Category: Commercial Relationship

Delaware Supreme Court Discusses Meaning of “Business Combination” In Activision Vivendi Case

As it turns out, it isn’t ambiguous.

Link: Activision Blizzard Inc. v Hayes

In an appeal of an injunction, the Delaware Supreme Court took a look at whether a stock buyback would be a “business combination” requiring stockholder approval under Activision’s bylaws.

Background

Activision Blizzard Logo
Activision Blizzard fights for its rights to buyback its shares.

In 2008 Activision bought Vivendi’s video game subsidiary for Activision shares.  Vivendi also made a separate cash investment in Activision.  Activision’s bylaws were amended to require approval of unaffiliated stockholders with respect to any merger, business combination or similar transaction between Activision and Vivendi. In 2012, Vivendi wanted to sell its Activision stake but found no takers.  Activision agreed to a buyback, under which Vivendi would create a non-operating sub, “Amber,” to hold the assets for sale and Activision would purchase Amber. Activision did not seek stockholder approval, which was the part of the reason for the litigation, which resulted in a preliminary injunction.

Court’s Analysis

The court first looked to see if “business combination” was ambiguous.  Nope.

“A provision is ambiguous only if it is “reasonably susceptible to more than one meaning,” and the fact that the parties offer two different interpretations does not create an ambiguity. Moreover, a provision “may be ambiguous when applied to one set of facts but not another. Finally, the provision must be read in context.”

The court decided that while the meaning could be ambiguous in some contexts, it was not ambiguous here because under their agreement, Vivendi will sell 429 million shares of Activision stock back to Activision. Because those shares will become treasury stock, control of Activision will shift from Vivendi to Activision’s public stockholders. Vivendi’s holdings will decrease from 61% to 12%, and Vivendi’s representation on Activision’s board will decrease from six appointees to none.

Since there was no “combination or intermingling of Vivendi’s and Activision’s businesses,” it is not a business combination.  In fact it is the opposite of a business combination.  These companies will be separating themselves.  As a result, the stockholder approval requirement does not apply.

In addition, structuring the sale through Amber does not change the analysis.  Neither the form of the transaction nor its size changes its fundamental nature. Amber is a shell created to serve as the transaction vehicle.  The court stated that calling Amber a business “disregards its inert status” and “glorifies form over substance.”

The size of the deal does not change the analysis.  The plaintiffs argued that it was a “value-moving” transaction.  However, the bylaws do not require stockholder approval based on size of the deal.

In addition, the bylaws do not require stockholder approval for any deal between Activision and Vivendi, only specified transactions.  While the Chancery Court may have been looking out for the non-interested shareholders’ interests, other provisions of the bylaws already provided for independent director approval for related party transactions.

Startup Tips: Knowing When To Add Salespeople

When you work in the startup world, you see it over and over again.  A company has founders, a product and, maybe, some angel or friends and family investors.  It is time to get that product out the door and some cash in your pocket.

Many founders believe that their wonderful and innovative idea combined with their passion will explode into sales.  This is not always the case, particularly when your target market is other businesses.

Being an inventor, administrator, financier or (even) attorney is not the same thing as being a salesman.  Selling is a talent and a skill.  Not everyone is born with the ability to sell.  Not everyone has taken the time to develop this particular skill.  However, if your business depends on personal sales calls to buyers, whether they are end users or intermediaries, you may want to consider whether you should hire a dedicated salesperson.

Generally, when the product has been tested and is ready for entry into the market, it is a good time for the startup to have a committed salesperson on board.  Preferably that person would know the industry and show up with a ready-made contact list, as ‘Rolodex’ is so-old economy.  However, even a person who has sales experience and can understand the product will be preferable to an inventor or founder who may not have the right experience to turn an opportunity into revenue.

Whirlpool’s Unforced Negotiating Errors Does Not Make Its Contracts Unenforceable

Whirlpool Corporation v. The Grigoleit Company

The delightfully named Grigoleit supplied knobs to Whirlpool for many years, and was the sole supplier for a particular line of washing machines and dryers.  Whirlpool began to phase out these appliances.

As their arrangement became smaller, Grigoleit requested price increases.  They later entered into an agreement for a smaller supply of knobs at a higher price, subject to volume and inventory issues, for which Whirlpool was financially on the hook.

Whirlpool then kicked Grigoleit to the curb, and Grigoleit issued a final invoice.  Whirlpool refused to pay it and declared the agreement unconscionable.

In Michigan, a claim of unconscionability is subject to a procedural (What is the bargaining power of the parties?) and substantive (Is the challenged term reasonable?) analysis.

The court did not look at the substantive issue because it found no procedural issue.

“Although courts should not substitute their judgment for that of freely contracting parties, “[i]mplicit in the principle of freedom of contract is the concept that at the time of contracting each party has a realistic alternative to acceptance of the terms offered.””

The court noticed that Whirlpool was a large, sophisticated company and presumed it was capable of competent negotiation.  The court also noted that unconscionability is rarely found in the commercial context.

And the kicker:  the term that Whirlpool considered unconscionable was a term that was proposed by Whirlpool.

The court noted a few key points:

  • Grigoleit was the sole supplier in this case by Whirlpool’s own design.  It was a cost-saving measure on their own part.  It created the risk that a disagreement with its supplier would cause manufacturing disruptions.
  • An unfavorable contract term is not the same as an unconscionable contract term.
  • Whirlpool had the resources, experience and ability to look elsewhere for its parts.
Whirlpool’s future-looking gizmos from the 80’s to make your world a little easier.