In a ruling from the bench, Vice Chancellor Laster of the Delaware Court of Chancery granted a preliminary injunction to halt a closing pursuant to a stock purchase agreement under which Vivendi, S.A. (Vivendi) would sell down much of its stake in Activision Blizzard Inc. (Activision Blizzard). The court held that the transaction qualified as a "business combination" under the terms of Activision Blizzard's certificate of incorporation and would require majority-of-the-minority stockholder approval.

Activision Blizzard, a publicly traded Delaware corporation, is the holding company of Activision Publishing, Inc. and Blizzard Entertainment, Inc., each of which publishes many well-known video games for different platforms and consoles. As a result of a business combination agreement entered into in 2007, Vivendi, the French media conglomerate, came to own a majority of the outstanding common stock of Activision Blizzard.

On July 25, 2013, Vivendi, Activision Blizzard and a Cayman Islands entity named ASAC II LP entered into the stock purchase agreement at issue. The Cayman entity is backed by an investor group led by Activision Blizzard's CEO and (separate) co-Chairman. At the time of the signing, Vivendi beneficially owned 61.5% of Activision Blizzard's outstanding common stock. Much of that stake was held through Vivendi's ownership of Amber Holding Subsidiary Co. (Amber Holding), the direct owner of 428,676,471 shares of Activision Blizzard common stock. In addition to its ownership of Activision Blizzard common stock, Amber Holding also held $676 million in NOLs.

Under the stock purchase agreement, two separate sales would take place:

The prices paid under the agreement ascribed a value of $13.60 per share to the shares of Activision Blizzard, representing a discount of approximately 10% from Activision Blizzard's trading price before the announcement. Because Activision Blizzard was the primary buyer under the agreement, the discounted price would apparently benefit Activision Blizzard and its stockholders, and the trading price of Activision Blizzard rose substantially after the announcement of the agreement. Once the contemplated transactions were to close, Vivendi and ASAC would hold approximately 12% and 24.9% of Activision Blizzard's common stock, respectively.

The plaintiff stockholder sued to restrain the closing of the transactions, which would otherwise have taken place the day after the court hearing. (Because of a delay in bringing the suit, the court switched the standard of review from a temporary restraining order standard to the standard for preliminary junction, which requires a showing of reasonable probability of success on the merits.) The plaintiff claimed that under Section 9.1(b) of the certificate of incorporation of Activision Blizzard, a vote of the stockholders of Activision Blizzard unaffiliated with Vivendi is required to approve the proposed transactions. That section states:

The plaintiff argued that the phrase "business combination" was broad enough to capture the transactions contemplated by the stock purchase agreement. The defendants (including all the parties to the agreement) responded that the charter provision is intended to capture combinations between the controlling stockholder Vivendi and Activision Blizzard, such as if Vivendi were to seek to increase its stake in Activision Blizzard. By contrast, the transactions proposed here constitute a "divorce," in counsel's words, in which Vivendi sells down its stake in Activision Blizzard, and should not be construed as a "combination."

In its ruling from the bench, the court agreed with the plaintiff's reading of Section 9.1(b) of Activision Blizzard's charter and enjoined the closing of the transactions pending either a stockholder vote or overturn on appeal by the Delaware Supreme Court.

In its discussion, the court took note of the Martin Marietta decision, which also dealt with the phrase "business combination" in the context of a confidentiality agreement and found it to be a broad and potentially ambiguous term (see Legal Update, Martin Marietta: Delaware Court of Chancery Holds Use of Confidential Information in Hostile Bid Breaches Confidentiality Agreements). In particular, the Martin Marietta court held that the purchase of stock of a wholly owned subsidiary could qualify as a "business combination."

The court also recalled the Delaware Supreme Court's overturn of the Chancery Court's decision in Airgas on an issue of interpretation of the word "annual" in a corporation's by-law amendment (see Legal Update, Delaware Supreme Court Overturns Chancery Court Ruling on Airgas By-law Amendment). In Airgas, the Delaware Supreme Court placed greater emphasis on the historical understanding of terms and extrinsic evidence of the parties' intentions than on theories of construing organizational documents in favor of greater stockholder protection (though, in any event, each theory in this case would weigh in favor of a stockholder vote).

In determining that the phrase "business combination" captured the stock acquisitions here, the court:

The court recognized that the proposed transaction appears to be a good deal for Activision Blizzard's stockholders, not one from which they require protection. However, the court stressed that the voting right does not turn on whether a court thinks this the deal is good or not. The court pointed out that, if all else were held equal except that Activision Blizzard were paying a premium for the shares instead of a discount, the optics of the transaction would appear to mandate a stockholder vote.

The court's decision, though not technically precedential, should be taken to mean that the phrase "business combination," when used in a charter or by-laws, will be read broadly to encompass more than mergers alone. To avoid ambiguity, a charter that aims to submit certain transactions with interested stockholders to a stockholder vote should delineate the types of transactions that fall under the purview of the provision. For an example of a detailed charter provision for voting rights on business combinations, see Standard Clause, Certificate of Incorporation (DE): Supermajority Requirements for Certain Business Combinations.

More broadly, the case, which will be heard by the Delaware Supreme Court on October 10, 2013, will give that court a chance to provide further guidance on the interpretation of ambiguous organizational documents. The Chancery Court explained that it was following Airgas by reaching a common-sense reading of Activision Blizzard's charter, and in so doing placed significant weight on extrinsic evidence like the mechanics of the transaction to influence that reading. Counsel for the defendants, by contrast, argued that a common-sense reading of the term "business combination" should have meant simply that the charter only contemplated combinations, not separations. Similar to its Airgas decision, the Delaware Supreme Court will have a chance to explain how extrinsic evidence should be applied to arrive at a common-sense reading.