
“Stipulation”). As noted, the consideration consisted of three principal components:
● A payment of $275 million to Activision ($67.5 million from Vivendi; some
portion from insurers; the remainder (at least $150 million) from ASAC).
● A reduction in the cap on Kotick and Kelly‟s voting power from 24.9% to 19.9%.
● The expansion of the Board by two spots to be filled by individuals independent of
and unaffiliated with ASAC, Kotick or Kelly, or any limited partner of ASAC.
Vivendi and the insurers will make their payments to Activision within fifteen days after
entry of a judgment approving the Settlement. ASAC will make its payments ten business
days after the final disposition of any appeal. The reduction in the cap on Kotick and
Kelly‟s voting power will take effect within ten days after entry of judgment. The
expansion of the Board will occur on or before July 31, 2015.
N. Hayes Objects To The Settlement.
When Lead Counsel presented the Settlement for court approval, Hayes re-
emerged as an objector. In an initial motion challenging the procedures for considering
the Settlement, Hayes complained that he could not access Lead Counsel‟s brief, which
was filed confidentially, or the confidential exhibits that Lead Counsel submitted. The
parties agreed to a stipulation that permitted Hayes to access the materials.
25
In his formal objection to the Settlement, Hayes advanced the numerous
arguments that are the principal subject of this decision. Pfeiffer and Benston resurfaced
as well. On behalf of their counsel, they petitioned for an award of fees and expenses on
the theory that their counsel contributed to the Settlement.
II. LEGAL ANALYSIS
The settlement of a class or derivative action requires court approval. See Ct. Ch.
R. 23(e) & 23.1(c). “The law, of course, favors the voluntary settlement of contested
issues.” Rome v. Archer, 197 A.2d 49, 53 (Del. 1964). The settlement of representative
litigation, however, “is unique because the fiduciary nature of the [litigation] requires the
Court of Chancery to participate in the consummation of the settlement . . . .” Prezant v.
De Angelis, 636 A.2d 915, 921 (Del. 1994). The potential divergence between the
personal interests of the attorneys conducting the litigation and the interests of the class
or corporation they represent means that “the Court of Chancery must . . . play the role of
fiduciary in its review of these settlements . . . .” In re Resorts Int’l S’holders Litig.
Appeals, 570 A.2d 259, 266 (Del. 1990). In carrying out this role, the court “must balance
the policy preference for settlement against the need to insure that the interests of the
class [or corporation] have been fairly represented.” Barkan v. Amsted Indus., Inc., 567
A.2d 1279, 1283 (Del. 1989).
The tasks assigned to the court include (i) confirming that the Settlement is
properly structured, (ii) ensuring that adequate notice has been provided, (iii) assessing
the reasonableness of the “give” and the “get,” as well as the allocation of the “get”
among various claimants, (iv) approving an appropriate award of attorneys‟ fees, and (v)
26
authorizing any payment from the fee award to the representative plaintiff. Hayes has
raised issues under each heading. Pfeiffer and Benston have piped in on the fourth, and
the defendants have joined Hayes in complaining about the fifth.
A. The Common Theme Underlying Hayes’ Objections
Hayes has advanced numerous objections under multiple headings, but they
depend on a common premise. Hayes believes that the “public stockholders who held
during the pendency of the [Restructuring] (i.e., between the announcement of the
[Restructuring] on July 25, 2013 and the consummation of the [Restructuring] on October
11, 2013)” have valuable damages claims, belonging to them personally, that are being
released in the Settlement for no consideration. Dkt. 352 at 27.
Critical to Hayes‟ objections is his perception that there are strong damages claims
that belong personally to all stockholders who held shares at any time during the relevant
period. Given what he believes to be the personal nature of these claims, Hayes contends
that stockholders who sold their shares did not transfer their right to pursue their personal
claims and receive the benefit of any recovery. As he sees it, the personal claims
remained with the former holders. Indeed, from Hayes‟ standpoint, these are the persons
for whom the Settlement is most problematic. Stockholders who continue to hold their
shares through the consummation of the Settlement at least benefit indirectly from the
consideration that the Settlement provides. But those who sold receive nothing in the
Settlement for the claims that Hayes believes they still possess. Because the persons
whose interests Hayes most vigorously champions were sellers, this decision refers to
them as the “Seller Class.”
27
Under Hayes‟ approach, the number of persons in the Seller Class could be vast.
Millions of Activision shares trade each day. Hayes thinks anyone who bought shares
after July 25, 2013, but before October 11, 2013, obtained personal claims. A day trader
who purchased shares on the morning of Friday, July 26, and sold that afternoon is part of
the Seller Class. So is any high frequency trader who held shares for a microsecond.
Hayes argues that the personal claims held by members of the Seller Class include
the strong causes of action under Delaware corporate law that Lead Counsel pursued and
which led to the Settlement. Because this position is fundamental to each of his
objections, it is worth addressing at the outset. In my view, Hayes is wrong.
The Delaware corporate law claims that Lead Counsel pursued and which formed
the basis for the Settlement fall into three categories: (i) corporate claims belonging to
Activision that Lead Counsel litigated derivatively; (ii) stockholder claims associated
with the rights carried by shares of Activision common stock that Lead Counsel litigated
directly, and (iii) dual-attribute claims having features of both direct and derivative
claims, which Lead Counsel asserted both directly and derivatively to cover both bases.
For each category, the right to assert the claim and benefit from any recovery is a
property right associated with the shares. By default, that property right travels with the
shares. By selling their shares, the members of the Seller Class defeased to their
purchasers any right they had to bring or benefit from these claims. In doing so, the
members of the Seller Class “made a conscious business decision to sell their shares into
a market that implicitly reflect[s] the value of the pending and any prospective lawsuits.”
In re Resorts Int’l S’holders Litig., 1988 WL 92749, at *10 (Del. Ch. Sept. 7, 1988);
28
accord In re Prodigy Commc’ns Corp. S’holders Litig., 2002 WL 1767543, at *4 (Del.
Ch. July 26, 2002).
There are admittedly theoretical causes of action under the expansive rubric of
American law that members of the Seller Class hold personally and which the Settlement
will release. The most obvious category is claims under the federal securities laws. But to
foreshadow the analysis of the adequacy of the Settlement and the reasonableness of the
allocation of consideration, no one (including Hayes) has meaningfully articulated any
personal claims or shown them to have any value whatsoever. Under controlling
Delaware Supreme Court precedent, a settlement can release claims of negligible value to
achieve a settlement that provides reasonable consideration for meaningful claims. In re
Phila. Stock Exch. Inc. (PHLX I), 945 A.2d 1123, 1140 (Del. 2008).
1. The Derivative Claims
The first category of claims that Lead Counsel litigated comprised causes of action
belonging to Activision that were prosecuted derivatively. A corporate claim is an asset
of the corporation, so authority over the claim ordinarily rests with the board of
directors.1 The power and authority afforded to directors by Section 141(a) of the DGCL
1
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984). In Brehm v. Eisner, 746 A.2d 244,
253-54 (Del. 2000), the Delaware Supreme Court overruled seven precedents, including
Aronson, to the extent those precedents reviewed a Rule 23.1 decision by the Court of Chancery
under an abuse of discretion standard or otherwise suggested deferential appellate review. See id.
at 253 n.13 (overruling in part on this issue Scattered Corp. v. Chi. Stock Exch., 701 A.2d 70, 72-
73 (Del. 1997); Grimes v. Donald, 673 A.2d 1207, 1217 n.15 (Del. 1996); Heineman v.
Datapoint Corp., 611 A.2d 950, 952 (Del. 1992); Levine v. Smith, 591 A.2d 194, 207 (Del.
1991); Grobow v. Perot, 539 A.2d 180, 186 (Del. 1988); Pogostin v. Rice, 480 A.2d 619, 624-25
(Del. 1984); and Aronson, 471 A.2d at 814). The Brehm Court held that going forward, appellate
review of a Rule 23.1 determination would be de novo and plenary. Brehm, 746 A.2d at 254. The
29
“encompasses decisions whether to initiate, or refrain from entering, litigation.” Zapata
Corp. v. Maldonado, 430 A.2d 779, 782 (Del. 1981) (footnote omitted). In limited
circumstances, however, a stockholder can assert the corporation‟s claims derivatively on
its behalf. See Schoon v. Smith, 953 A.2d 196, 208 (Del. 2008).
The stockholder‟s derivative suit was created in equity in the first half of
the nineteenth century. Its initial purpose was to provide the stockholder a
right to call to account his directors for their management of the
corporation, analogous to the right of a trust beneficiary to call his trustee to
account for the management of the trust corpus.2
“Devised as a suit in equity, the purpose of the derivative action was . . . to protect the
interests of the corporation from the misfeasance and mal-feasance of „faithless directors
seven partially overruled precedents otherwise remain good law. This decision does not rely on
any of them for the standard of appellate review. It therefore omits the cumbersome subsequent
history, which creates the misimpression that Brehm rejected core elements of the Delaware
derivative action canon.
2
Maldonado v. Flynn, 413 A.2d 1251, 1261 (Del. Ch. 1980), rev’d on other grounds sub
nom. Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981); accord Taormina v. Taormina
Corp., 78 A.2d 473, 475 (Del. Ch. 1951) (“[W]henever a corporation possesses a cause of action
which it either refuses to assert or, by reason of circumstances, is unable to assert, equity will
permit a stockholder to sue in his own name for the benefit of the corporation solely for the
purpose of preventing injustice when it is apparent that the corporation‟s rights would not be
protected otherwise.”); Cantor v. Sachs, 162 A. 73, 76 (Del. Ch. 1932) (Wolcott, Jos., C.)
(“Inasmuch however as the corporation will not sue because of the domination over it by the
alleged wrongdoers who are its directors, the complainants as stockholders have a right in equity
to compel the assertion of the corporation‟s rights to redress.”); 1 R. Franklin Balotti & Jesse A.
Finkelstein, The Delaware Law of Corporations and Business Organizations § 13.10, at 13-24
(3d ed. 2014) (“The fundamental purpose of a derivative action is to enforce a corporate right
that the corporation has refused for one reason or another to assert.”); 4 John Norton Pomeroy,
Equity Jurisprudence § 1095, at 278 (Spencer W. Symons ed., 5th ed. 1941) (“The stockholder
does not bring such a suit because his rights have been directly violated, or because the cause of
action is his, or because he is entitled to the relief sought; he is permitted to sue in this manner
simply in order to set in motion the judicial machinery of the court.”) (emphasis in original).
30
and managers.”‟ Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991) (quoting
Cohen v. Beneficial Loan Corp., 337 U.S. 541, 548 (1949)).
A derivative action under Delaware law joins two suits in one. “The nature of the
[derivative] action is two-fold. First, it is the equivalent of a suit by the shareholders to
compel the corporation to sue. Second, it is a suit by the corporation, asserted by the
shareholders on its behalf, against those liable to it.”3 Only in its second dimension does
the derivative action assert a claim belonging to the corporation. In its first dimension, the
claim being asserted belongs to the stockholders in their capacities as owners of shares:
Inasmuch however as the corporation will not sue because of the
domination over it by the alleged wrongdoers who are its directors, the
complainants as stockholders have a right in equity to compel the assertion
of the corporation‟s rights to redress. This is their individual right. A bill
filed by stockholders in their derivative right therefore has two phases—one
is the equivalent of a suit to compel the corporation to sue, and the other is
the suit by the corporation, asserted by the stockholders in its behalf,
against those liable to it. The former belongs to the complaining
stockholders; the latter to the corporation.
3
Aronson, 473 A.2d at 811; accord Schoon, 953 A.2d at 201-202 (tracing history of
derivative action and explaining its dual nature); Spiegel v. Buntrock, 571 A.2d 767, 773 (Del.
1990) (citing the “two-fold” nature of the derivative action); Sternberg v. O’Neil, 550 A.2d 1105,
1124 n.41 (Del. 1988) (“The normal derivative suit was two suits in one: (1) The plaintiff
brought a suit in equity against the corporation seeking an order against it; (2) to bring a suit for
damages or other legal injury for damages or other relief against some third person who had
caused legal injury to the corporation.” (internal quotation marks omitted)); Kaplan v. Peat,
Marwick, Mitchell & Co., 540 A.2d 726, 730 (Del. 1988) (describing the “two-fold” nature of
the derivative action); Zapata, 430 A.2d at 784 (citing “the „two phases‟ of a derivative suit, the
stockholder‟s suit to compel the corporation to sue and the corporation‟s suit”); Harff v.
Kerkorian, 324 A.2d 215, 218 (Del. Ch. 1974) (“The nature of the derivative suit is two-fold:
first, it is the equivalent of a suit by the stockholders to compel the corporation to sue; and
second, it is a suit by the corporation, asserted by the stockholders in its behalf, against those
liable to it.”), aff’d in pertinent part, 347 A.2d 133 (Del. 1975).
31
Cantor, 162 A. at 76. The former action “may be regarded as a „propulsive‟ one, to
compel in one proceeding the enforcement of the obligation owed by the corporation to
the plaintiff and to all its shareholders, to assert its right of action for their benefit.”
Henry Winthrop Ballantine, Ballantine on Corporations § 145 at 344 (Rev. ed. 1946).
Although the derivative action originated to enable stockholders to pursue internal
corporate claims against corporate fiduciaries, the logic of the structure was not so
limited. The same concepts would facilitate an action to enforce any corporate right that
the corporation “has refused for one reason or another to assert.” Balotti & Finkelstein,
supra, § 13.9 at 13-24. “„Any claim belonging to the corporation may, in appropriate
circumstances, be asserted in a derivative action,‟ including claims that do—and claims
that do not—involve corporate mismanagement or breach of fiduciary duty.”4
During the nineteenth century, corporations frequently encouraged stockholders
who were supportive of management to assert claims derivatively on the corporation‟s
behalf, including claims for breach of contract, in order to establish diversity jurisdiction
in federal court. See Hawes v. City of Oakland, 104 U.S. 450, 452-53 (1881).
4
3 Stephen A. Radin, The Business Judgment Rule 3612 (6th ed. 2009) (quoting Midland
Food Servs., LLC v. Castle Hill Hldgs. V, LLC, 792 A.2d 920, 931 (Del. Ch. 1999) (Strine,
V.C.)); see, e.g., First Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279,
1293 (Fed. Cir. 1999) (permitting “contract actions brought derivatively by shareholders on
behalf of the contracting corporation”); Slattery v. United States, 35 Fed. Cl. 180, 183 (1996)
(same); Suess v. United States, 33 Fed. Cl. 89, 93 (Fed. Cl. 1995) (denying motion to dismiss a
derivative claim for breach of contract against the United States); see also Ross v. Bernhard, 396
U.S. 531, 542-43 (1970) (holding right to jury trial existed for breach of contract claim asserted
by stockholder derivatively because “[t]he corporation, had it sued on its own behalf, would have
been entitled to a jury‟s determination”).
