On July 17, 2024, the Delaware legislature enacted significant amendments to the Delaware General Corporation Law (“DGCL”).1 The changes address critical issues raised by the Delaware Court of Chancery in Sjunde AP-fonden v. Activision Blizzard, Inc. about board approvals of merger agreements.2 The speed with which the Delaware legislature responded to Activision demonstrates the state’s acute sensitivity to commercial transactions and related market practices.
Background: The Activision Case and Its Repercussions
In Activision, a stockholder challenged the validity of a merger, alleging that the board failed to comply with certain sections of the DGCL.3 The main issue centered on the fact that the board was presented with, and thereafter approved, a draft of the merger agreement lacking key components, such as the price (though clearly discussed in board deliberations), the surviving company’s charter, and the company disclosure schedules – documents and details that were finalized later in negotiations.
The court’s opinion danced between (1) the plaintiff’s position, namely that the plain meaning of the statute requires the board to approve an execution version of the merger agreement, and (2) the defendant’s counter that the plaintiff’s position did not square with the norms of market practice. Boards routinely approve merger agreements in draft or near-final form, with disclosure schedules and other details being finalized “up until the moment a deal closes, if not beyond.”4
The court was able to avoid resolving the tension between these two positions because of the specific facts in this case. While not necessarily accepting the plaintiff’s position in full, it noted in down-to-earth fashion that “there was a lot of important stuff missing.” This allowed it to conclude that, at a bare minimum, the statute requires a board to approve an “essentially complete version of the merger agreement,” which the board did not do because of the missing details and documents.5
Notwithstanding the court’s seemingly common-sense interpretation of the merger approval requirements of the DGCL, the decision introduced uncertainty into common corporate practices. Boards often approve near-final drafts of merger agreements, with ancillary documents like disclosure schedules finalized later by officers pursuant to delegated authority. Historically, corporate attorneys have presented boards with forms or resolutions approving merger agreements and other significant transaction documents for approval “in substantially” final form. The court’s own opinion expressed some uncertainty as to whether certain omissions from the presented drafts were “essential” in the present case. Following this decision, conservative legal practitioners began insisting on attaching the final execution forms of transaction agreements to board consents or presenting them for board approval.
Legislative Response: Amendments to the DGCL
In response to these and other concerns raised by Activision, the Delaware legislature amended the DGCL just several months later by introducing several new provisions with a practical bent, including new Section 147.6 Section 147 allows boards to approve agreements, instruments, or other documents required by the DGCL in “final form or substantially final form.” A document is considered in substantially final form if all material terms are included or if those terms can be determined from information presented to or known by the board at the time of approval. This change acknowledges the practicalities of deal-making, where details may be finalized after board approval but before execution. Additionally, if any part of the approved agreement needs to be filed with the Secretary of State between the time of approval and the effective filing, the board can adopt a resolution ratifying the agreement, and such ratification is considered to relate back to the original approval date. This amendment seems to return the formalities of board approval of merger agreements back to common practices before the Activision decision.
Implications/Conclusion
Corporate practitioners, including those at our firm, routinely recommend organizing a business entity in Delaware due to that jurisdiction’s receptivity to business and focus on legal certainty. While the Delaware Chancery Court seemed to throw a complication into these considerations, it proved to be brief given the promptness of the legislature’s response to restore certainty to merger approval processes, aligning basic statutory requirements with practical business and governance realities.
For further guidance on how these changes may affect your transactions, please contact John Chu at jchu@princelobel.com or Jay Cho at jcho@princelobel.com, or any other member of Prince Lobel’s Business Transactions Practice Group.
1 See Original Synopsis to Del. S.B. 313, 152nd Gen. Assem. (Signed July 17, 2024), available at https://legis.delaware.gov/BillDetail/141480.
2 Sjunde AP-fonden v. Activision Blizzard, Inc., C.A. No. 2022-1001-KSJM (March 19, 2024).
3 Activision at 6..
4 Id at 14.
5 Id at 14.
6 See DGCL §§ 147, 232(g), and 268.