Record $275 mln Activision settlement goes before Dela. Chancery Court

March 3, 2015

Most of the nation’s attention on Wednesday will be fixed on the U.S. Supreme Court, where the justices will hear arguments in King v. Burwell, a case that could bring down President Obama’s healthcare law. Securities lawyers, though, should keep an eye on Delaware Chancery Court as well. Vice Chancellor Travis Laster is scheduled to hear arguments about whether to approve a proposed $275 million settlement of derivative claims against Activision board members who allegedly breached their duties when they agreed to a $6 billion buyback of shares held by Vivendi in 2013.

That $275 million would be the most money ever paid to settle a derivative suit, and the plaintiffs’ lawyers who reached the deal, Friedlander & Gorris and Bragar Eagel & Squire, are requesting correspondingly outsize fees of $72.5 million. Their brief on why the settlement should be approved argues that the case “stands at the pinnacle of what entrepreneurial counsel have ever achieved when settling breach of fiduciary duty claims.” But the settlement faces an objection by an Activision investor who contends that the deal signs away shareholder class action claims without delivering value directly to investors. (As always, I’m indebted to the Chancery Daily for links to some of the briefs in the case.)

I have a hard time believing that Vice Chancellor Laster will refuse to approve a record-setting settlement, especially because it will bring tens of millions of dollars into Activision’s treasury from Vivendi and an allegedly self-dealing special board committee. And as lead plaintiffs’ lawyer Joel Friedlander explained in a response brief last week, the extensive litigation history of the suit, which settled soon before trial was supposed to begin, confirmed that the value of the case lay in his client’s derivative fiduciary duty theory, not in the class action theory espoused by the objecting shareholder and his lawyers at Kessler Topaz Meltzer & Check and Prickett Jones & Elliott.

The vice chancellor may, however, have some questions about how the settlement money is being allocated – a fundamental issue in M&A shareholder litigation, which often features both shareholder class actions and breach-of-duty derivative suits brought against board members on behalf of the corporation. In the Activision case, the proposed $275 million settlement releases shareholders’ class action claims but, as in almost all derivative suits, the money goes to the corporate treasury. That’s in contrast to a deal the Activision defendants very nearly reached with shareholders in 2013, when the class action theory advanced by Kessler Topaz and Prickett Jones was at a crest. The lead plaintiff in the derivative suit, according to briefs filed over the last month, actually agreed to the 2013 class action settlement just before the deal fell apart and the dynamics of the Activision case changed.

The new briefs flesh out the story of that aborted 2013 settlement, exposing behind-the-scenes dealmaking among plaintiffs’ firms. Kessler Topaz and Prickett Jones, which represented an uncertified class of Activision shareholders, reached the agreement in October 2013, just before the Delaware Supreme Court was to hear arguments on a preliminary injunction blocking Activision from moving ahead with the stock buyback. Defendants insisted, however, that they wouldn’t move forward with the class action settlement unless Kessler Topaz and Prickett Jones obtained the consent of Friedlander’s client, who had already filed a derivative suit, and clients of Levi & Korsinsky, which had filed a demand for Activision books and records.

Kessler Topaz and Prickett Jones told the other plaintiffs’ firms that their proposed class action settlement would deliver $85 million in cash and stock directly to Activision shareholders. (I previously reported the money would have gone to stock owners in a special dividend, but that’s not quite right. Because the deal would have been structured to resolve class action claims, settlement money would have flowed directly to shareholders who were members of the class.) Friedlander’s client at first resisted, arguing that the proposed 2013 settlement was worth only $41 million. Eventually he signed on to the deal, but then the defendants backed out.

The failure of that 2013 settlement turned out to be a good thing for Friedlander and his co-counsel and, they would argue, for Activision and its shareholders. After the Delaware Supreme Court dissolved the injunction obtained by the class, Vice Chancellor Laster appointed Friedlander’s group to lead the case, reasoning that the state justices had shown skepticism about the class theory. Friedlander & Gorris and Bragar Eagel, both very small firms, threw everything they had into the Activision litigation. Partners at both firms took out loans to finance the case through dismissal motions and certification of a class of shareholders. In all, according to their filings, the firms expended more than 7,300 hours of lawyer time on the case. Their $72.5 million fee request – which the defendants agreed not to oppose as part of the settlement – represents an hourly rate of more than $9,500.

Kessler Topaz and Prickett Jones want the attorneys’ fees cut by $40 million and want Vice Chancellor Laster to require that $100 million of the settlement go to shareholders. Levi & Korsinsky, meanwhile, wants a cut of attorneys’ fees because, according to its brief, if its client hadn’t refused to sign the proposed 2013 deal, the $275 million settlement would never have come about. (No one else in the litigation subscribes to that theory.)

King v. Burwell it’s not, but In re Activision is a case of consequence.

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