32
[I]t was not uncommon for a corporation that had a direct claim against a
party who was a cocitizen of the state of its incorporation to seek to have
the claim litigated in a federal court as a derivative suit brought by a
nominal shareholder-plaintiff who was chosen because the shareholder‟s
citizenship was different from that of the corporation and its officers, as
well as that of the prospective defendant. If an accommodating stockholder
could not be found, one could be created by transferring stock to an
individual whose citizenship enabled that person to bring the suit.
7 Charles Alan Wright, Arthur R. Miller & Mary K. Kane, Federal Practice and
Procedure § 1830 (3d ed. 2007) (emphasis added). In Hawes, the United States Supreme
Court created the contemporaneous ownership requirement to prevent corporations from
manufacturing diversity jurisdiction for claims against third parties. 104 U.S. at 461; see
Robert C. Clark, Corporate Law § 15.4 at 651 (1986) (“Originally the rule was designed
simply to deter the buying of shares in order to create diversity of citizenship and thereby
gain access to the federal courts.”).
The problem of management using a friendly stockholder to manufacture
jurisdiction did not confront state courts (and it still doesn‟t). Consequently, “many
courts, including Delaware, did not follow the rule of the Hawes case [viz., the
contemporaneous ownership requirement].” Rosenthal v. Burry Biscuit Corp., 60 A.2d
106, 111 (Del. Ch. 1948) (Seitz, V.C.). At common law, the right to sue derivatively
passed with the shares, and “in order to maintain a derivative action, a stockholder was
not required to be the owner of the shares at the time of the transaction of which he
complained.” Id. at 110 (citing cases). But in 1945, the General Assembly created the
contemporaneous ownership requirement for derivative actions by adopting what is now
Section 327 of the DGCL. In its current form, it states:
33
In any derivative suit instituted by a stockholder of a corporation, it shall be
averred in the complaint that the plaintiff was a stockholder of the
corporation at the time of the transaction of which such stockholder
complains or that such stockholder‟s stock thereafter devolved upon such
stockholder by operation of law.
8 Del. C. § 327.
The new provision “effected a substantial change in the Delaware Corporation
Law.” Burry Biscuit, 60 A.2d at 110. Before its adoption, both the right to sue and the
right to benefit indirectly from any derivative recovery passed with the shares. After the
adoption of Section 327, the right to benefit from a derivative recovery continued to pass
with the shares, but the successor holder did not have the right to sue.
The contemporaneous ownership requirement has been the subject of extensive
criticism. Professor Clark has written in his respected treatise that if
a person thinks he has a valid derivative claim against his corporation‟s
directors and officers but is reluctant to start a lawsuit himself—perhaps
because he lacks the time or is risk-averse—it would appear to be a good
thing, for himself and other shareholders, if he could sell his shares to a
more daring investor who is willing to act as prosecutor on behalf of all the
shareholders. Thus, it is difficult to justify the continued existence of the
contemporaneous ownership requirement.
Clark, supra, § 15.4 at 651. At the other end of the temporal spectrum, one of the earliest
authors of an American corporate law treatise commented that
the estate of a corporation is to be treated as that of a continuing institution,
irrespective of the members at any particular time composing it. Each share
represents an interest in the entire concern, and the several holders are
entitled to equal rights irrespective of the time when they acquired their
shares. Causes of action belonging to the corporation increase the value of
the corporate estate, and must be treated like any other assets; when
enforced, they inure to the benefit of all the shareholders without
distinction. It is plain, therefore, that a shareholder has an interest in all of
34
the causes of action belonging to the corporation, whether they arose before
or after he purchased his shares.
Victor A. Morawetz, The Law of Private Corporations § 265 (2d ed. 1886). He
continued: “There seems to be no good reason why a shareholder should not, as a rule, be
permitted to sue on account of causes of action which arose before he purchased his
shares, it being assumed, of course, that the corporation ought to sue but is unable to act.”
Id. § 266.
Intervening treatise authors shared these views. Henry Winthrop Ballantine
regarded the contemporaneous ownership requirement as illogical because
[t]he transfer of shares not only conveys to the transferee the ownership of
the shares and the right to the future dividends thereon, but also places him
upon an equal footing with the other shareholders—provided neither he nor
his transferrer is otherwise estopped—in respect to the right to call the
officers and agents of the corporation to account in a derivative suit, or to
compel the corporation to assert its rights of action against third parties. A
shareholder has an interest in all assets and all causes of action belonging to
the corporation, whether they arose before or after he purchased his shares.
Ballantine, supra, § 148 at 353. George D. Horstein wrote that “[r]ejection of the
contemporaneous ownership doctrine appears logically sound since the shareholder sues
in the right of the corporation and the corporation‟s right should not be affected by the
date when shares were acquired by an individual who sets in motion the judicial
machinery.” 2 George D. Horstein, Corporation Law & Practice § 712 at 195 (1959). As
35
in Delaware, a majority of jurisdictions refused to adopt a contemporaneous ownership
requirement in the absence of a statute.5
For reasons discussed at length elsewhere, I do not believe that a coherent and
credible policy justification has ever been offered for Section 327‟s limitation on the
ability of stockholders to assert pre-transfer claims. See J. Travis Laster, Goodbye to the
Contemporaneous Ownership Requirement, 33 Del. J. Corp. L. 673 (2008). The purposes
that have been proffered for Section 327‟s limitation on stockholder standing (i) ignore
the two-fold nature of the derivative action, id. at 676-77, (ii) conflict with Delaware law
on the assignability of claims, id. at 680-81, (iii) do not match up with how the statute
operates, id. at 682-84, 688-91, or (iv) stand in tension with financial and economic
theory, id. at 685-88. Nevertheless, Section 327 is obviously the law of Delaware, and
this court is bound to apply it.
5
Id. at 194; accord Note, Negotiability of Shares—Right of Subsequent Transferee To
Sue, 23 Minn. L. Rev. 484, 488 n.30 (1939) (explaining that “a subsequent transferee of shares in
a corporation should be able to maintain a derivative suit” and stating that “[t]his appears to be
the majority position”); Note, Stockholder’s Suit For Wrong Which Occurred Before
Complainant Acquired Stock, 68 U.S. L. Rev. 169, 169 (1934) (noting that “[i]n most of the
jurisdictions in which the question has been presented, it has been held that in the absence of
special circumstances a stockholder‟s suit may be brought by one who was not a stockholder at
the time of the transaction of which he complains”); see id. at 172-75 (drawing on reasoning of
cases to criticize contemporaneous ownership requirement); 6 Seymor D. Thompson & Joseph
W. Thompson, Commentaries on the Law of Corporations § 4638 at 538 (3d ed. 1927) (“The
general rule in the state courts undoubtedly is that the stockholder who pleads a good cause of
action may maintain the same, although he was not an owner of the stock at the time the breach
of duty was committed . . . .”). For a representative decision rejecting the imposition of a
contemporaneous ownership requirement at common law, see Pollitz v. Gould, 94 N.E. 1088
(N.Y. 1911).
36
The question for present purposes is whether by cutting off the right to sue,
Section 327 transmutes the lost ability to bring a derivative claim into a personal claim
belonging to the selling stockholder such that the Seller Class could have a claim for
damages. But for Section 327, it would be clear that both the right to assert the derivative
claim and the ability to benefit from any recovery traveled with the shares when they
were sold. The plain language of Section 327 only addresses the right to assert the claim.
Nothing in Section 327 limits the ability to benefit from any derivative recovery. And
achieving that result would be difficult. The recovery in a derivative action belongs to
and is almost inevitably awarded to the corporation, so all current stockholders benefit,
notwithstanding the contemporaneous ownership requirement. It seems plain to me that
to the extent the Seller Class retains personal claims, they do not encompass or derive
from the derivative claims that Lead Counsel asserted.
The claim in the case that was most obviously and purely derivative was Count XI
of the Complaint, which alleged that ASAC breached the Stockholders Agreement. Count
XI alleged that ASAC breached the contractual limit on its Board representation by
seeking and obtaining Board seats for Nolan and Wynn. The claim to enforce the
Stockholders Agreement belonged to Activision, which was a party to that agreement.
The other claims that the Complaint styled as derivative are more properly viewed
as having dual attributes. In Counts VI through X, the Complaint described the alleged
wrongs associated with the Restructuring in which the defendants had engaged and
framed the theories as derivative claims brought on behalf of Activision. In Counts VI
37
through X, the Complaint described the same alleged wrongs and framed the theories as
direct claims brought on behalf of the Class.
For purposes of evaluating the underlying premise of Hayes‟ objections, what
matters presently is that any right to benefit from the derivative claims belongs to the
current holders of shares. Anyone who sold their shares “chose to dissociate their
economic interests from the corporation and, by doing so, to forego the opportunity to
benefit from . . . the potential benefit to the corporation from the derivative claims.” In re
Triarc Cos., Inc. Class & Deriv. Litig., 791 A.2d 872, 875 (Del. Ch. 2001). The Seller
Class has no right to benefit from the derivative claims.
2. Direct Claims
A similar analysis applies to the second category of Delaware corporate law
claims, namely the direct claims. Shares of stock carry with them particular rights that a
holder of the shares can exercise by virtue of being the owner. A stockholder can invoke
these rights directly, rather than derivatively. First Hayes and then Lead Counsel litigated
direct claims belonging to holders of Activision common stock.
Direct claims include the causes of action conferred on stockholders by specific
statutory provisions of the DGCL.6 Direct claims also include causes of action to enforce
contract rights that stockholders possess under the corporation‟s certificate of
6
See, e.g., 8 Del. C. §§ 168, 205, 211, 219, 220, 223, 225, 226, 262, 273, 291.
38
incorporation and bylaws,7 recognizing that the DGCL forms a part of every Delaware
corporation‟s charter.8 Classic examples included the right to vote, the right to compel
payment of a contractually specified dividend, and the right to own and alienate shares.9
Stockholders similarly can sue directly to enforce contractual constraints on a board‟s
authority under the charter, bylaws, and provisions of the DGCL.10 The availability of a
direct cause of action in these situations comports with the Delaware Supreme Court‟s
longstanding recognition that the DGCL, the certification of incorporation, and the
7
See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1037-39 (Del. 2004);
Rich Realty, Inc. v. Potter Anderson & Corroon LLP, 2011 WL 743400, at *4 (Del. Super. Feb.
21, 2011); Ruffalo v. Transtech Serv. P’rs Inc., 2010 WL 3307487, at *9 (Del. Ch. Aug. 23,
2010); MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *7, *13-14 (Del. Ch. May 5, 2010);
Manzo v. Rite Aid Corp., 2002 WL 31926606, at *5 (Del. Ch. Dec. 19, 2002), aff’d, 825 A.2d
239 (Del. 2003) (TABLE). As Tooley specifically held, stockholders suffer direct injury and may
sue individually for breach of their contractual rights, even when all stockholders had the same
right and suffered the same injury. Tooley, 845 A.2d at 1039. See generally Allen v. El Paso
Pipeline GP Co., L.L.C., 90 A.3d 1097, 1105-1109 (Del. Ch. 2014).
8
8 Del. C. § 394 (“This chapter and all amendments thereof shall be a part of the charter
or certificate of incorporation of every corporation.”); STAAR Surgical Co. v. Waggoner, 588
A.2d 1130, 1136 (Del. 1991) (“[I]t is a basic concept that the General Corporation Law is a part
of the certificate of incorporation of every Delaware company.”); Hartford Acc. & Indem. Co. v.
W. S. Dickey Clay Mfg. Co., 24 A.2d 315, 321 (Del. 1942) (“[T]here is impliedly written into
every corporate charter as a constituent part thereof the pertinent provisions of the State
Constitution and statutes.”); Fed. United Corp. v. Havender, 11 A.2d 331, 338 (Del. 1940) (“It is
elementary that these provisions [of the DGCL] are written into every corporate charter.”).
9
See Lipton v. News Int’l, Plc, 514 A.2d 1075, 1078-79 (Del. 1986) (right to vote); In re
Gaylord Container Corp. S’holders Litig., 747 A.2d 71, 78-79 (Del. Ch. 1999) (Strine, V.C.)
(right to own and alienate shares); Moran v. Household Int’l, Inc., 490 A.2d 1059, 1070 (Del.
Ch.) (discussing classic examples), aff’d, 500 A.2d 1346 (Del. 1985); see also Turner v.
Bernstein, 768 A.2d 24, 33 n.20 (Del. Ch. 2000) (Strine, V.C.) (observing that the right to
declare or compel a dividend has been recognized as a classic example of an action suitable to
certification under Rule 23(b)(1)).
10
See Grimes, 673 A.2d at 1213; Grayson v. Imagination Station, Inc., 2010 WL
3221951, *5 (Del. Ch. Aug. 16, 2010).
39
bylaws together constitute a multi-party contract among the directors, officers, and
stockholders of the corporation.11 As parties to the contract, stockholders can enforce it.12
Section 327 does not apply to direct claims. When a share of stock is sold, the
property rights associated with the shares, including any claim for breach of those rights
and the ability to benefit from any recovery or other remedy, travel with the shares.13
“This is the general rule embodied in 6 Del. C. § 8-303(a), which provides that upon
delivery of a . . . security to a purchaser, the purchaser acquires all rights in the security
11
Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 940 (Del. Ch. 2013)
(Strine, C.) (“[O]ur Supreme Court has long noted that bylaws, together with the certificate of
incorporation and the broader DGCL, form part of a flexible contract between corporations and
stockholders.”); accord Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182, 1188 (Del. 2010)
(“Corporate charters and bylaws are contracts among a corporation‟s shareholders . . . .”);
STAAR Surgical, 588 A.2d at 1136 (“[A] corporate charter is both a contract between the State
and the corporation, and the corporation and its shareholders.”); Centaur P’rs, IV v. Nat’l
Intergroup, Inc., 582 A.2d 923, 928 (Del. 1990) (“Corporate charters and by-laws are contracts
among the shareholders of a corporation . . . .”); cf. Lawson v. Household Fin. Corp., 152 A. 723,
726 (Del. 1930) (“The same rules which govern the construction of statutes, contracts and other
written instruments, are made use of in construing the provisions and determining the meaning of
charters and grants of corporate powers and privileges.”).
12
See Grimes, 673 A.2d at 1212; Grayson, 2010 WL 3221951, at *6; see also Blasius
Indus., Inc. v. Atlas Corp., 564 A.2d 651, 660 (Del. Ch. 1988) (Allen, C.) (noting that the scope
of a restriction on a fiduciary‟s authority is “not . . . a question that a court may leave to the
[fiduciary] finally to decide so long as he does so honestly and competently; that is, it may not be
left to the [fiduciary‟s] business judgment”).
