M&A litigation, corporate personhood

Welcome to shoulder, Primacy from free float media. A podcast about activist investing Securities Law, and all the ways, the financial and legal worlds, intersect and Collide in real life. And I have returned and Lipton is, of course, a law professor at the University of Colorado, who teaches and researchers Securities, and business law, she holds up and presides over the legal end of our podcast, and that's Mike Levin an activist investor who lives and works in Chicago. He covers the financial side of our podcast, great. I'm gonna remind you, why don't you talk about our mailbox you want to do that? Sure. We have an email address, which you can email us, and you can ask questions or ask us to talk about particular topics. We are at Cheryl Elder Primacy at free float. One word dot LLC. Excellent. Well, we talked about covering a couple of interesting subjects. One is based on some quite recent news on a case that's been going on for a while. And another one reflects something that I had thought about I'm not the only one with thought about it but others have many many years ago but came up again and sort of remains timely so the latter one which we'll talk about a little later pertains to whether corporations are people. And we can explore that odd formulation a little later. But first though we were going to look at a particularly juicy bit of m&a litigation involving Activision and Microsoft's acquisition thereof. So why not begin with that may we Of course. All right, so the proximate news was Delaware Chancery Court and our old fave a chance for McCormick allowing a shower, is it a class action show? Their class action. So it's not derivative. Its class action lawsuit to proceed against the directors of the formerly independent of public. But now owned by Microsoft Activision, which of course is the video game. A company which what are some of their games? Do you happen to know? I don't know. I don't even know. Anyway, they have some big games. I'm sure they do. Yes. Microsoft wouldn't have paid all that money for them if they didn't. And they merged and the merger closed in 2023 and then the lawsuit started flying, right? So, and so Microsoft bought them. So, what what what's notable for now about this case? Well, here's why this stands out from me. So we have talked several times throughout this year about how that was essentially a Revolt among a bunch of powerful companies in Delaware and backers like private Equity firms complaining. The Delaware was too late to just that it was creating too much litigation risk. And as a result, as we've said, Delaware essentially rewrote their laws to make it very easy for boards and controlling shareholders to insulate themselves from any kind of shareholder Challenge. And yeah, Chancellor McCormick just held at a merger challenge could proceed and tackling. This challenge was brought under the Old Law that not the new limits, don't apply, but it's not obvious that they would have made a difference. Her basis for allowing the case to proceed, might not be By the new law. So the reason this really surprises me is once leaving aside everything else, this was kind of an uphill challenge to begin with even leaving a circle challenge for the plaintiffs for the plane. Yes. Okay. Even aside from that, um, when the I think the Delaware legislature kind of demonstrated such hostility to shareholder, litigation that I sort of expected. Some Delaware judges my kind of get the message that they should be more skeptical of shareholder slaves and here's McCormick coming out guns blazing saying no and it was And it was guns blazing. She wrote like an 80 plus page. Oh for Delaware, that's nothing good for me. Who I who I looked I looked at me he was not the lawyer here. It was it was a lot to kind of way through, but it was, there was there was some, there was some there was some I'm not gonna say in San Diego area, but there were some fairly fairly big words going on. So I want to be really clear. Into changing how she thinks about these kinds of claims. She's gonna think about them the way she thinks about. All right, so the significance here. In addition to being significant for Activision and Microsoft Cheryl so forth, and some fun ways because some of the facts on the ground are also yeah, pretty notable. the significance here has to do with the and we'll return to this the importance of the statutory changes and how they would have affected this huge case, had it been filed this past spring rather than two Springs ago. Yeah, all right. Cool. So what are some, what's being what are the claims here? What's being alleged? Yeah. So the, the basic claim is that the activation board under sold the company that the price was too low, they didn't get enough value for shareholders. It happens. All I think about that all the time, by the way. Okay. This is a big problem was a standalone company and then there was this big sexual harassment Scandal. It was like the middle of me too. And there were all these allegations that its CEO, Bobby kotick knew, and he called, and they were employed protests and the stock price tanked and there were 10. There were Regulators involved investigating. So, there was a real chance that Kodak was going to be ousted for calls, which would mean he'd forfeit. A lot of his pay and Active. And and at that moment with Activision stock price, shall we say temporarily in distress, Microsoft's swooped in and offered two acquire, the company and the fundamental allegation in the cases that the board rushed through this deal with Microsoft, in order to protect kotic and avoid dealing with the sexual harassment Scandal, but they didn't really get the maximum amount they could have gotten for shareholders. So the idea was that codec either alone or persuaded the board of board was trying to protect Hotel. I mean, there