In the intricate dance of corporate mergers and acquisitions, the legal intricacies often resemble a labyrinth where every turn necessitates careful navigation. Take, for instance, the demands placed upon Delaware corporations contemplating a merger. Within the contours of Delaware law, a mandate stands firm: boards of directors must adopt a resolution that approves the merger agreement. Yet, reality paints a different picture; the drafts that boards often review are frequently mere shadows of their finalized counterparts—preliminary sketches still being refined. But herein lies a tantalizing question: Does this practice contravene the tenets of Delaware law?
The recent amendment to the Delaware General Corporation Law (DGCL) is a pivotal development in this saga. It stipulates that any agreement necessitating board approval must emerge in either a “final” or “substantially final” form at the moment of approval. This legislative shift arose in the wake of a landmark ruling by the Delaware Chancery Court, which sided with a stockholder asserting that the board had breached Delaware law by approving only a draft of the merger agreement. As corporate directors reflect on their responsibilities, this evolution in legislation accentuates the criticality of ascertaining whether the draft merger agreement presented is indeed substantially final before extending their approval.
Navigating the Statutory Landscape
Delving into DGCL Section 251(b), the requirements become apparent: the boards of those courageous Delaware corporations desiring to merge must not only pass a resolution endorsing an agreement of merger but also declare its advisability. This section delineates essential provisions that must be captured within the agreement, from the terms of the merger to the revision of the surviving corporation’s certificate of incorporation.
In the pulsating rhythm of M&A negotiations, it’s commonplace for the target board to bless the merger at a juncture when the agreement remains but a draft. The interlude between this approval and the final execution often sees the incorporation of final amendments, the completion of schedules, and attachments that were yet unformed.
The Activision Saga
Here, we turn our gaze toward a notable case: on January 17, 2022, Activision Blizzard’s board gave its nod to a merger agreement with Microsoft Corporation. Curiously, the document they approved was lacking key elements—most glaringly, a disclosure letter, specific schedules, and a definitive mention of the merger consideration, represented in the document merely by a conspicuous placeholder (“[●]”). Strikingly absent was a dividend covenant, a crucial factor considering the long path to obtaining antitrust clearance that loomed ahead—an issue flagged as a “key open” matter, unresolved at the time of approval.
This approval, however, proved enigmatic. Following January 17, the board did not revisit the merger agreement before it was finalized, which ultimately contained several critical components that the approved draft had overlooked.
Soon after, a stockholder took action, launching a lawsuit in November 2022, claiming that the directors of Activision—and by extension, the company itself and Microsoft—had trampled upon Section 251(b) by giving their assent to a not-fully-baked draft rather than a completed merger agreement.
In their defense, the accused directors argued that requiring the endorsement of a finalized document would clash with established market practices and breed uncertainty. In essence, it is routine for boards to approve merger agreements that are drafts or close to final form before they reach their complete incarnation. This practice becomes even more prevalent concerning ancillary documents like disclosure schedules.
In her ruling, Chancellor Kathaleen McCormick did not seek to unravel the complexities between the plaintiff’s insistence on an execution version and the defendants’ appeal to market norms. Instead, the court adopted an analytical stance, presuming that Section 251(b) does not explicitly require approval of an execution-version document.
Yet what, then, does Section 251(b) require? The chancellor illuminated a vital point: the law necessitates that boards approve agreements that are “essentially complete.” Without such completeness, she reasoned, the very mechanism of board approval would stand rendered pointless, as essential terms could shift substantially—thereby thwarting any genuine declaration of merger advisability. She also asserted that a board’s duty to ensure an essentially complete agreement is not merely a procedural task but a fundamental exercise of fiduciary responsibility.
As the court grappled with the qualities of the agreement approved by Activision’s board, it concluded that the document could plausibly lack key elements, rendering it not essentially complete. The absence of the defined merger consideration was significant, particularly given that references to the disclosure letter permeated the draft. This left the court to ponder: how much detail constitutes “essential” in an agreement poised for approval?
Legislative Ripples
In light of the discussions stirred by the Activision case, the Delaware legislature responded promptly, enacting amendments to the DGCL that came into effect on August 1, 2024. A noteworthy addition was the introduction of DGCL Section 147, which echoes the sentiment that any document statutorily required for board approval must be in a “final” or “substantially final” state. While the specifics of “substantially final” remain somewhat nebulous, legislative clarity indicates that all material terms must either be encapsulated in the agreement or discernible through additional information known to the board.
Key Insights
The ramifications of these developments are profound. Boards in Delaware must now tread carefully, ensuring that any draft of a merger agreement they are presented with stands up to scrutiny as being substantially final—including all pertinent schedules and disclosures. Should ambiguity arise regarding the completeness of the agreement, directors would be wise to demand additional insights from which material terms can be duly evaluated. Moreover, when crafting resolutions to endorse merger agreements, including language affirming the agreement’s substantial finality may further safeguard against potential disputes.
Ultimately, the provisions of the new Section 147 also furnish boards with a mechanism to ratify agreements post-approval but prior to the submission to the Secretary of State, reinforcing the status of the initially endorsed document as being substantially final.
In this era of heightened scrutiny, vigilance and clarity emerge as the guiding principles for Delaware corporate boards navigating the maze of mergers and acquisitions.