13
Schultz v. Ginsburg (PHLX II), 965 A.2d 661, 667 (Del. 2009) (“As a matter of law, a
Charter Violation claim transfers to a later purchaser because the injury is to the stock and not
the holder.”); Prodigy, 2002 WL 1767543, at *4 (“[W]hen Beoshanz sold his shares in the
marketplace, the claim relating to the fairness of the then-proposed transaction passed to his
purchaser, who enjoyed the benefits of the settlement.”); Triarc, 791 A.2d at 878-79 (explaining
owners of stock who sell their shares are “viewed as having sold their interest in the claim with
their shares”); In re Sunstates Corp. S’holder Litig., 2001 WL 432447, at *3 (Del. Ch. Apr. 18,
2001) (“I can see little reason why the claim for breach of the preferred stock charter provisions
would not ordinarily transfer with the shares.”). But see Omnicare, Inc. v. NCS Healthcare, Inc.,
809 A.2d 1163, 1169 (Del. Ch. 2002) (applying judicially created version of contemporaneous
ownership requirement to direct claims as a matter of public policy).
40
that the transferor had or had power to transfer.” Sunstates, 2001 WL 432447, at *3
(internal quotation marks omitted). More generally, Delaware has a longstanding rule that
claims are freely assignable and can be asserted by the acquirer if the right of action is the
type of claim that would survive the death of the transferor and pass to his personal
representative. See Indus. Trust Co. v. Stidham, 33 A.2d 159, 160-61 (Del. 1942). By
statute, “[a]ll causes of action, except actions for defamation, malicious prosecution, or
upon penal statutes, shall survive . . . .” 14 Direct claims survive and are transferrable.15
14
10 Del. C. § 3701. Because Delaware law generally permits parties to acquire and
assert claims, and in light of Section 18-303 of title 6, there does not seem to be support for the
statement that “Delaware law recognizes a policy against buying a lawsuit.” PHLX II, 965 A.2d
at 668. As the only authority for this proposition, the PHLX II opinion cited this court‟s decision
granting a motion to dismiss a bidder‟s claims for breach of fiduciary duty. See Omnicare, 809
A.2d at 1169. The Omnicare opinion asserted that before the adoption of Section 327, there was
“a longstanding Delaware public policy against the „evil‟ of purchasing stock in order „to attack
a transaction which occurred prior to the purchase of the stock.‟” Id. (quoting Burry Biscuit, 60
A.2d at 111). The Omnicare opinion also asserted that “[t]he policy against purchasing lawsuits
involving the internal relations of Delaware corporations was codified in the derivative suit
context by [Section 327].” Id. (emphasis added). As support, the Omnicare decision relied on
Burry Biscuit and authorities traceable to Burry Biscuit. But on both points, Burry Biscuit said
exactly the opposite. As to the state of the law before the adoption of Section 327, then-Vice
Chancellor Seitz wrote: “Under the Delaware Law as it existed prior to the enactment of [Section
327], in order to maintain a derivative action, a stockholder was not required to be the owner of
the shares at the time of the transaction of which he complained.” Burry Biscuit, 60 A.2d at 111.
As to the supposed codification of existing law, then-Vice Chancellor Seitz wrote that Section
327 “effected a substantial change in the Delaware Corporation Law.” Id. The change was that
before its passage, a stockholder could sue for wrongs pre-dating the acquisition of stock, but
“[a]fter its passage, a stockholder filing a derivative action was required to allege and therefore
to prove that he was a stockholder at the time of the transaction of which he complained, or that
his stock devolved upon him by operation of law.” Id. Delaware also did not view a lawsuit
brought by an after-acquiring stockholder as champerty—the common law doctrine that guarded
against the purchase of a lawsuit, “for champerty cannot be charged against one having an
interest in the matter in controversy.” Eshleman v. Keenan, 181 A. 655, 658 (Del. Ch. 1935)
(Wolcott, Jos., C.). Delaware law does not limit the ability of investors in the other half of the
corporate capital structure—debt—to assert direct claims that arose before they purchased their
securities. Imagine what it would mean for negotiable instruments if an after-acquiring
debtholder could not sue for breach. Perhaps PHLX II suggests that the Delaware Supreme Court
41
The claim in this case that was most obviously direct was the Voting Right Claim
which the Delaware Supreme Court held was meritless. The other claims styled as direct
are better viewed as having dual attributes.
What again matters for present purposes is that the direct claims asserted in this
case, along with the right to benefit from any remedy, belong to the current holders of
shares. Persons who sold their shares “chose to dissociate their economic interests from
the corporation and, by doing so, to forego the opportunity to benefit from . . . the class
claims.” Triarc, 791 A.2d at 872. The Seller Class has no right to pursue or benefit from
the direct claims.
3. The Dual Claims
The principal claims that Lead Counsel litigated had attributes that permitted them
to be pled either as derivative claims or direct claims.16 Corporate transactions that
would recognize that Delaware has a public policy against a stockholder buying property rights
that include choses in action, but any such policy should rest on reasons why the law would
disfavor the property rights of stockholders relative to those of other similarly situated claimants.
15
In re Emerging Commc’ns, Inc. S’holders Litig., 2004 WL 1305745, at *29 (Del. Ch.
May 3, 2004, revised June 4, 2004) (Jacobs, J. by designation) (“In this case, the choses in action
are breach of fiduciary duty and fraud claims. Those claims survive to (or against) a personal
representative under 10 Del. C. § 3701.”); accord Puma v. Marriott, 294 F. Supp. 1116, 1119 (D.
Del. 1969) (holding that claim for breach of fiduciary duty survived under Section 3701); St.
Search P’rs, L.P. v. Ricon Int’l, L.L.C., 2006 WL 1313859, at *3 (Del. Super. May 12, 2006)
(“[C]laims for breach of fiduciary obligations and resultant unjust enrichment have been held to
survive”).
16
See Gatz v. Ponsoldt, 925 A.2d 1265, 1268 (Del. 2007); (“[T]he claims before us are
not exclusively derivative and could be brought directly.”); Gentile v. Rossette, 906 A.2d 91, 99-
100 (Del. 2006); Grimes, 673 A.2d at 1212 (“Courts have long recognized that the same set of
facts can give rise both to a direct claim and a derivative claim.”); Sagarra Inversiones, S.L. v.
Cementos Portland Valderrivas, S.A., 2011 WL 3371493, at *5 n.31 (Del. Ch. Aug. 5, 2011)
(“Although the Tooley formulation provides a two-part analysis for determining whether an
42
reallocate stock ownership percentages and voting rights often give rise to dual-attribute
claims.17
asserted claim is direct or derivative, there are some limited exceptions where the same facts may
support both direct and derivative claims.”); San Antonio Fire & Police Pension Fund v.
Bradbury, 2010 WL 4273171, at *9 n.68 (Del. Ch. Oct. 28, 2010) (“The same facts may support
both direct and derivative claims.”); Thornton v. Bernard Techs., Inc., 2009 WL 426179, at *3
n.28 (Del. Ch. Feb. 20, 2009) (“It is possible for a claim to be both derivative and direct.”); Big
Lots Stores, Inc. v. Bain Capital Fund VII, LLC, 922 A.2d 1169, 1181 n.54 (Del. Ch. 2006)
(acknowledging the “common sense principle” that the same set of facts can set forth both direct
and derivative claims seeking different forms of relief); Odyssey P’rs v. Fleming Co., 1998 WL
155543, at *3 (Del. Ch. Mar. 27, 1998) (“[I]n some circumstances, the same conduct (or aspects
thereof) may give rise to both derivative and direct claims.”).
17
See Gatz, 925 A.2d at 1281 (concluding that transaction in which stockholder gained
controlling position and public stockholders were diminished to a minority position were not
exclusively derivative and could have been brought directly); Gentile, 906 A.2d at 90 (discussing
dual attribute claims based on expropriation caused by a dilutive stock issuance); Carsanaro v.
Bloodhound Techs., Inc., 65 A.3d 618, 655 (Del. Ch. 2013) (discussing direct and derivative
claims caused by a dilutive stock issuance); Robotti & Co., LLC v. Liddell, 2010 WL 157474, at
*6-7 (Del. Ch. Jan. 14, 2010) (noting that claims alleging overpayment and subsequent common
stock dilution are typically regarded as derivative but claims alleging that a controlling
stockholder caused the corporation to overpay for stock thereby increasing the controllers
ownership and decreasing minority stockholders‟ ownership are direct); Dubroff v. Wren Hldgs.,
LLC (Dubroff I), 2009 WL 1478697, at *3 (Del. Ch. May 22, 2009) (“Gentile and its progeny
make clear that a shareholder‟s claim can be both derivative and direct in a unique situation:
where a controlling shareholder causes the corporate entity to issue more equity to the
controlling shareholder at the expense of the minority shareholders.”); Oliver v. Bos. Univ., 2006
WL 1064169, at *17 (Del. Ch. Apr. 14, 2006) (characterizing claim alleging equity dilution
following a preferred stock issuance as a derivative claim but noting that “[v]oting power
dilution may constitute a direct claim, because it can directly harm the shareholders without
affecting the corporation, and any remedy for the harm suffered under those circumstances
would benefit the shareholders.”); In re JP Morgan Chase & Co. S’holder Litig., 906 A.2d 808,
818 (Del. Ch. 2005), aff’d, 906 A.2d 766 (Del. 2006) (noting that dilution claims alleging the
diminishment of voting power may be considered direct claims “where a significant
stockholder‟s interest is increased at the sole expense of the minority” (quoting In re Paxson
Commc’n Corp. S’holders Litig., 2001 WL 812028, at *5 (Del. Ch. July 12, 2001)); Triarc, 791
A.2d at 874 (discussing direct and derivative claims resulting from the issuance of cash bonuses
and stock options in excess of what was permitted by a stockholder approved compensation
arrangement). See generally 3 Edward P. Welch et al., Folk On The Delaware General
Corporation Law § 327.02[A][7] (6th ed. 2015).
43
Under Delaware law, to determine whether a claim is derivative or direct, a court
must consider “(1) who suffered the alleged harm (the corporation or the suing
stockholders, individually); and (2) who would receive the benefit of any recovery or
other remedy (the corporation or the stockholders, individually)?” Tooley, 845 A.2d at
1033. When a transaction reallocates ownership percentages at the stockholder level, the
first question in the Tooley test can be answered either way. Because the board of
directors has exclusive authority to issue stock, see 8 Del. C. §§ 152-157, shares of stock
are deemed an asset of the corporation. Stock is a form of currency that can be exchanged
for other forms of currency or used for a variety of corporate purposes, including paying
off debts, acquiring assets, compensating employees, or acquiring other entities. If a
complaint contends that the corporation received too little for its shares, then in one
sense, the injury is suffered by the corporation because it did not receive greater value.18
But in another sense, the effects of reallocating ownership are felt at the
stockholder level. A stock certificate does not have intrinsic value; it is a piece of paper
with ink on it. An electronic book entry has even less physical substance. A share is
simply a convenient means of tracking proportionate ownership, and the property rights
that shares carry have greater or lesser value depending on the relative and absolute
18
See, e.g., Gentile, 906 A.2d at 99 (“[C]laims of corporate overpayment are treated as
causing harm solely to the corporation and, thus, are regarded as derivative. The reason . . . is
that the corporation is both the party that suffers the injury (a reduction in its assets or their
value) as well as the party to whom the remedy (a restoration of the improperly reduced value)
would flow.”); Dubroff I, 2009 WL 1478697, at *3 (“[B]ecause the corporation has suffered an
injury (inadequate payment for its shares) . . . any recovery would flow to the corporate
treasury”); JP Morgan, 906 A.2d at 819 (noting that “if the [director] defendants are found
liable, the remedy will accrue to JPMC”).
44
percentage of ownership that they represent.19 Transactions involving stock reallocate
power and ownership at the stockholder level. A dilutive issuance that raises the
recipient‟s ownership stake increases that holder‟s relative power and ownership at the
expense of the non-recipients. Because of these stockholder-level effects, sophisticated
investors bargain for anti-dilution protection and pre-emptive rights. See Joseph W.
Bartlett & Kevin R. Garlitz, Fiduciary Duties In Burnout/Cramdown Financings, 20 Johns.
19
Delaware law recognizes this reality in many ways. Delaware case law acknowledges
that the owner of a controlling block legitimately can insist on a premium for its shares that is not
shared with the remaining stockholders. See, e.g., Thorpe by Castleman v. CERBCO, Inc., 676
A.2d 436, 442 (Del. 1996) (noting a “basic precept[] of corporate law” that “controlling
shareholders have a right to sell their shares, and in doing so capture and retain a control
premium”); Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 43 (Del. 1994) (“The
acquisition of majority status and the consequent privilege of exerting the powers of majority
ownership come at a price. That price is usually a control premium which recognizes not only
the value of a control block of shares, but also compensates the minority stockholders for their
resulting loss of voting power.”); In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1039 (Del.
Ch. 2012) (Strine, C.) (“It is, of course, true that controlling stockholders are putatively free
under our law to sell their own bloc for a premium or even to take a different premium in a
merger.”); Mendel v. Carroll, 651 A.2d 297, 305 (Del. Ch. 1994) (Allen, C.) (“The law has
acknowledged, albeit in a guarded and complex way, the legitimacy of the acceptance by
controlling shareholders of a control premium”). Delaware case law also empowers directors to
use defensive measures to limit a party‟s ability to assemble a controlling block. See eBay
Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 29 (Del. Ch. 2010) (noting proper use of rights
plan “to block a creeping takeover”); Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310,
359 (Del. Ch. 2010) (Strine, V.C.), aff’d, 15 A.3d 218 (Del. 2011) (same); Gaylord Container
Corp., 753 A.2d at 481 (“The primary purpose of a poison pill is to enable the target board of
directors to prevent the acquisition of a majority of the company‟s stock through an inadequate
and/or coercive tender offer”). The DGCL imposes statutory limitations on transactions between
a corporation and an interested stockholder, defined as someone beneficially owning 15% or
more of the entity‟s voting power, for three years after the stockholder became an interested
stockholder (subject to several exceptions). See 8 Del. C. § 203. Numerous federal statutes
similarly impose consequences based on a stockholder‟s level of equity ownership. See, e.g., 15
U.S.C. § 78m (requiring “beneficial owners” to disclose the acquisition of beneficial ownership
of more than five percent of a company‟s equity securities within ten days of purchase); id. § 78p
(treating as an insider “[e]very person who is directly or indirectly the beneficial owner of more
than 10 percent of any class of any equity security (other than an exempted security)”).
