One of the great litigation curses in recent times in the corporate litigation arena has been the rise of merger objection litigation. These kinds of lawsuits, which these days arise in connection with almost every M&A transaction, often are settled for nothing more than an agreement to make additional disclosures and to pay the plaintiffs’ attorneys fees. However, from time to time, there are merger objection lawsuits that settle on more substantial terms.
Within the past few days, two merger objection settlements – one involving Activision Blizzard, Inc. and the other involving Freeport-McMoRan, Inc. — have been announced involving massive cash payments, much of it reportedly to be paid by D&O insurers. The Activision settlement may represent the largest cash settlement payment ever in a shareholder derivative lawsuit.
The Activision Settlement: On November 19, 2014, Activision, which is the maker of the popular videogames “Call of Duty” and “Worlds of Warcraft,” announced (here) the $275 million settlement of the shareholder derivative lawsuit that had been filed in Delaware Chancery Court. The lawsuit had been filed in connection with the transaction announced in July 2013 whereby Activision and an entity controlled by Activision‘s two senior officers acquired over 50% of Activision‘s outstanding shares from Vivendi S.A., its controlling stockholder, for approximately $8 billion in cash.
After the transaction was announced, several Activision shareholders filed lawsuits challenging the stock purchase. The defendants in the litigation included members of the Activision board (including six members of Activision board that had been designated by Vivendi); the senior Activision officers that were participating in the transaction and the corporate vehicles through which they were purchasing the Activision shares from Vivendi; and Vivendi itself. Among other things, the shareholders contended that the transaction should be put to a vote of the Activision shareholders.
The Delaware Chancery Court had put the transaction on hold pending a shareholder vote, but the Delaware Supreme Court, in an interlocutory appeal, reversed the ruling, allowing the transaction to go forward. The lawsuit, seeking damages, went foward. The November 15, 2013 Delaware Supreme Court opinion addressing the interlocutory appeal — and that describes the transaction and the lawsuit in greater detail — can be found here.
In its press release, Activision said that the $275 million settlement amount was to be paid to Activision itself by “multiple insurance companies, along with various defendants.” Ashby Jones’s November 19, 2014 Wall Street Journal article describing the settlement (here) states that Vivendi is among the parties that will be contributing to the settlement payment.
The Activision press release also states that as part of the settlement two unaffiliated directors would be added to the company board; the plaintiffs’ attorneys would be paid their “reasonable and customary fees and costs”; and there would be an adjustment made to voting rights. The deal must be approved by Delaware Chancellor Travis Laster.
According to the November 19, 2014 Reuters article by Tom Hals (here), the Activision settlement is “the largest of a shareholder derivative lawsuit,” exceeding last year’s $139 million News Corp. settlement.
The Freeport-McMorRan Settlement: According to Liz Hoffman’s December 1, 2014 Wall Street Journal article (here), Freeport-McMoRan is nearing a settlement of more than $130 million to resolve a 2013 shareholder derivative lawsuit that had been filed in connection with the company’s purchase of two oil-and-gas companies.
The settlement would resolve allegations by Freeport’s shareholders that the company overpaid when it bought McMoRan Exploration and Plains Exploration & Production companies for a combined $9 billion. The shareholders had alleged that the Freeport board had conflicts of interest while negotiating the company’s summer 2013 purchase of McMoran and Plains.
According to the Journal article, the shareholders alleged that the deals had been an effort by Freeport management to rescue struggling McMoRan, in which Freeport, its board members, and key executives owned shares. The shareholder plaintiffs alleged that Freeport had agreed to acquire McMoRan at too high a price as a way to bail out a struggling company. The two companies shared six directors including each company’s CEO. Nine Freeport directors owned about 6% of McMoRan stock between them. The overlap between the two companies was a relic of the companies’ past, as McMoRan had split from Freeport in the 1990s. Plains owned 31% of McMorRan and had the ability to block the sale of the company.
The Journal article reports that under the settlement agreement, which is subject to court approval, much of the more than $130 million to be paid in the settlement would be paid to the Freeport shareholders in the form of a special dividend. The total amount of the dividend is likely to exceed $100 million.
