Challenge to Merger of Video Game Makers Asks Del. High Court to Press Replay

A shareholder of video game maker Activision Inc. has asked the Delaware Supreme Court to reboot its suit challenging the "lenient" standard a judge used to evaluate the company's allegedly bargain-basement merger with "World of Warcraft" publisher Vivendi S.A.

In support of its appeal of the dismissal of its breach-of-duty action, the plaintiff, municipal pension fund Wayne County Employees' Retirement System, says the Chancery Court judge used the wrong yardstick to assess the 2008 merger that produced video game giant Activision Blizzard.

It says the court wrongly blessed the disloyal Activision officers who sold the company too cheaply with the protection of the business judgment rule, which gives the decisions of officers and directors the benefit of the doubt.

The plaintiff says the judge instead should have applied the "entire fairness" standard, which requires officers with conflicts of interest to explain why the transaction they engineered was the best deal that shareholders could get.

Vivendi subsidiary Vivendi Games created the multiplayer online game "World of Warcraft." Activision developed and distributed popular video games such as "GuitarHero," "Call of Duty" and the "Tony Hawk" skateboarding series.

Activision shareholders approved the combination, which provided for a stock purchase and tender offer of $27.50 per share, with Vivendi contributing its $8.1 billion games unit along with $1.7 billion in cash, according to the pension fund's suit.

That suit failed to convince the Chancery Court to enjoin the merger, and the pension fund later filed a second amended class-action complaint in which it claimed that the Activision board of directors did not provide full and fair disclosure to shareholders in connection with the vote to approve the deal.

Former Activision President and CEO Robert A. Kotick and board co-Chairman Brian G. Kelly controlled the sale process along with the company's advisers and favored their personal interests in the merger ahead of the shareholders', the suit claimed.

While the officers secured good jobs for themselves at the Activision Blizzard , the Activision shareholders allegedly were cheated out of the premium price they should have received for selling control of the company.

However, Chancellor William Chandler found that the control-premium allegation was simply a thinly veiled complaint that the merger price was too low.

The fact that Kotick's and Kelly's employment agreements were approved by Activision directors dispels any notion that they obtained employment benefits without the company's knowledge, the judge said.

In the appeal, the pension fund contends that when there is any evidence of self-dealing, as there clearly is here, judges must apply the entire-fairness standard.

"Plaintiff sufficiently alleged that the defendants Kotick and Kelly engaged in disloyal and unfair self-dealing in connection with the sale of control of Activision," the appellant says in its opening brief.

Moreover, the pension fund says, it sufficiently alleged that the Activision directors "acted unreasonably, in a manner not calculated to maximize value for Activision stockholders, and that their actions in this sale-of-control context constitute disloyal conduct."

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The plaintiff is represented by Pamela Tikellis, Robert Kriner Jr., A. Zachary Naylor and Meghan Adams of Chimicles & Tikellis in Wilmington, Del., and E. Powell Miller, David Fink, Brian Etzel and Darryl Bressack of the Miller Law Firm in Rochester, Minn.