45
Corp. L. 593, 595-96 (1995). The answer to Tooley‟s first question—who suffered the
harm (the corporation or the stockholders, individually)—is either and both.
The second question under Tooley—who would receive the benefit of any
recovery or other remedy (the corporation or the stockholders, individually)—likewise
can be answered either way. One remedy is to require the recipient of the increased stake
to pay more to the corporation, fixing the harm at the corporate level. Another remedy is
to adjust the relative rights of the stock or invalidate a portion of the shares, fixing the
harm at the stockholder level.20
The principal claims for breach of fiduciary duty and aiding and abetting in this
case had dual attributes. In response to first question under Tooley—who suffered the
harm—the answer could be either Activision or the unaffiliated stockholders. In one
sense, Activision was harmed by the Restructuring because the defendants‟ misconduct
prevented Activision from repurchasing a greater percentage of its shares from Vivendi.
Rather having Activision buy the shares and benefit all of its stockholders indirectly,
ASAC bought them. But in another sense, Activision‟s unaffiliated stockholders were
harmed because they lost the opportunity to have control return to the market. The
Committee sought a transaction that would have eliminated Vivendi‟s control block
without a replacement controller. Kotick and Kelly took advantage of Vivendi‟s situation
20
See In re Loral Space & Commc’ns Inc., 2008 WL 4293781, at *32 (Del. Ch. Sept. 19,
2008) (Strine, V.C.) (reforming the securities purchase agreement to convert the preferred stock
into non-voting common stock), aff’d, 977 A.2d 867 (Del. 2009); Linton v. Everett, 1997 WL
441189, at *7 (Del. Ch. July 31, 1997) (invaliding shares that directors issued to themselves for
inadequate consideration).
46
to engineer a transaction where they emerged with practical control and substantial
financial benefits. Only the unaffiliated stockholders suffered this injury. Kotick, Kelly,
and ASAC benefitted. Precedent exists that supports characterizing the injury suffered by
the unaffiliated stockholders as direct, not derivative.21
In response to second question under Tooley—who would receive the benefit of
any remedy—the answer again could be either Activision or the unaffiliated stockholders.
One set of possible remedies would operate at the corporate level and include damages in
favor of Activision, disgorgement of the defendants‟ profits, an order requiring ASAC to
transfer its shares to Activision, or a constructive trust over the shares for Activision‟s
benefit. These remedies would have addressed the injury Activision suffered. But another
set of possible remedies would operate at the stockholder level, such as an order
invalidating some or all of ASAC‟s shares, a permanent injunction blocking ASAC‟s
ability to exercise some or all of its voting rights, or an order adjusting the voting rights
directly. See, supra, n.20.
For the present purpose of evaluating Hayes‟ principal objection, the critical
question is whether dual-attribute claims travel with the shares. Because both direct and
21
See, e.g., Gaylord, 747 A.2d at 84 (holding that challenges to poison pill and charter
and bylaw amendments were individual in nature, because when a board takes actions “that
diminish the ability of non-management stockholders to elect a new slate of directors, entertain
sales proposals, and to amend the corporation‟s charter and bylaws, the resulting injury to the
non-management stockholders is independent of and distinct from any injury to the corporation”
and “is to the stockholders within the corporate structure that have lost relative power, not to the
corporation as an entity”); Carmody v. Toll Bros., Inc., 723 A.2d 1180, 1189 (Del. Ch. 1998)
(holding challenge to adoption of dead hand poison pill is individual because it involves claimed
wrongful interference “with the shareholders‟ right to elect a new board” and “the right to vote is
a contractual right and an attribute of the Toll Brothers shares”).
47
derivative claims travel with the shares, claims that have both attributes also logically
travel with the shares. That was the conclusion reached in Triarc, where the defendants
approved executive compensation awards that violated the terms of a stockholder-
approved compensation arrangement. 791 A.2d at 874. The court noted that the wrong
gave rise both to derivative and direct claims and held that all of the claims traveled with
the shares. Id. at 874-75, 878-79.
There is an ambiguous reference in PHLX II that could support a different rule.
The Court of Chancery had approved a complex settlement comprising both direct and
derivative claims, which allocated the per share consideration across a class of
stockholders as follows:
100% per share to the Continuous Holders; 80% per share to the First
Period Buyers; 20% per share to the First Period Sellers; 60% per share to
Second Period Buyers; 40% per share to Second Period Sellers; and 20%
per share to In and Out Traders who bought in the First Period and sold in
the Second Period.
965 A.2d at 666. The Court of Chancery evaluated the strength of the different groups‟
claims and “found the allocation plan to be a rational assessment of the competing
interests.” Id. Several objectors appealed. Most pertinently, certain sellers argued that
they suffered damage because of economic dilution from a challenged stock issuance and
should have received a larger allocation. Id. at 667.
The Delaware Supreme Court reviewed the Court of Chancery‟s approval of the
allocation under an abuse of discretion standard and found no error. When describing the
nature of the economic dilution claim, however, the Delaware Supreme Court deployed
inconsistent terminology. Initially, the Delaware Supreme Court stated that “as [the lead
48
plaintiff] admitted, the Economic Dilution claim was personal [and thus] would remain
with the Seller and not transfer to the Buyer.” Id. at 668. But in the very next paragraph,
the Delaware Supreme Court stated that the lead plaintiff “predicted that the Chancellor
would likely find the Economic Dilution claim to be derivative” and that, as a result, the
objecting sellers “would not be able to recover because the corporation would receive the
relief.” Id. And in PHLX I, an earlier decision in the case, the Delaware Supreme Court
suggested that the dilution claim was direct, noting that “[i]t is at least arguable that only
the Class A shareholders who were the original PHLX seatholders, or their successors in
interest, could legitimately claim to have been diluted.” 945 A.2d at 1141 n.34.
Given the inconsistent observations in PHLX I and II, I do not regard PHLX II as
holding definitively that a dilution claim is personal and remains with the sellers. Other
Delaware decisions consistently treat dilution claims as direct, derivative, or both, but
never as personal. See, supra, nn. 16 & 17. Nor does the effect of a dilutive issuance fit
with a personal characterization. For the non-recipients, the dilutive issuance affects the
holders in proportion to their ownership stake in the corporation. That injury can be
regarded as derivative or direct because it has attributes of both, but it is not personal.
In my view, the dual-attribute claims—like the direct and derivative claims—
travelled with the shares. The Seller Class has no right to pursue or benefit from them.
4. Personal Claims
The foregoing discussion of the direct, derivative, and dual-attribute claims does
not mean that an individual holder of shares cannot have personal claims. There simply
49
were not any advanced or litigated in this case, and Hayes has not relied on any to
support his objections to the Settlement.
Quintessential examples of personal claims would include a contract claim for
breach of an agreement to purchase or sell shares or a tort claim for fraud in connection
with the purchase or sale of shares. One major distinction between these types of claims
and the Delaware corporate law claims discussed previously is that for the personal
claims, the nature of the underlying property does not matter. The property happens to be
shares, but the cause of action is not a property right carried by the shares, nor does it
arise out of the relationship between the stockholder and the corporation. For the breach
of contract claim, the cause of action arises out of the contract between the buyer and the
seller. For the fraud claim, the cause of action arises out of the false representations made
by the buyer or seller on which the counterparty relied to her detriment, suffering
causally related damages as a consequence. The underlying property could just as easily
be land or a car.
A Rule 10b-5 claim under the federal securities laws is a personal claim akin to a
tort claim for fraud. The right to bring a Rule 10b-5 claim is not a property right
associated with shares, nor can it be invoked by those who simply hold shares of stock.
See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006). It arises
only when there has been fraud in connection with the purchase or sale of a security. 15
U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; Blue Chip Stamps v. Manor Drug Stores, 421
U.S. 723 (1975). As such, the Rule 10b-5 claim is personal to the purchaser or seller and
remains with that person; it does not travel with the shares. The personal nature of federal
50
securities claims manifests itself in the fact that class certification generally must be
obtained under Rule 23(b)(3).22 By contrast, because Delaware corporate law claims are
tied to the shares themselves, they are certified under Rules 23(b)(1) and (b)(2).23
It is theoretically possible that the Seller Class might possess federal securities law
claims or other personal claims. For purposes of evaluating the premise of Hayes‟ many
objections, two points matter. First, none of the Delaware corporate claims are personal
claims. Second, Hayes has not provided any reason to believe that any of the Class‟s
personal claims, including hypothetical federal securities law claims, have any value.
B. The Objection To The Structure Of The Settlement
Initially, Hayes relies on his (in my view, flawed) premise to challenge the
definition of the Class. The parties, conversely, ask the court to re-certify the Class. This
22
See, e.g., Glosser v. Cellcor Inc., 1995 WL 106527, at *3 n.6 (Del. Ch. Mar. 10, 1995)
(Allen, C.) (“Numerous federal courts have certified actions alleging federal securities violations
as class actions under Federal Rules of Civil Procedure Rule 23(b)(3).”). See generally 7A
Wright, Miller & Kane, supra, § 1781.1 (noting that “Rule 23(b)(3) has been used quite
frequently in cases involving securities frauds”).
23
See, e.g., Leon N. Weiner & Assocs., Inc. v. Krapf, 584 A.2d 1220, 1227 (Del. 1991)
(finding class action properly maintainable under Rule 23(b)(1)(A) and 23(b)(2)); In re Mobile
Commc’ns Corp. of Am., Inc., Consol. Litig., 1991 WL 1392 (Del. Ch. Jan. 7, 1991) (Allen, C.)
(“Typically an action challenging the propriety of director action in connection with a merger
transaction is certified as a (b)(1) or (b)(2) class because . . . all members of the stockholder class
are situated precisely similarly with respect to every issue of liability and damages”), aff’d, 608
A.2d 729 (Del. 1992) (ORDER); see also Turner v. Bernstein, 768 A.2d 24, 31 (Del. Ch. 2000)
(Strine, V.C.) (declining to certify a class under Rule 23.1(b)(3) where “any monetary remedy
due to the Proposed Class will be calculated on a per share, rather than per shareholder, basis”);
Joseph v. Shell Oil Co., 1985 WL 21125, at *5 (Del. Ch. Feb. 8, 1985) (declining to certify a
class under Rule 23.1(b)(3) because “if a finding of damages occurs, the damages will be
mathematically allocated on a per share basis to all the stockholders in similar circumstances”).
51
decision does neither. The Class was properly certified, and this court‟s earlier
certification order remains in effect.
After a contested motion for class certification, the court certified a class
comprising “the holders of shares of Activision common stock that were outstanding as
of July 25, 2013 (the „Class Shares‟), in their capacities as holders of Class Shares,
together with their heirs, assigns, transferees, and successors-in-interest in each case in
their capacity as holders of Class Shares.” Dkt. 330 ¶ 1 (the “Class”). The date selected
was when the Board approved the Restructuring and entered into the Stock Purchase
Agreement. The class certification order stated that “[t]he defendants and their affiliates
are excluded from the Class.” Id. ¶ 2. The certification order further provided that
notwithstanding the general exclusion of the defendants and their affiliates, “limited
partners in ASAC and their affiliates are included in the Class, but only to the extent they
own Class Shares outside of ASAC and ownership of those shares is not attributable to
ASAC.” Id. ¶ 3. This exception permitted funds managed by limited partners in ASAC,
such as Fidelity, to qualify as Class members for shares owned outside ASAC.
1. Hayes’ Request That The Class Focus On The Sellers
Relying on his general premise, Hayes argues that the definition of the Class “does
not fit the class who suffered damages.” Dkt. 352 at 25. According to Hayes, the Class
definition
provides for a “one-size-fits-all” Class, when many current and former
public stockholders stand in different positions. . . . This Class definition
treats those who held on July 25, 2013, but sold at any time after July 25,
2013, as having no interest in the claims. On the other hand, purchasers
who bought after the [Restructuring] closed, with full knowledge of its
52
terms and effects, are considered the Class members with a live interest in
the claims.
Dkt. 352 at 27. According to Hayes, “[t]he stockholders who were harmed [by the
Restructuring] were those who were denied the opportunity to benefit from Vivendi‟s
below-market sale.” Id. at 27-28. Hayes does not request any specific relief based on this
objection, but he presumably would like (i) a separate class or subclass defined as those
stockholders who held shares at a particular instant on July 25 and (ii) for some or all of
the Settlement consideration to flow directly to those holders.
In my view, the Class is defined properly. PHLX I, 945 A.2d at 1139-40. “[T]he
law recognizes that when a claim is asserted on behalf of a class of stockholders
challenging the fairness of the terms of a . . . transaction under Delaware law, the class
will ordinarily consist of those persons who held shares as of the date the transaction was
announced and their transferees, successors and assigns.” Prodigy, 2002 WL 1767543, at
*4. “[I]t is commonplace for class certification orders entered by this Court in actions
involving the internal affairs of Delaware corporations to define the relevant class as all
persons (other than the defendants) who owned shares as of a given date, and their
transferees, successors and assigns.” Triarc, 791 A.2d at 878-79.
For reasons that this decision has discussed at length, it is correct to treat “those
who held on July 25, 2013, but sold at any time after July 25, 2013, as having no interest
in the claims.” Those persons “chose to dissociate their economic interests from the
corporation and, by doing so, to forego the opportunity to benefit from . . . the class
claims [and] the potential benefit to the corporation from the derivative claims.” Id. at
53
875; accord Sunstates, 2001 WL 432447, at *3. They “made a conscious business
decision to sell their shares into a market that implicitly reflect[s] the value of the
pending and any prospective lawsuits.” Resorts Int’l, 1988 WL 92749, at *10; accord
Prodigy, 2002 WL 1767543, at *4. Those claims passed to the buyers, who are properly
considered Class members with a live interest in the claims.
As this decision already has noted, it is theoretically possible that members of the
Seller Class might have some personal claims, such as federal securities law claims, that
the Settlement releases. The possible existence of those claims does not require a separate
class or subclass.24
2. Hayes’ Objection To The Ambiguity Of The Class
Hayes next contends that the Class is ambiguous. Dkt. 352 at 25. He identifies two
categories of shares, currently trading in the market, that are not Class Shares. The first
comprises shares held by defendants or their affiliates on July 25, 2013. The second
comprises shares issued after July 25. Hayes points out that millions of shares trade each
day, that Class Shares cannot be distinguished from non-Class Shares, and that some
purchasers will have acquired shares that were not Class Shares.
As to the first category—shares held by defendants or their affiliates on July 25,
2013—Hayes is incorrect. Those shares are Class Shares. The certification order defined
the Class Shares as the “shares of Activision common stock that were issued and
24
PHLX I, 945 A.2d at 1140 (reviewing and approving Court of Chancery case law); see,
e.g., Triarc, 791 A.2d at 878-79 (certifying class that included former holders despite absence of
benefits to former holders); Prodigy, 2002 WL 1767543, at *4 (same); Resorts Int’l, 1988 WL
92749, at *10-11 (same).