According to the Journal article, “most of the cost of the settlement would be paid for using a special type of insurance policy that covers directors and executives, according to some of the people. Freeport would pay the rest.”
According to a December 1, 2014 WSJ MoneyBeat blog post about the settlement (here), this type of settlement providing for a dividend payment to shareholders is the “first example” of this type of settlement payout.
One of the main criticisms of the recent wave of merger objection litigation is that the lawsuits often accomplish little except the transfer of cash to the plaintiffs’ lawyers that file the suits. Indeed, until recently, settlements of shareholders’ derivative lawsuits of all kinds rarely involved the payment of significant amounts of cash. However, as I noted at the time of the $139 million News Corp. settlement (here), in more recent times there have been a number of derivative lawsuit settlements that have involved very significant cash payments.
These two recent settlements described above show that at least under certain circumstances, even the settlement of shareholder lawsuits involving merger objections can involve the payment of significant cash amounts.
The common feature of these two cases that may account for the magnitude of the cash payments seems to be the conflicts of interest that were alleged to be part of the challenged transactions. In the Activision case, two senior Activision officials allegedly were active participants in the acquisition of the company’s shares from Vivendi. In the Freeport-McMoRan case, Freeport’s acquisition of McMoRan and Plains allegedly involved the company’s supposed overpayment for companies in which senior company officials had financial interests and with which the Freeport board had overlapping memberships.
Another common element with respect to these two settlements is that at least according to press reports the settlements will involve significant cash contributions by D&O insurers. I have not yet been able to get my hands on the settlement documents for either of these settlements so I have been unable to determine how much of either of these settlements was to be paid by D&O insurers.
An interesting question about the D&O insurers’ contribution is – exactly whose D&O Insurance will be making the contribution? In the Activision case, the defendants involved included both Activision and its board but also Vivendi. The Journal article describing the settlement said that Vivendi was contributing to the settlement; it isn’t clear whether or to what extent Vivendi’s D&O insurer might be contributing. The Activision press release about the settlement didn’t say whether the insurers that were contributing were Activision’s insurers or Vivendi’s insurers (or some combination).
The information in the Journal about the Freeport-McMoRan settlement doesn’t say whether the D&O insurers that would be making the payment were Freeport’s or if the insurers for one of the target companies are also contributing.
The fact that the $275 million cash in the Activision settlement will be paid to Activision itself raises the question whether the D&O insurers’ contribution to the shareholder derivative settlement would be a Side A payment (and, if it is a Side A payment, whether Activision’s Side A/DIC insurers might have been called upon to contribute to the settlement). To the extent Vivendi’s insurers contributed to the settlement, Vivendi’s insurers’ contribution would not likely be a Side A contribution.
The fact that most of the settlement cash in the Freeport case will be paid to the Freeport shareholders in the form of a special dividend raises an interesting question about the role of the D&O insurance. I can see that many D&O Insurers would be very uncomfortable with the idea that one of their insured companies might want to finance a special dividend to its shareholders with the proceeds of the D&O insurance policies. Even if the dividend is to be paid in the settlement of a D&O lawsuit, the use of insurance to finance a dividend is a notion that arguably does not sit comfortably with the usual purposes and role of liability insurance. I would be very interested in others’ thoughts about this aspect of the Freeport-McMoRan settlement.
In any event, as I said at the time of the $139 million News Corp. settlement, shareholders derivative litigation is becoming a severity risk for companies and their directors and officers – and for their D&O insurers. The News Corp. settlement was funded entirely by D&O insurers and the Activision and Freeport McMoRan settlement were funded at least in part by D&O insurance. There was a time when the severity exposure for D&O insurers did not involved derivative litigation, but those days seem to be gone now. The rise of jumbo shareholder derivative lawsuit settlements has a number of implications. Among other things, it is a topic that will have to be taken into account as D&O insurance buyers consider how much insurance they will need to ensure that their interests are adequately protected.