was some some balance there, right? Exactly. Couldn't have done it himself but the facts in the opinion are pretty damning and to be clear, I just want to be clear, it's only a complaint. We don't know what Discovery he'll show, but based on the allegations play, the side of the story according to the complaint the board. First of all, let Kodak handle the whole process. Even though they knew that he was conflicted and he pretty much got ahead of the board on several occasions and started negotiating and making promises before the board got involved. The board suddenly revised. Its projections of the future downward For No Good Reason, which apparently the Microsoft offer. Look more attractive. They spurned alternative acquirers Without Really engaging them because they were trying to like rush through this deal more quickly. And the ultimate merger agreement, explicitly protected, Kotex job, and his salary, and indemnify him from future claims. And then like the merger was dragging on because there was a lot of antitrust risk to the point where it actually reached the outside date, where Activision could have walked away. And at that point Activision its new, its stock price had recovered, its new games had really taken off. So it was in a better position to have liked to have told Microsoft either up the deal price or we'll walk away or looked to see if other acquirers would have paid more. But the board didn't it just sort of rushed in to extend the outside date. So This these facts put together. Or were exactly where the basis essentially, for the plaintiffs claims. And, and yeah, so there wasn't, there wasn't a single thing, but there was a number of facts that we know of so far and the facts are just based on, you know, not Discovery, but just public documents or whatever. The plane, there's really get from from books and Records demand. Yeah, exactly. Which is Whether the new law would have affected anything but right. So but and the interesting thing here is that this is definitely a story of a sloppy board, but you don't, you The plaintiffs couldn't succeed on their claims, just with a sloppy board. They actually in order to be able to advance their claims. They needed to show disloyalty like an actual disloyal board that was consciously not acting in the best and more loyal to the CEO, essentially then to the shareholders. Okay, go ahead. And there's a thing about that the way you normally showed disloyalty that easy case for disloyalty is a conflict. Like, an actual conflict of interest like a financial conflict. And here, we absolutely had that with coaching because he was saving his job, and he saved his change of control benefits, but there was no conflict for the rest of the board. In fact, McCormick did not even find that the other board members were not independent of kotek. Like, she never found that they were so close to compromise their independence. Instead, she concluded that based on these facts. They were so egregious that, they suggested that the board acted in bad faith, that they were actually just acting in bad faith. They just, even though they aren't, like, not independent coach in the traditional test for indep. That they were just more interested in protecting him. And perhaps I think, you know, just not having to deal with the sexual harassment Scandal figure out what to do about it. And they would just wanted to plow ahead and get this off their hands. And also, I mean, there was a shareholder vote and normally, as we've said, several times shareholder, votes will climb. They cleanse, right? They wash it, completely they disinfected. But there has to have been full disclosure and she held that the shareholders were told about the role that sexual harassment was playing in the board's decision making. So, therefore, there was a full disclosure and she refused to dismiss the claims and the case goes forward on the, on the theory that the board acted with bad faith. Now, one thing about this case, good, normally if a board isn't conflicted, we've said several times if a board acts and they are not conflicted, normally their decisions are extraordinarily deferred to buy quartz they get right? Yes, business judgment rule governance, right. But there's an exception, if it's a sale of the company, When the company is being sold, then quartz look a little bit more closely at the board's process. It's sort of an intermediate standard. It's not as closely as they look when there's an actual conflict, but it's more carefully than business judgment defense. And it was because of that closer look, that she was able to conclude that plaintiffs and shown bad faith. But it's still striking that she went that far, especially given the current atmospherics in Delaware. Oh, atmospherics related to the sort of the political environment, the political environment, and essentially, the legislature. Saying is possible courts. You should dismiss these cases. So she held essentially that there was a I mean again this wasn't a case. It says we decided on the merits, she's basically just letting the case proceeded which was which we'll talk about in a minute. So she essentially held then that there was Evidence of this bad faith, right? And because of the failure to disclose the sexual harassment stuff that is why the clutch shoulder vote didn't cleanse anything, but the bad feet was really more like just the boards lack of days ago approach. Well, not like a musical, they rushed it through without fully, you know, exploring the Alternatives without thinking with, you know, apparently changing their projections to benefit coaching and extended the day. Extended the drop dead. Yes, I did. And see that's usually what an activist just kind of activist. Another show was kind of waiting for There's plenty of situations where you sort of see this deal and you don't exactly know, you know, what