54
outstanding on July 25, 2013.” Under that definition, all shares outstanding as of July 25
are Class Shares, regardless of whether or not they were held by the defendants or their
affiliates. The certification order excluded defendants and their affiliates from the Class
because the court could have found that the defendants were wrongdoers and ordered
them to pay damages to the Class. If that occurred, then the exclusion ensured that the
defendants and their affiliates would not share in the recovery. But that did not mean that
the shares were not Class Shares or that an unaffiliated successor could not participate in
the recovery. For example, Vivendi owned over 41 million shares on July 25 that Vivendi
later sold to the public. Those shares were Class Shares, but if there had been a class
recovery while Vivendi or its affiliates still owned them, then Vivendi and its affiliates
could not have participated. Any amount that would have gone to Vivendi or its affiliates
would have been redistributed among the other members of the Class. Once Vivendi sold
its shares, however, Vivendi‟s unaffiliated successors could receive their pro rata share
of any recovery. In my view, the certification order properly excluded the defendants
from participating in any recovery and is not ambiguous in this respect.
As to the second category of shares—those issued by Activision after July 25,
2013—Hayes is correct. Those shares are not Class Shares. But for the purposes of the
strong Delaware corporate law claims that were advanced in this litigation and formed
the basis for the Settlement, the distinction does not matter. The Delaware causes of
55
action arose when Board approved the Stock Purchase Agreement on July 25, 2013.25
Stockholders as of that date possessed those causes of action, and when they sold their
shares, the claims and the right to participate in any recovery passed with them. Holders
of shares issued after July 25 did not have any Delaware corporate law claims, so there is
no need to identify holders of non-Class Shares for purposes of the release.
As discussed, it is possible that some persons might have personal claims, such as
federal securities law claims. It is likewise possible that some of those persons might
have bought or sold non-Class Shares. If that subset of persons has claims that are not
released by the Settlement, then so be it. The defendants did not bargain for a release of
those claims (likely because the claims are at best hypothetical). The time to address any
administrative issues associated with litigating those claims would be in the next case, not
this one, and only if the claims (whatever they might be) could survive a motion to
dismiss. It is passing strange for Hayes to object to the Class definition as being too
25
See Kahn v. Seaboard Corp., 625 A.2d 269, 270 (Del. Ch. 1993) (Allen, C.) (“The
wrong attempted to be alleged is the use of control over Seaboard to require it to enter into a
contract that was detrimental to it and beneficial, indirectly, to the defendants. Any such wrong
occurred at the time that enforceable legal rights against Seaboard were created.”); accord In re
Mobilactive Media, LLC, 2013 WL 297950, at *10 (Del. Ch. Jan. 25, 2013); Sutherland v.
Sutherland, 2010 WL 1838968, at *9 (Del. Ch. May 3, 2010); Hokanson v. Petty, 2008 WL
5169633, at *5 (Del. Ch. Dec. 10, 2008) (Strine, V.C.); In re Coca-Cola Enters., Inc., 2007 WL
3122370, at *5 (Del. Ch. Oct. 17, 2007), aff’d sub nom. Int’l Bhd. Teamsters v. Coca-Cola Co.,
954 A.2d 910 (Del. 2008) (ORDER); see also Albert v. Alex Brown Mgmt. Servs., Inc., 2005 WL
1594085, at * 18 (Del. Ch. June 29, 2005) (“[A] claim accrues at the time of the alleged
wrongdoing, and not when the plaintiff suffered a loss.”); Schreiber v. R.G. Bryan, 396 A.2d
512, 516 (Del. Ch. 1978) (“[W]hat must be decided is when the specific acts of alleged
wrongdoing occur, and not when their effect is felt.”).
56
narrow. This shows that Hayes is really just trying to gum up the works, not raise
legitimate objections. In my view, the Class definition is not ambiguous.
3. Recertification
For their part, the parties to the Stipulation ask the court to recertify the Class to
add the following language to the definition: “For avoidance of doubt, the Class includes
anyone who acquired a Class Share after July 25, 2013.” Stipulation, ¶ 1.1. This sentence
is superfluous. As indicated by the prepositional phrase “[f]or avoidance of doubt,” the
language is confirmatory. Anyone who acquired a Class Share after July 25 is an assignee
or transferee of, or a successor-in-interest to, a holder of a Class Share on July 25. There
is no need to recertify the Class on that basis.
C. The Adequacy Of Notice
Court of Chancery Rules 23(e) and 23.1 require that notice of a proposed
compromise of a representative action be provided to stockholders or class members “in
such manner as the Court directs.” Ct. Ch. R. 23(e) & 23.1. Adapting his premise to the
notice phase, Hayes argues that the Seller Class did not receive a mailed notice. He also
argues that the notice did not adequately describe the claims or the fact that the Seller
Class is not receiving any consideration. These objections lack merit.
1. The Adequacy Of Mailing
“[I]n the context of a proposed settlement, the Court typically enters a scheduling
order that, in addition to setting a date for a settlement hearing, tentatively approves the
form and content of the notice and sets forth the manner in which notice is to be given.”
Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the
57
Delaware Court of Chancery § 9.04[e] at 9-193 (2012). There is no requirement to mail a
settlement notice to every single class member who ever owned a share of a publicly held
company. Cf. Ct. Ch. R. 23(e) (permitting notice “by mail, publication or otherwise”).
In the current case, the court entered a scheduling order which addressed the
giving of notice. Paragraph 7 stated:
The Court approves, in form and content, the Notice of Pendency and of
Settlement of Action (the “Notice”) filed by the parties with the Stipulation
as Exhibit B and finds that the giving of notice substantially in the manner
set forth herein meets the requirements of Court of Chancery Rules 23 and
23.1 and due process, is the best notice practicable under the circumstances
and shall constitute due and sufficient notice to all persons entitled thereto.
No later than sixty (60) calendar days prior to the Settlement Hearing (the
“Notice Date”), Activision shall mail, or cause to be mailed, by first class
U.S. mail or other mail service if mailed outside the U.S., postage pre-paid,
the Notice, substantially in the form annexed as Exhibit B to the
Stipulation, to all persons who are current stockholders of record or were
on July 25, 2013 record holders of common stock of Activision at their last
known address appearing in the stock transfer records maintained by or on
behalf of Activision. All Current Stockholders and all members of the Class
who are record holders of Activision common stock on behalf of beneficial
owners shall be directed to forward the Notice promptly to the beneficial
owners of those securities. Additionally, Activision shall use reasonable
efforts to give notice to all beneficial owners of common stock of
Activision by providing additional copies of the Notice to any record holder
requesting the Notice for purposes of distribution to such beneficial owners.
Dkt. 334 ¶ 7. The scheduling order further provided that “[n]o later than the Notice Date,
Activision shall also file a copy of the Notice as an exhibit to a Form 8-K with the
Securities and Exchange Commission. Id. ¶ 8.
Paragraph 7 of the scheduling order required that notice of the Settlement be
mailed to “all persons who are [i] current stockholders of record or [ii] were on July 25,
2013 record holders of common stock of Activision.” Id. ¶ 7. The notice thus went to two
58
readily identifiable stockholder lists that Activision‟s transfer agent could generate:
record holders on July 25, 2013, and record holders as of the date of mailing. Paragraph 7
also required that Activision use “reasonable efforts to give notice to all beneficial
owners of common stock of Activision by providing additional copies of the Notice to
any record holder requesting the Notice for purposes of distribution to such beneficial
owners.” Id.
Hayes argues that the use of two record dates created a gap that omitted the Seller
Class. In my view, the scheduling order could have required mailing only to a single list
of record holders as of the date of mailing. Notice need only be sent to record holders.
Am. Hardware Corp. v. Savage Arms Corp., 136 A.2d 690, 692 (Del. 1957). Delaware
law contemplates the use of a record date for delivering notice. See 8 Del. C. § 213; see
also id. §§ 211(c), 222, 228(e), 262(d). Using two record dates went beyond what
Delaware law requires.
Hayes also challenges the sufficiency of the mailing because the affidavit recites
that the notice went to (i) record holders based on “a list from counsel” and (ii) to a
database of “the largest and most common” nominees. Hayes questions the accuracy of
counsel‟s list, but he has not offered any specifics. Absent evidence to the contrary, the
court can rely on counsel to assist the Company in performing its obligations under the
scheduling order. Returning to his focus on the Seller Class, Hayes posits that some
members of the Seller Class might hold stock through nominees that were not in the
database. “If an owner of stock chooses to register his shares in the name of a nominee,
59
he takes the risks attendant upon such an arrangement, including the risk that he may not
receive notice of corporate proceedings.” Am. Hardware, 136 A.2d at 692.
Activision used reasonable efforts to give notice to nominees and other beneficial
owners. The use of a large database of common nominees accomplished this, as did the
availability of additional notices for nominees who requested them. The settlement
administrator caused over 180,000 copies of the notice to be mailed. The filing of a copy
of the notice as an exhibit to a Form 8-K provided an additional means for beneficial
owners to receive notice.
The record at the settlement hearing provided further evidence of the adequacy of
notice. The public announcement of the basic terms of the Settlement in November 2014
was national news. ASAC promptly filed with the SEC an amended Schedule 13D setting
forth the basic terms. Soon thereafter, the monetary portion of the Settlement was ranked
as the largest cash derivative settlement in history. In addition to the Form 8-K,
Activision has been featured the Stipulation and Notice prominently on the Investor
Relations tab of its website.
Hayes himself did not require notice, and he timely objected. No one in the Class
joined Hayes in objecting to notice or to the merits of the Settlement. In my view, notice
was adequately distributed.
2. The Contents Of The Notice
A notice of settlement “need not adhere to the stringent disclosure requirements
governing prospectuses for the marketing of securities under the federal disclosure laws.”
Wolfe & Pittenger, supra, § 9.04[e] at 9-194; see also Prince v. Bensinger, 244 A.2d 89,
60
92 (Del. Ch. 1968). A notice of settlement is sufficient if it “contains a description of the
lawsuit, the consideration for the settlement, the location and time of the settlement
hearing, and informs class members that additional information can be obtained by
contacting class counsel.” PHLX I, 945 A.2d at 1135 n.13. A notice is “not required to
eliminate all occasion for initiative and diligence on the part of the stockholders.” Braun
v. Fleming-Hall Tobacco Co., 92 A.2d 302, 309 (Del. 1952). An adequate notice
describes the settlement, “puts stockholders upon notice as to the general nature of the
subject matter, and warns them that their substantial interests are involved.” Geller v.
Tabas, 462 A.2d 1078, 1080 (Del. 1983). Armed with this information, any party
interested in learning more can contact class counsel or “easily obtain all the details of
the terms by examining the file in the Court of Chancery.” Braun, 92 A.2d at 309.
According to Hayes, the most glaring deficiency is what he believes to be an
inadequate description of the Class damages claim. The Notice states that
[t]he Complaint seeks derivative and direct relief against the Vivendi
Defendants, the Special Committee Defendants, the Management
Defendants, and the ASAC Defendants with respect to the [Restructuring].
The Complaint alleges that the Vivendi Defendants, the Special Committee
Defendants and Management Defendants breached their fiduciary duties by
entering into the [Restructuring], and that the ASAC Defendants aided and
abetted those alleged breaches. Among other things, the Complaint alleges,
and the Defendants deny, that the Management Defendants usurped a
corporate opportunity in purchasing shares of stock from Vivendi at a
discount to the market price and obtained control over Activision, and that
Vivendi assented to the [Restructuring] to obtain desired liquidity. The
Complaint also challenges the initial appointment and subsequent re-
nomination and reelection by some or all of the Special Committee
Defendants and Management Defendants of directors Peter Nolan and
Elaine Wynn to the Activision Board as a breach of fiduciary duty and a
breach of the Stockholders Agreement by ASAC.
61
Notice ¶ 19. In my view, this paragraph adequately describes the claims. A stockholder
that wished to find out more information about the particular claims being asserted could
contact Lead Counsel or consult the docket.
Hayes also objects to the Notice‟s statement that the benefits of the Settlement
inure directly to Activision and indirectly to the Class. In particular, Hayes criticizes the
following language:
Because this Action was brought as a class and derivative action on behalf
of and for the benefit of a class of stockholders and Activision, the benefits
of the Settlement will go to both Activision and the Class, as defined
below. Individual Class members will not receive any direct payment of
funds from the Settlement, but will obtain the benefits from the Settlement
that are described in paragraph 29 below.
Notice at 2. This statement is not only non-objectionable; it is accurate.
Last, Hayes contends that the Notice contains confusing descriptions of who can
object to the Settlement and when objections are due. Experience demonstrates that
objecting stockholders are not sticklers about complying with the procedures for filing
objections, and the court generally considers objections on the merits. “[I]n the absence
of resulting prejudice to other participants, the Court‟s general practice has been to hear
and consider all such objections and to deal with them substantively, notwithstanding the
objector‟s failure to comply with the letter of the notice.” Wolfe & Pittenger, supra, §
9.04[d] at 9-192. In the current case, I am confident that if anyone other than Hayes had
objected to the quality of notice or the substantive terms of the Settlement, they would
have come forward. The Settlement was too widely publicized and represents too
62
significant a development for Activision to reach any other conclusion. In my view, the
contents of the Notice were adequate.
D. The Adequacy Of The Settlement Consideration
Perhaps the most important task that the court has when considering a settlement
in a representative action is to evaluate the adequacy of the settlement consideration.
Determining adequacy does not require a definitive evaluation of the case on its merits.
“To do so would defeat the basic purpose of the settlement of litigation.” Rome, 197 A.2d
at 53. The reviewing court instead should consider multiple factors including “(1) the
probable validity of the claims, (2) the apparent difficulties in enforcing the claims
through the courts, (3) the collectability of any judgment recovered, (4) the delay,
expense and trouble of litigation, (5) the amount of the compromise as compared with the
amount and collectability of a judgment, and (6) the views of the parties involved, pro
and con.” Polk v. Good, 507 A.2d 531, 536 (Del. 1986). “The Court must especially
balance the value of all the claims being compromised against the value of the benefit to
be conferred . . . by the settlement.” In re MCA, Inc., 598 A.2d 687, 691 (Del. Ch. 1991).
In framing the standard that this court should apply when evaluating a settlement,
the Delaware Supreme Court has used interchangeably concepts of fairness,
reasonableness, and business judgment.26 When applied to fiduciaries making decisions
26
See In re Infinity Broad. Corp. S’holders Litig., 802 A.2d 285, 289 (Del. 2002) (“Any
decision of the Court of Chancery regarding the fairness of a proposed settlement is within the
discretion of that court and requires an application of its own business judgment”); Ala. By-
Prods. Corp. v. Cede & Co. ex rel. Shearson Lehman Bros., Inc., 657 A.2d 254, 260 (Del. 1995)
(“The unique fiduciary nature of the class action requires the Court of Chancery to participate in
the consummation of any potential settlement to determine its intrinsic fairness”); Kahn v.
