$275 million Activision settlement faces protest over who gets payout

February 18, 2015

Remember the unusual structure of FreeportMcMoran’s $137.5 million settlement with investors last month? The settlement resolved shareholder derivative claims, brought by investors in the name of the corporation. Typically, the cash recovered in shareholder derivative litigation goes to the company’s treasury, which means investors benefit only indirectly. But Freeport agreed to distribute all of the settlement money (less attorneys’ fees) to shareholders in a special dividend. I hypothesized that the Freeport deal might be a new model for derivative suits, an answer to critics who call derivative litigation a mere shift of funds from one corporate pocket to another.

The question of who should get the cash has now cropped up in the biggest-ever derivative deal, a $275 million proposed settlement of claims that Activision investors were shortchanged in the company’s $6 billion buyback of shares from Vivendi in 2013. Last Thursday, lawyers for an Activision shareholder informed Vice-Chancellor Travis Laster of Delaware Chancery Court that they intend to file an objection to the proposed settlement. (Hat tip to The Chancery Daily.) Letters between those lawyers and lead counsel for the shareholder who reached the $275 million settlement make it clear that the objection centers on how settlement money should be allocated.

The structure of the proposed deal, according to the objecting shareholder’s counsel at Prickett Jones & Elliott and Kessler Topaz Meltzer & Check, gives no direct consideration to Activision’s current shareholders – and, in fact, gives control of the money, via the company treasury, to the board that supposedly failed investors in the buyback. By contrast, Prickett and Kessler said in a Jan. 22 letter, a settlement proposed by the objecting shareholder would have returned $70 million to Activision investors in a special dividend.

But not all of the defendants would ever have struck that deal, according to plaintiffs’ lawyer Joel Friedlander of Friedlander & Gorris in a Jan. 24 response to Prickett and Kessler. Friedlander, who led the case for the shareholder who agreed to the proposed $275 million settlement, said two of the defendants that signed the settlement – Vivendi, which put up $67.5 million, and a special investment committee headed by Activision’s CEO – simply wouldn’t have acquiesced to a special dividend to Activision’s public shareholders. Both Vivendi and the special committee retain big stakes in Activision stock but are specifically excluded from the class of shareholders certified as plaintiffs in the case. They were willing to cough up settlement money to benefit the company, Friedlander suggested, but wouldn’t have agreed to put up cash to be funneled to other shareholders. (Friedlander also took issue with the supposed $70 million value of the settlement proposed by Prickett’s client, saying the return to public shareholders in that deal would have been closer to $40 million.)

There’s quite a bit of contentious history underlying the dispute over the Activision settlement. Shareholder litigation over the stock buyback originally moved on two parallel tracks. Prickett and Kessler filed a shareholder class action and managed to win an injunction halting the transaction. While the defendants appealed the injunction, Prickett and Kessler reached a $70 million settlement with some, but not all, of the defendants. That settlement fell through when the Delaware Supreme Court reversed the injunction in November 2013.

In the meantime, a different Activision shareholder represented by Friedlander and Bragar Eagel & Squire continued with derivative breach-of-duty claims. His lawyers eventually amended his complaint to include class action allegations. At a hearing in December 2013, both Friedlander and Michael Hanrahan of Prickett asked to be appointed lead counsel.(Prickett and Kessler disclosed the settlement they almost obtained in accompanying lead plaintiff filings.) Despite Hanrahan’s argument that Friedlander’s client had “stolen” his client’s class action allegations, Judge Laster picked Friedlander’s client as lead plaintiff.

The fight over the Activision settlement is just getting started. The letters between Prickett and Friedlander were ostensibly procedural. Prickett and Kessler will file their formal brief opposing approval of the deal on Friday, and, based on the letter exchange, I’m expecting some unpleasantness over the proposed $72.5 million fee request and $50,000 incentive award to the lead plaintiff, in addition to debate over the allocation of the cash payout. Judge Laster is scheduled to hold a hearing on final approval next month. A lot of shareholder lawyers are going to be interested in what he has to say about returning derivative settlement money to shareholders.

For more of my posts, please go to WestlawNext Practitioner Insights

Follow me on Twitter

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/