63
in other contexts, each concept ties to a different standard of judicial review: respectively,
the entire fairness test, the intermediate standard of enhanced scrutiny, and the business
judgment rule. The burdens on the parties and the court would vary greatly depending on
which standard of review the Delaware Supreme Court intended.
Sullivan, 594 A.2d 48, 59 (Del. 1991) (describing trial court‟s determination as whether the
settlement is “fair and reasonable”); Resorts Int’l, 570 A.2d at 266 (explaining that “[i]n essence,
the trial court‟s function is to exercise its business judgment in deciding whether the settlement is
reasonable in light of the factual and legal circumstances of the case”; calling on trial court to
consider “[a]ll challenges to the fairness of the settlement” when “deciding whether the
settlement is reasonable”; further stating that the Supreme Court reviews deferentially the trial
court‟s determination of “the reasonableness of the settlement” and that the Supreme Court does
not independently judge “the intrinsic fairness of the settlement”); Barkan v. Amsted Indus., Inc.,
567 A.2d 1279, 1284 (Del. 1989) (stating that “when the Court of Chancery reviews the fairness
of a settlement, it must evaluate all of the circumstances of the settlement by using its own
business judgment”; noting that “the Court of Chancery‟s most important yardstick of a
settlement‟s fairness is its business judgment”; describing the trial court‟s task as evaluating “the
fairness of the settlement” and stating that the Supreme Court does not “evaluate independently
the intrinsic fairness of the settlement”); Nottingham P’rs v. Dana, 564 A.2d 1089, 1102-1103
(Del. 1989) (stating that “[t]he reasonableness of a particular class action settlement is addressed
to the discretion of the Court of Chancery, on a case by case basis, in light of all of the relevant
circumstances”; also stating that the Court of Chancery must determine whether to approve the
settlement “as reasonable through the exercise of sound business judgment”); Polk, 507 A.2d at
536 (stating that the trial court must determine whether the settlement is “fair and reasonable”;
explaining that the trial court “exercises a form of business judgment to determine the overall
reasonableness of the settlement”; noting that the Supreme Court does not independently
“determine the intrinsic fairness of the settlement”); Fins v. Pearlman, 424 A.2d 305, 308-309
(Del. 1980) (stating that “the Court of Chancery is to use its own business judgment to determine
whether the settlement is intrinsically fair” and that “[t]he Court of Chancery‟s responsibility and
function is to examine the proposed settlement‟s intrinsic fairness”); Neponsit Inv. Co. v.
Abramson, 405 A.2d 97, 100 (Del. 1979) (“In determining whether or not to approve a proposed
settlement of a derivative stockholders‟ action in these circumstances, the Court of Chancery is
called upon to exercise its own business judgment.”); Rome, 197 A.2d at 53-54 (Del. 1964)
(stating that “[b]ecause of the fiduciary character of a class action, the court must participate in
the consummation of a settlement to the extent of determining its intrinsic fairness”; further
stating that the court discharges its function by determining if the settlement is “reasonable”;
citing factors for trial court to consider “through the exercise of sound business judgment”;
noting that on appeal the Supreme Court does not “determine the intrinsic fairness of the
settlement in the light of [its] own business judgment”).
64
I have attempted to distill a single, practical standard from the various
formulations deployed in the Delaware Supreme Court opinions. In my view, the court‟s
role when acting as a fiduciary in the settlement context is
to determine whether the settlement falls within a range of results that a
reasonable party in the position of the plaintiff, not under any compulsion
to settle and with the benefit of the information then available, reasonably
could accept. In this sense, the Court‟s task is analogous to that of an
attorney (also a fiduciary) who is asked by a client whether a settlement
seems reasonable. The ultimate decision whether or not to settle rests with
the client—indeed, it falls within the client‟s “business judgment”—but the
lawyer appropriately can apply legal knowledge and experience to make an
assessment of the likely outcomes so as to advise the client on whether the
settlement is one that the lawyer believes the client legitimately could
accept. The resulting judicial inquiry is most akin to range-of-
reasonableness review, and the submissions and presentations received by
the Court in a settlement hearing are consistent with that standard.
Forsythe v. ESC Fund Mgmt. Co. (U.S.), 2013 WL 458373, at *2 (Del. Ch. Feb. 6, 2013).
The Delaware Supreme Court has recognized that when evaluating a settlement, a
trial court can determine initially whether the settlement consideration as a whole
provides adequate consideration for a global release. PHLX I, 945 A.2d at 1136. If it
does, the trial court can approve the settlement and then evaluate separately whether the
settlement reasonably allocates the pool of available consideration among various
claimants. Id. In my view, the Settlement easily warrants approval.
1. The Monetary Consideration
The monetary consideration of $275 million is the largest cash recovery ever
achieved on stockholder derivative claims. The magnitude of the Settlement reflects that
Lead Counsel advanced strong claims for breach of the duty of loyalty. That does not
mean that the claims were without risk. Articulate witnesses, skilled counsel, and
65
polished experts would contend that (i) the Restructuring was highly beneficial to
Activision and its stockholders, (ii) Kotick and Kelly‟s personal investment of $100
million was instrumental to putting a deal together and the positive stock price reaction,
(iii) it was beneficial to take the stock that ASAC purchased off the market for one to
four years, (iv) the secondary offering proposed by Vivendi was not viable, was
presented for tactical reasons, and posed the risks that Vivendi might retain a large stake
or the stock price might not increase as much as it did, (v) it was unreasonable to
negotiate an alternative transaction structure given the billions of dollars needed to
eliminate Vivendi‟s controlling stake, and (vi) any hypothetical alternative structure
would be too speculative to credit.
In addition to the risks of losing on liability, there was risk associated with the
possible remedies. Lead Counsel sought three potential monetary remedies: restitution,
damages to Activision, and damages to unaffiliated stockholders. Lead Counsel correctly
perceived that the court would be unlikely to require restitution from Kotick and Kelly
and award damages against them. See Bomarko, Inv. v. Int’l Telecharge, Inc., 794 A.2d
1161, 1190 (Del. Ch. 1999) (concluding on the facts of the case that “any order requiring
disgorgement would constitute a double recovery for the plaintiffs”).
Restitution was the most likely and straightforward remedy. When the
Restructuring closed, Kotick and Kelly achieved an immediate unrealized net profit of
$178 million, and the present value of ASAC GP‟s projected gains after four years
(assuming a 9.0x trading multiple) was $253.1 million (after deducting Kotick and
Kelly‟s initial investment and without considering their entitlement to interest). An order
66
requiring disgorgement of these gains to Activision was a logical and plausible outcome,
but it could have had collateral consequences for Activision. A final judgment holding
Kotick and Kelly liable for breaching their duty of loyalty might have led to questions
about their future with Activision and generated uncertainty about the Company‟s
prospects. The certainty of the $275 million settlement payment compares favorably with
the disgorgement remedy and avoids this risk.
An award of damages to Activision based on a disloyal failure to pursue the Over-
the-Wall Transaction provided another logical remedy. The operative question was what
price the court would find that an equity investor would have paid to buy a large block of
Activision stock in advance of the public announcement of a repurchase transaction by
Activision at $13.60 per share. Assuming the court used the then-current market price of
$15.18 per share, this measure would translate into a damages award of $271.7 million. If
the court used a higher figure, the damages would be greater, but if the court found that
Activision would sold fewer shares in the Over-the-Wall Transaction than ASAC
purchased in the Restructuring, then the damages would be less. The certainty of the $275
million settlement payment compared favorably with this outcome as well.
The least likely alternative was an award of damages to the Class based on the
failure to pursue the Rights Offering, secondary offerings, or other alternatives. The
defendants had a strong argument that as a matter of Delaware law, the unaffiliated
stockholders had no right to be included in a particular form of alternative transaction.
Lead Counsel would have had to establish that a loyal Board would have pursued a
67
transaction involving the public stockholders as the best available option, such that it was
disloyal for the Board to follow an alternative course.
It would have been difficult for Lead Counsel to establish that a loyal Board would
have pursued the Rights Offering. The factual record did not contain any references to a
Rights Offering, suggesting that it was not consciously avoided, and Lead Counsel‟s
expert did not find any strong transactional precedent. The Rights Offering would have
required public registration of the rights, creating potential delay and risk of non-
consummation, and pricing the rights at a discount to market to facilitate exercise was not
viable because of restrictions imposed on Vivendi by French law. The amount of value
that the stockholders might have obtained through a Rights Offering, and hence the
potential quantum of damages, would have been lower than a restitutionary award or a
damages recovery calculated based on the Over-the-Wall Transaction. The magnitude of
the $275 million settlement payment to Activision and the indirect benefits that
stockholders receive compare favorably with the risk-adjusted prospect of a damages
award to the Class based on a Rights Offering.
It would have been more straightforward for Lead Counsel to establish that a loyal
Board would have pursued at least some form of secondary offering, but that alternative
would not have supported as large a damages award as the Over-The-Wall Transaction.
As with the Rights Offering, there was no reason to suppose that Vivendi would price the
secondary offering below market, rather than at a higher market-clearing price. Nor was
it clear that only Activision‟s existing stockholders would have purchased the shares.
Third parties could have bought them, raising additional questions about the quantum of
68
damages. Once again, the certainty of a $275 million settlement payment to Activision
compares favorably to the alternative.
The monetary consideration provided by the Settlement also compares favorably
with what Hayes bargained for in the Draft MOU. Hayes has claimed that his settlement
was worth $85 million to Activision‟s public stockholders, but its actual value was less
than that headline figure. If the shares were equivalent to $70 million in cash, as Hayes
seemed to think, then the settlement was comparable to Activision making a $70 million
payment to the public stockholders. Paragraph 1(a) of the Draft MOU contemplated that
the issuance would take place within thirty days after the effective date of the
Restructuring. Once the Restructuring closed, the public stockholders would own 63% of
Activision, so the public stockholders would end up funding 63% of the $70 million. The
defendants only would fund 37% of the $70 million, or $25.9 million. The incremental
value that the settlement transferred to the public stockholders was therefore $25.9
million + $15 million, for a total of $40.9 million.
Another way to view the settlement contemplated by the Draft MOU is to measure
the public stockholders‟ share of the post-dilution value of Activision. Paragraph 1(a) of
the Draft MOU called for Activision to
[i]ssue a number of shares of common stock . . . equal to $70,000,000
(seventy million) USD divided by the average, i.e. mean, closing price,
rounded to the nearest cent, of a share of common stock of Activision on
the NASDAQ Global Select Market on the ten trading days (i.e., a day on
which a closing price for Activision common stock was quoted on
NASDAQ) preceding and including the Effective Date (the “Stock Price”)
on a pro rata basis to the members of the Class (as defined below) . . . .
69
Once the Restructuring closed, Activision would have 695.29 million shares of common
stock outstanding. Using for purposes of illustration a stock price of $16.28, which was
the closing price on October 9, 2013 (the date the Draft MOU was circulated), Activision
would have to issue approximately 4.3 million shares to provide the public stockholders
with nominal value of $70 million. After that number was added to the shares
outstanding, the percentage of stock owned by the public would increase by 0.22%. As of
October 9, Activision‟s stock price implied a total equity value for Activision of $11.319
billion. The settlement would not increase Activision‟s intrinsic value, only the public
stockholders‟ share of it. By increasing the public stockholders equity stake by 0.22%,
the settlement would increase their share of Activision‟s value by 0.22% of $11.319
billion, or approximately $25 million. The value of the settlement to the public
stockholders was again $25 million + $15 million, or approximately $40 million.
Compared to the consideration contemplated by the Draft MOU, the Settlement
provides an implied benefit to Activision‟s public stockholders of $173.25 million, given
their ownership of approximately 63% of the entity. Admittedly the comparison is not so
simple. The Draft MOU would have delivered its consideration a year earlier, and
because of the endowment effect, parties prefer actual ownership. See generally Daniel
Kahneman, Jack L. Knetsch & Richard H. Thaler, Anomalies: The Endowment Effect,
Loss Aversion, and Status Quo Bias, 5 J. Econ. Perspectives 193 (1991). Mathematically
speaking, the remedial equivalent of a direct payment of $40 million to the unaffiliated
stockholders would be a payment of $63.5 million to Activision ($63.5 * 0.63 = $40). But
because of the endowment effect and the time-value of money, stockholders would not be
70
indifferent between $40 million in cash paid to them in 2014 and $63.5 million paid to
Activision in 2015. For stockholders to regard those as equivalent, the amount paid to
Activision would have to be higher. Here, it is multiples higher. The Settlement yields an
indirect benefit for the public stockholders more than four times greater than the value
that would have been provided by the Draft MOU. In my view, the Settlement is superior
to the consideration that Hayes and his counsel championed as adequate.
The manner in which the Settlement was reached provides further evidence of its
reasonableness. It resulted from a protracted mediation conducted by a highly respected
former United States District Court Judge, with the negotiations taking place in the
shadow of an impending trial. See Ryan, 2009 WL 18143, at *5 (“The Settlement was
reached after . . . . hard fought motion practice before this court, and . . . a mediation
session with Judge Weinstein. The diligence with which plaintiffs‟ counsel pursued the
claims and the hard fought negotiation process weigh in favor of approval of the
Settlement.”). The negotiation process falls at the opposite end of the spectrum from the
routine disclosure-only settlements, entered into quickly after ritualized quasi-litigation,
that plague the M&A landscape.
2. The Non-Monetary Consideration
The non-monetary consideration provided important additional benefits. The
defendants‟ agreement to expand the Board by two seats and fill them with independent
individuals unaffiliated with Kotick and Kelly or any limited partner of ASAC is a form
of relief that Lead Counsel could not have obtained at trial. The addition of two new
independent directors in July 2015 creates a facially independent Board majority.
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The reduction of Kotick and Kelly‟s voting power from 24.9% to 19.9% similarly
helps ensure that control over Activision shifts away from Kotick and Kelly and towards
the public stockholders. The Committee tried to cap Kotick and Kelly‟s voting power at
19.9%, but Kotick and Kelly refused. Lead Counsel had argued that Kotick and Kelly‟s
block of 24.9%, coupled with the sizeable stakes owned by ASAC limited partners, gave
them working control, especially so long as Vivendi needed Activision‟s cooperation to
sell down its block through registered offerings. During the litigation, Lead Counsel
learned that one of the ASAC limited partners—Fidelity—had counterbalancing interests,
and Vivendi sold off its stake, increasing the public float and putting more shares in play
for purposes of any stockholder vote. Together, these events support the reasonableness
of capping Kotick and Kelly‟s voting power at the level desired by the Committee.
3. The Court’s Assessment Of The Adequacy Of The
Consideration
The consideration provided by the Settlement in exchange for a global release for
the defendants falls within a range of results that reasonable parties on the plaintiffs‟ side
(encompassing both Activision and the Class), not under any compulsion to settle and
with the benefit of the information then available, reasonably could accept. The
Settlement is therefore approved.
E. The Allocation Of Settlement Consideration
The Settlement compromises both derivative and class claims. No consideration is
passing directly to the Class. All of the monetary consideration flows to Activision,
benefitting the Company directly and its current stockholders indirectly. The non-
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monetary consideration likewise benefits the current stockholders indirectly. Hayes
objects to the failure to pay any consideration directly the Class, but this is hardly an
altruistic position. Hayes hopes that by reallocating the consideration, his counsel can
justify a fee award and partially rectify the injustice they feel they suffered in the
leadership dispute.
An allocation plan must be reasonable. PHLX I, 945 A.2d at 1137-38. A plan does
not have to compensate all potential claimants equally. “A reasonable plan may consider
the relative values of competing claims.” PHLX II, 965 A.2d at 667. The claims in this
case consist of (i) personal claims belonging to the Class, including the Seller Class, that
have not been articulated and are hypothetical at best, and (ii) strong Delaware corporate
law claims belong to Activision and its current stockholders.
The Settlement allocates no consideration to the unarticulated personal claims
belonging to the Class. This is reasonable. The Settlement was driven by the Delaware
corporate law claims. The probable validity of the unidentified personal claims is non-
existent, and the possibility that they might have led to a monetary recovery is entirely
hypothetical. “If it appears that those claims are weak or of little or no probable value or
would not likely result in any recovery of damages by individual stockholders, it is fair to
bar those claims as part of the overall settlement.” Triarc, 791 A.2d at 876. The court‟s
ability to bar weak personal claims extends to federal securities claims, even though the
claims could not be litigated in this court. Matsushita Elec. Indus. Co. v. Epstein, 516
U.S. 367 (1996).
73
The Settlement allocates all of the monetary consideration to Activision. This also
is reasonable. The Delaware corporate law claims that led to the monetary component of
the Settlement were the dual-attribute claims relating to the Restructuring. The only
purely direct claim that existed in the case was the Voting Right Claim that the Delaware
Supreme Court found meritless. Once that claim was rejected, the remaining claims were
either purely derivative, like Count XI, or had dual attributes. I believe that when
granting a remedy for dual-attribute claims, a court can impose a remedy at either the
corporate or the stockholder level as the facts and equities of the case requires. See,
supra, n.20. The same flexibility should exist when settling dual-attribute claims.
Hayes effectively contends that when settling dual-attribute claims, some form of
consideration must flow to the stockholders directly. At the same time, Hayes argues that
the claims that were asserted and the resulting damages theories were the same. 27 If so,
then in light of the one-for-one correspondence between the holders of the direct claims
(Activision‟s current stockholders) and the indirect beneficiaries of the derivative claims
(Activision‟s current stockholders), there is very little (if any) practical difference
between the two forms of settlement. If the consideration goes to Activision, current
stockholders receive their proportionate share of the benefits indirectly. If a proportionate
amount of the consideration goes to the unaffiliated stockholders directly, as Hayes
prefers, they receive approximately the same amount, after the deduction of more
27
See Dkt. 352 at 2 (“The class and derivative damages claims had the same liability and
damages theories.”); id. at 43 (“The class damages claims . . . tracked the derivative damages
claims.”).
74
significant administrative costs. Once again, the endowment effect must be considered,
but in my view, assuming the claims and recoveries are functionally equivalent, the
indirect benefits of the consideration adequately compensate the Class for the dual-
attribute claims. The advantage of using the derivative remedy is primarily one of
efficiency. Clark, supra, 289 (noting that the derivative action “elegantly sidesteps”
administrative issues associated with class litigation).
The foregoing analysis accepts Hayes‟ assumption that the derivative and class
remedies would be functionally equivalent. In reality, the prospects for a corporate-level
recovery were much stronger than the prospects for a stockholder-level recovery.
Derivative damages depended on the feasibility of the Over-the-Wall Transaction.
Restitution to Activision depended largely on the feasibility of (i) the Over-the-Wall
Transaction, (ii) the secondary offering alternative, or (iii) a hybrid of the two. Class
damages, by contrast, rested on establishing the feasibility of the Rights Offering, which
was an unlikely alternative. If Lead Counsel had focused on obtaining a Settlement that
provided consideration directly to the Class, Lead Counsel could not have obtained as
favorable a resolution of the case.
Perhaps ironically, the relief that Lead Counsel obtained on Count IX, the purely
derivative claim, inures predominantly to the Class. By reducing the cap on Kotick and
Kelly‟s voting power and by obtaining two additional Board seats for independent,
outside directors, Lead Counsel effectively increased the voting power and influence of
the unaffiliated shares. Although these corporate governance measures can be viewed as
good for Activision, they are primarily good for the Class.
75
In my view, the allocation of consideration in the Settlement is reasonable. Under
the circumstances of the case, the fact that the Class is not receiving any direct payment
does not provide grounds for disapproval or warrant reallocation.
F. The Fee Award For Lead Counsel
“Under the „common benefit‟ exception [to the general rule that a party must pay
its own counsel fees], a litigant may . . . receive an award of attorneys‟ fees if: (a) the
action was meritorious at the time it was filed, (b) an ascertainable group received a
substantial benefit, and (c) a causal connection existed between the litigation and the
benefit.” Dover Historical Soc’y, Inc. v. City of Dover Planning Comm’n, 902 A.2d 1084,
1089 (Del. 2006). The doctrine is “founded on the equitable principle that those who have
profited from litigation should share its costs.” Goodrich v. E.F. Hutton Gp., Inc., 681
A.2d 1039, 1044 (Del. 1996). “Otherwise, „persons who obtain the benefit of a lawsuit
without contributing to its cost [freeriders] are unjustly enriched at the successful
litigant‟s expense.‟” Id. (alteration in original; quoting Boeing Co. v. Van Gemert, 444
U.S. 472, 478 (1980)).
The power to award fees for a common benefit “is a flexible one based on the
historic power of the Court of Chancery to do equity in particular situations.”
Tandycrafts, Inc. v. Initio P’rs, 562 A.2d 1162, 1166 (Del. 1989). When awarding fees,
the Court of Chancery “must make an independent determination of reasonableness.”
Goodrich, 681 A.2d at 1046. When evaluating the reasonableness of a fee award, the
Court of Chancery considers the factors identified by the Delaware Supreme Court in
Sugarland Industries, Inc. v. Thomas, 420 A.2d 142 (Del. 1980). In Sugarland, the
76
factors appear diffusely throughout the opinion. The Delaware Supreme Court has since
summarized them concisely as follows: “1) the results achieved; 2) the time and effort of
counsel; 3) the relative complexities of the litigation; 4) any contingency factor; and 5)
the standing and ability of counsel involved.” Ams. Mining Corp. v. Theriault, 51 A.3d
1213, 1254 (Del. 2012).
1. The Benefits Conferred
“Delaware courts have assigned the greatest weight to the benefit achieved in
litigation.” Id. “When the benefit is quantifiable, . . . Sugarland calls for an award of
attorneys‟ fees based upon a percentage of the benefit.” Id. at 1259. The Delaware
Supreme Court has cited with approval this court‟s practice of “awarding lower
percentages of the benefit where cases have settled before trial” and awarding greater
percentages as the litigation progresses. Id.
When a case settles early, the Court of Chancery tends to award 10-15% of
the monetary benefit conferred. When a case settles after the plaintiffs have
engaged in meaningful litigation efforts, typically including multiple
depositions and some level of motion practice, fee awards in the Court of
Chancery range from 15-25% of the monetary benefits conferred. . . .
Higher percentages are warranted when cases progress to a post-trial
adjudication.
Id. at 1259-60 (footnotes omitted). “Delaware case law supports a wide range of
reasonable percentages for attorneys‟ fees, but 33% is the very top of the range of
percentages.” Id. (internal quotation marks omitted).
The incentive effect of using percentages that increase depending on the stage of
the litigation counteracts a natural human tendency towards risk aversion.
77
Just as it is human nature to regard your personal accomplishments and
performance as above-average (even exceptional), it is human nature to be
risk-averse. For plaintiffs‟ counsel, risk aversion manifests itself as a
natural tendency to favor an earlier bird-in-the-hand settlement that will
ensure a fee, rather than pressing on for a potentially larger recovery for the
class at the cost of greater investment and with the risk of no recovery.28
The promise of a larger potential share of the benefit nudges representative counsel‟s
incentives towards greater alignment with the class or entity on whose behalf they are
litigating.29
The incentive effects of the sliding scale apply equally to large and small
settlements. Risk aversion can be most problematic when entrepreneurial counsel are
negotiating for incremental dollars after investing much uncompensated time and
expense. As Chief Justice Strine explained while serving as a member of this court, “I‟ve
said this before and I will continue to say it—that, you know, you don‟t reduce people‟s
28
In re Orchard Enters., Inc. S’holders Litig., 2014 WL4181912, at *8 (Del. Ch. Aug 22,
2014); see also John C. Coffee, Jr., Understanding the Plaintiff’s Attorney: The Implications of
Economic Theory for Private Enforcement of Law Through Class and Derivative Actions, 86
Colum. L. Rev. 669, 690 (1986) (“[P]laintiff‟s attorneys have an incentive to settle prematurely
and cheaply when they are compensated on the traditional percentage of the recovery basis.”);
Alon Harel & Alex Stein, Auctioning for Loyalty: Selection and Monitoring of Class Counsel, 22
Yale L. & Pol‟y Rev. 69, 71 (2004) (“The class attorney‟s egoistic incentive is to maximize his
or her fees—awarded by the court if the action succeeds—with a minimized time-and-effort
investment. This objective does not align with a both zealous and time-consuming prosecution of
the class action, aimed at maximizing the amount of recovery for the class members.”). For now-
classic treatments of this problem, see Kevin M. Clermont & John D. Currivan, Improving on the
Contingent Fee, 63 Cornell L. Rev. 529, 543-46 (1978); Geoffrey P. Miller, Some Agency
Problems in Settlement, 16 J. Legal Stud. 189, 198-202 (1987); and Murray L. Schwartz &
Daniel J.B. Mitchell, An Economic Analysis of the Contingent Fee in Personal-Injury Litigation,
22 Stan. L. Rev. 1125, 1133-39 (1970).
29
See Forsythe v. ESC Fund Mgmt. Co., 2012 WL 1655538, at *5 (Del. Ch. May 9,
2012); In re Emerson Radio S’holder Deriv. Litig., 2011 WL 1135006, at *3-4 (Del. Ch. Mar.
28, 2011).
78
fees because they gain much. You should, in fact, want to create an incentive for real
litigation.” In re Am. Int’l Group, Inc. Cons. Deriv. Litig., C.A. No. 769-VCS, tr. at 9-10
(Del. Ch. Jan. 25, 2011).
This case settled one month before trial. “While there are outliers, a typical fee
award for a case settling at this stage of the proceeding ranges from 22.5% to 25% of the
benefit conferred.” Orchard, 2014 WL 4181912, at *8. Selecting an appropriate
percentage requires an exercise of judicial discretion. Ams. Mining, 51 A.3d at 1254.
Nevertheless, “from a systemic standpoint, departures from the precedential ranges
should be rare.” Orchard, 2014 WL 4181912, at *8.
If counsel can take the lesser bird-in-the-hand and get a greater percentage
from the court, then the incentive to press on is undermined. The reward for
an exceptional result comes not from a special appeal for case-specific
largesse, but rather from the percentage calculation itself. A percentage of a
low or ordinary recovery will produce a low or ordinary fee; the same
percentage of an exceptional recovery will produce an exceptional fee. The
wealth proposition for plaintiffs‟ counsel is simple: If you want more for
yourself, get more for those whom you represent.
Id. (citation omitted). As the Delaware Supreme Court has stated, the “common fund is
itself the measure of success.” Ams. Mining, 51 A.3d at 1259.
An award of 20% of the $275 million would be $55 million. An award of 22.5%
would be $61.88 million. An award of 25% would be $68.75 million.
In addition, Lead Counsel obtained substantial non-monetary relief. The
Settlement adds two independent directors and reduced Kotick and Kelly‟s voting power
from 24.9% to 19.9%. Establishing an independent Board majority and reducing the
stockholder-level control of insiders at a corporation with a market capitalization in
79
excess of $15 billion is a valuable non-monetary benefit. Precedent suggests that an
award of $5-10 million could be justified.30
2. The Complexity Of The Litigation
One of the secondary Sugarland factors is the complexity of the litigation. All else
equal, litigation that is challenging and complex supports a higher fee award.
The litigation in this case was more complex than the typical Court of Chancery
case. The legal issues were more complex because the Restructuring was a bespoke
transaction; it was not a familiar scenario such as a controller squeeze-out or a third-party
M&A deal. Vivendi‟s status as a foreign issuer raised additional complications. The
remedial issues were unique and forced Lead Counsel and their expert to develop
potentially precedent-setting theories of damages.
The factual issues in the case were particularly challenging. As noted, Lead
Counsel obtained and reviewed in excess of 800,000 pages of documents from the
defendants and numerous non-parties, as shown by the following table:
Producing Party Pages
Activision Blizzard, Inc. 220,325
Allen & Company 12,410
30
See In re Google Inc. Class C S’holder Litig., Cons. C.A. No. 7469-CS, tr. at 19-20
(Del. Ch. Oct. 28, 2013) (awarding $8.5 million plus expenses for a “largely corporate
governance settlement” in which “the benefits are substantial” and “somewhere between a solid
single and a double”); In re Yahoo! S’holders Litig., C.A. 3561-CC, let. op. at 1 (Del. Ch. Mar. 6,
2009) (awarding $8.4 million for “substantial benefit” of amending employee severance plan in a
manner that “made it less expensive to sell Yahoo, making the company a more attractive target
to potential suitors”); Minneapolis Firefighters’ Relief Assoc. v. Ceridian Corp., C.A. No. 2996-
CC (Del. Ch. Feb. 25, 2008) (awarding $5.4 million for empowering a potential buyer to present
a leveraged recapitalization proposal and eliminating a termination right for the merger partner in
the event a new slate of directors was elected before the merger closed).
80
ASAC II LP 4,479
Bank of America Merrill Lynch 967
Barclays Bank PLC 59,357
Centerview 60,327
Covington & Burling LLP (counsel to Tencent) 4,708
Davis Selected Advisors 7,974
FMR LLC 16,039
Goldman Sachs & Co. 74,903
JP Morgan 156,733
Brian Kelly 2,419
Robert Kotick 9,195
LGP 13,137
Special Committee 18,569
Vivendi 151,303
To obtain, review, and analyze these documents required significant effort, including
extensive and numerous follow-up communications with the producing parties to ensure
timely and comprehensive productions. Vivendi initially resisted production of its
electronic documents, resulting in a motion to compel and a written decision. See In re
Activision Blizzard, Inc. S’holder Litig., 86 A.3d 531 (Del. Ch. 2014). All defendants
asserted privileges and generated mammoth privilege logs, requiring extensive follow up.
Obtaining documents also required third party practice. For example, Lead
Counsel initially served a subpoena in Massachusetts on a Fidelity affiliate. After the
affiliate objected and moved to quash, Lead Counsel served a new subpoena on a
Delaware affiliate. Fidelity again objected, forcing Lead Counsel to move to enforce.
That motion was resolved when Fidelity relented and agreed to produce all responsive,
non-privileged documents.
Language issues further complicated matters. After this court overruled Vivendi‟s
objections, Vivendi produced numerous documents written in French. Lead Counsel had
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to identify the documents warranting unofficial and official translation, obtain the
translations, and review them.
Piecing together the chronology required mixing and matching documents from
multiple sources. In the ordinary course, Kotick and Kelly routinely deleted emails and
electronic files. Kotick often preferred receiving documents by fax rather than email and
considered it a good business practice to vet any communication orally before anything
was sent to him. Lead Counsel had to engage in careful detective work to understand
what happened, given the wholesale assertions of privilege and the contemporaneous
destruction of documents.
Also as noted, Lead Counsel deposed twenty-three fact witnesses, as shown by the
following table:
Name Affiliation Date
Joseph Tuite Brian Kelly‟s family office June 11, 2014
Danton Goei Davis Selected Advisors June 18, 2014
Andrew Boyd Fidelity June 20,2014
Kris Galashan LGP June 25, 2014
Mark Fiteny JP Morgan July 1, 2014
Jean-François Dubos Director Defendant July 2, 2014
Frédéric Crépin Director Defendant July 3, 2014
Robert Pruzan Centerview July 8, 2014
Richard Sarnoff Director Defendant July 9, 2014
Régis Turrini Director Defendant July 9, 2014
Robert J. Corti Director Defendant July 15, 2014
Brian Kelly Director Defendant July 15, 2014
Gregory Dalvito Barclays Bank PLC July 16, 2014
Robert Morgado Director Defendant July 17, 2014
Robert Kotick Director Defendant July 22, 2014 &
Sept. 12, 2014
Jean-Rene Fourtou Vivendi July 23, 2014
Nancy Peretsman Allen & Company, LLC July 24, 2014
Philippe Capron Director Defendant July 24, 2014
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Michael Ronen Goldman Sachs & Co. July 29, 2014
Anwar Zakkour Former JP Morgan July 31, 2014
Peter Nolan LGP July 31, 2014
Jonathan Mattern Centerview August 7, 2014
Ian The Centerview August 8, 2014
The complicated legal issues and the need for extensive discovery made this case
more complex than most. This factor supports an award at the higher end of the range.
3. The Contingent Nature Of The Representation
Another secondary Sugarland factor is the contingent nature of the representation.
It is the “public policy of Delaware to reward risk-taking in the interests of shareholders.”
In re Plains Res. Inc., 2005 WL 332811, at *6 (Del. Ch. Feb. 4, 2005). Not all contingent
cases involve the same level of contingency risk.
Unlike the now-ubiquitous pre-closing expedited challenges to mergers that
are routinely settled with supplemental disclosures, [Lead] Counsel did not
enter the case with a ready-made exit. [Lead] Counsel faced risk in
pursuing a damages remedy, including the realistic possibility that [Lead]
Counsel would receive nothing for their time and effort.
Orchard, 2014 WL 4181912, at *9.
The prosecution of the litigation by co-lead counsel was a largely undiversified,
entrepreneurial undertaking. F&G and BE&S are both small firms, with two partners and
three partners respectively. Two partners from each firm were deeply involved in all
stages of the litigation and took or defended all of the depositions. Both firms had limited
ability to work on other cases and turned away potential new business. A partner of
BE&S took out a personal loan due to the litigation expense of this case. In addition,
F&G recapitalized itself effective April 30, 2014. In part to ensure that the firm could
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finance this litigation and operate regardless of its outcome, F&G took out a five-year
loan secured by personal guarantees from its two partners.
This case involved true contingency risk. This factor supports an award at the
higher end of the range.
4. The Time And Effort Expended
“The time and effort expended by counsel serves [as] a cross-check on the
reasonableness of a fee award.” In re Sauer-Danfoss Inc. S’holders Litig., 65 A.3d 1116,
1138 (Del. Ch. 2011). “This factor has two separate but related components: (i) time and
(ii) effort.” Id. “The time (i.e. hours) that counsel claim to have worked is of secondary
importance.” Id. “[M]ore important than hours is effort, as in what plaintiffs‟ counsel
actually did.” Ams. Mining, 51 A.3d at 1258 (internal quotation marks omitted).
As demonstrated by the discussion of the complexities of the litigation, Lead
Counsel did a lot. And they did it all under the pressure of a schedule designed to get the
case to trial within one year. Lead Counsel did not throw a horde of junior timekeepers at
the matter that would have inflated the overall number of hours. It created efficiencies for
the four senior lawyers who comprised the trial team to take all of the depositions, work
with the expert, and immerse themselves in all facets of the case. While the size of the
award implies a generous hourly rate, in this case it is justified by the effort.
5. The Standing And Ability Of Counsel
No one disputes the standing or ability of counsel or argues that the award should
be adjusted downward because of this factor. To the contrary, Lead Counsel brought a
particular blend of expertise, initiative, and ingenuity to the case. In my view, few
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litigation teams could have achieved this result against the determined, well-represented,
and aggressive adversaries that Lead Counsel faced.
6. Deference To A Negotiated Agreement
The Delaware Supreme Court has held that “the Court of Chancery must make an
independent determination of reasonableness on behalf of the common fund‟s
beneficiaries, before making or approving an attorney‟s fee award.” E.F. Hutton, 681
A.2d at 1046. As this court has observed, E.F. Hutton “unequivocally” requires that
“where plaintiffs and defendants agree upon fees in settlement of a class action lawsuit, a
trial court must make an independent determination of reasonableness of the agreed to
fees.” In re Nat’l City Corp. S’holders Litig., 2009 WL 2425389, at *5 (Del. Ch. July 31,
2009) (internal quotation marks omitted), aff’d, 998 A.2d 851 (Del. 2010). “The fact that
a fee is negotiated . . . does not obviate the need for independent judicial scrutiny of the
fee because of the omnipresent threat that plaintiffs would trade off settlement benefits
for an agreement that the defendant will not contest a substantial fee award.” Id. at *5.
Notwithstanding these statements, some of this court‟s decisions speak of giving
deference to a negotiated fee agreement.31 In my view, any apparent tension can be
harmonized by differentiating between evaluating a range of reasonableness and
determining a specific amount. Under Delaware Supreme Court precedent, the court must
31
See Prodigy, 2002 WL 1767543, at *6 (“Where, as here, the fee is negotiated after the
parties have reached an agreement in principle on settlement terms and is paid in addition to the
benefit to be realized by the class, this court will also give weight to the agreement reached by
the parties in relation to fees.”); In re AXA Fin., Inc., 2002 WL 1283674, at *7 (Del. Ch. May 22,
2002) (same).
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determine that the award falls within a reasonable range. If it does, then a court can defer
to the parties‟ negotiated amount. See Forsythe, 2012 WL 1655538, at *7 (remarking that
a negotiated fee application which “falls within a reasonable range [warrants] deference
to the parties‟ negotiated amount”).
After reaching agreement with defendants on the substantive terms of the
settlement, Lead Counsel and Activision negotiated an agreement whereby defendants
would not oppose an application for a fee award up to $72.5 million. Assuming that the
non-monetary benefits support an award of $5-10 million, the agreed-upon fee ranges
from 22.7% to 24.5% of the monetary benefit. This falls within the range of
reasonableness for the stage at which the litigation settled. This decision therefore
approves as reasonable the fee award of $72.5 million that was negotiated after
agreement on the substantive settlement terms.
G. No Fee Award For Pfeiffer And Benston’s Counsel
Pfeiffer and Benston have sought a fee award for their counsel. They have made
this claim jointly, because neither was involved for the duration of the case. In
September, after Hayes and Pacchia filed suit, Pfeiffer made a Section 220 demand.
When Hayes‟ counsel circulated the Draft MOU, Pfeiffer‟s demand was still outstanding.
After the Delaware Supreme Court‟s decision, Pfeiffer filed a Section 220 action, but he
dismissed it when Activision challenged his status as a stockholder. Pfeiffer‟s counsel
then found Benston, who made a Section 220 demand, followed up with a Section 220
action, and obtained documents in February 2014, after Lead Counsel was already deep
into the merits.
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According to Pfeiffer and Benston, their counsel deserves a fee award of $7.25
million. They should get this amount because when Hayes‟ counsel tried to settle the
case, they attempted to get Pfeiffer‟s counsel on board. Pfeiffer‟s counsel declined to sign
the Draft MOU. Pfeiffer and Benston claim that their counsel “prevented an inferior
settlement from being consummated, paving the way for the . . . Settlement currently
before the Court.” Dkt. 349 at 7.
The power to award fees for a common fund or benefit “is a flexible one based on
the historic power of the Court of Chancery to do equity in particular situations.”
Tandycrafts, 562 A.2d at 1166. “Not everyone who contributes to a benefit gets a fee
award.” Orchard, 2014 WL 4181912, at *9.
One of the factors identified in Sugarland is “whether the plaintiff can rightly
receive all the credit for the benefit conferred or only a portion thereof.”32 The law has
long recognized a distinction between an abstract causal connection and a proximate
cause. “[H]arm flowing from an event in the but-for sense at some point becomes too
attenuated to give rise to liability. Our law will not award damages for a kingdom when
the wrong concerns a two-penny nail.” NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1,
32
Plains Res., 2005 WL 332811, at *3; accord Allied Artists Pictures Corp. v. Baron,
413 A.2d 876, 878 (Del. 1980) (explaining that Delaware public policy is to compensate counsel
“for the beneficial results they produced” and requiring both a meritorious claim and “a causal
connection to the conferred benefit”); Aaron v. Parsons, 139 A.2d 365, 367 (Del. Ch.)
(“[C]ounsel for plaintiffs are entitled to be compensated for the part played by this suit insofar as
it contributed to the benefits received by the corporation in the settlement”), aff’d, 144 A.2d 155
(Del. 1958).
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32 (Del. Ch. 2009). Sufficient causal attenuation similarly can result in the denial of an
application for a fee award.
Pfeiffer and Benston claim that the defendants would have signed the Draft MOU
if their counsel had signed. That is not credible. At that point, Benston had not yet
appeared, and Pfeiffer only had made a Section 220 demand. He claimed to own a total of
two shares of stock, and Activision disputed whether he owned stock at all. Rather, the
defendants refused to sign because they were bullish on their chances before the
Delaware Supreme Court. They had written highly aggressive briefs and made new
factual and legal arguments that Hayes had not been able to counter fully for the first time
on appeal. As Hayes‟ counsel anticipated, the successful appeal killed the Draft MOU
because it removed the bargaining leverage that was a byproduct of this court‟s
injunction. Pfeiffer‟s counsel was not a meaningful threat.
Assuming Pfeiffer and Benston‟s counsel did play some attenuated role in the
defendants‟ decision not to sign, they can claim to have contributed causally to the
Settlement only in the metaphysical sense that the flap of a butterfly‟s wings in Beijing
may lead to a thunderstorm in Delaware, or that a stone thrown into the ocean off the
Canary Islands creates a wave which may someday wash the beaches of Lewes. This is
not a situation in which peer-reviewed statistical studies provide a responsible foundation
for awarding fees based on a contingent event. Cf. In re Compellent Technologies, Inc.
S’holder Litig., 2011 WL 6382523, at *22 (Del. Ch. Dec. 9, 2011) (relying on statistical
studies and expert report when exercising discretion regarding amount of award for
modifications to defensive measures).
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Pfeiffer and Benston mention halfheartedly their counsel‟s effort to get a piece of
the action on remand, but their application for an issue-specific role was denied. They did
not make any substantive contribution to the case. Because they did not generate benefits
for Activision or the Class, Pfeiffer and Benston‟s counsel are not entitled to a fee award.
H. The Special Award For The Lead Plaintiff
The defendants and Hayes object to the Lead Plaintiff receiving a special award of
$50,000. The defendants‟ objection will not be considered. They agreed not to “object to
or otherwise take any position on” the negotiated $72.5 million fee application.
Stipulation § 4.1. Elsewhere in the Stipulation, they purported to reserve their right to
object to the Lead Plaintiff award. Id. § 4.3. In my view, they lack standing to do so. The
defendants agreed not to oppose a deduction of up to $72.5 million from the total amount
that otherwise would go to Activision. They cannot legitimately quibble about whether
0.0069% of the $72.5 million is allocated to the Lead Plaintiff, any more than they could
object to how the balance of the fee award is allocated among F&G, BE&S, and the
Rosenthal firm.
Hayes returns to his basic premise. He contends that when the Class only receives
benefits from the Settlement indirectly, the Lead Plaintiff should not get money directly.
The short answer to this objection is that Pacchia served as the Lead Plaintiff and is
receiving a payment in that capacity. The other stockholders did not.
Delaware decisions have approved similar awards for lead plaintiffs under similar
circumstances. See Orchard, 2014 WL 4181912, at *13 n.8 (collecting cases). The
amount is reasonable and will be paid out of Lead Counsel‟s fee, so the award does not
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harm Activision or the Class. The award has been fully disclosed and is not so large as to
raise the specter of a conflict of interest or an improper lawyer-client entanglement. The
Lead Plaintiff participated meaningfully in the case, sat for a deposition, and attended
hearings and the mediation. He has been subjected to vigorous attacks throughout these
proceedings, first by Hayes and his counsel during the leadership fight, next by the
defendants at the class certification phase, and now by both during the settlement phase.
The special award provides him with reasonable compensation for taking on the
additional burden of serving as lead plaintiff.
III. CONCLUSION
The Settlement is approved. Lead Counsel is awarded fees and expenses of $72.5
million. Pfeiffer and Benston‟s counsel are not entitled to any fee award. Lead Counsel
has permission to pay Pacchia a special award of $50,000 out of the amount of the fee.
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