went on and so forth. But it sort of maybe, sometimes you kind of cross your fingers and hope that something delays it and that they can. And then the board came in and said, no, you get another, what three mile, whatever number of, yeah. Because they and they were gonna have animals and they were still litigating over it. And here's another thing though, on this case actually proceeded in stages in an earlier stage, the plaintiffs that the board. It wasn't simply that they acted in bad faith. The plaintiffs actually pointed out that the board violated Delaware law because they approved, they were in such a rush to approve. The merger agreement that it wasn't complete when they approved it. They approved essentially incomplete who were blanks, it was like, Wow, and Delaware, statute requires boards approved merger Grant's. So in earlier, stage of the case, She allowed the claims to proceed based on this deal was never properly approved and this upset, the legislature so much that they immediately changed the law to say that now boards are allowed to prove like substantially complete Deals. They ought to be all the way complete and even. And so even though they did that again she would like like this is now the legislature specifically responding to her decision in an earlier stage of this case to overrule her with the statute and she still is allowing the claims to proceed. She just she so she persists, she princess. Okay, so here's the question which gets us back to the theme here which is if The if the case said been brought this past spring after I came here, I speak 22. Is that what was the 21st 21 had was the law of the land or the land in Delaware? What? What do we think might have changed as a consequence? Okay, so, here's the thing, the new statute deals with conflicted deals, how to cleanse conflicted, transactions. This is not that case, because other than kochik, this wasn't a conflict. There was no conflict, he wasn't a controller, right? Exactly. So like he was conflicted but the rest of the board had to agree and she did not find they were in independent. She just found they just acted bad and he probably, he probably were accused from the voter. Oh, I don't think she did because he wasn't conflicted in the traditional sense. He just so He ran the whole. Legend process. So this actually all the conflict cleansing procedures that were added to Delaware law. None of them actually have anything to do with this case. The only thing that I think the new law maybe might have affected is this? As you said, the way the plaintiffs were able to make all these allegations was based on public documents and a 220 requests, they made it to 20 request. Yeah, 220 is a books and Records right now. I don't know what they got but I think we can infer that they got some things that helped them with their allegations. And one of the things that Delaware changed was it changed the standards for 220 requests and in particular made it harder to get certain kinds of documents especially informal materials. So, it's possible that if brought to day the reason it might have been more of a battle wouldn't have been because of conflict lensing but because they might not have been able to get the same information that they ultimately worry. But I don't know for sure because I don't know exactly what they got out of their earlier, 220 requests. I would expect it's funny because I did not read. Again I mentioned I kind of Skimmed cancer requirements ruling here but I didn't look at the footnotes. I didn't look at all the evidence. I just kind of was trying to get the gist of it. And I would imagine a resourceful. You know, assistant law, professors somebody. I don't I don't know could go through it and figure out what facts are in. Like that's the basis for that and figure out what might have not been available because the complaint has blacked out parts. That was probably what they got. Okay, so you read the compliance in the comment, I didn't read it and you can tell whether using confidential information and like a lot of The opinion. I don't think she cared. What was blacked out whether it was confidential. This happens all the time by the way. So um, so so you might be able to see it but here's the but I I can't I don't know if they only got formal board materials then they could have still gotten that under the new Statue, but if they got anything in for him, all right? If there was like some emails, if there was corresponds, that would be harder. Now, I know Activision fought the 220 request to begin with, and then after they, like got filed a complaint, they finally came. So anyway, that's the only way that I can obviously see the new lawn at it. Oh interesting. So oh, so all right. So where are we? So this case is not going to proceed. It's going to proceed. It goes and they're going to they're gonna go okay. Which oh yeah. That's your that your guess. That's right. I mean usually these things do that would be my guess. But my, I mean, it's special activation thinks that, you know, the Delaware Supreme Court is likely to be more sympathetic. Well, no, it's not active as you're making the decisions, but Micro yeah, but Microsoft may not well, their directors are the well, it's not even Microsoft. Microsoft on a defendant, it's the directors know. Yeah, but Microsoft's funding, this and is there a reputation because they're intended the direct. All right, so let's stay tuned. We'll sort of see what kind of settlement gets announced in the next year, I guess. Is that, right? I Know, it's on trial. Oh, there be interesting. Let's see. We have seen one of those in a little bit. So right. All right, let's um, let's let's pause here and then we can return to talk about corporate personhood here at shareholder Primacy. Cheryl Primacy is brought to you by free float, analytics.com. The only free database of corporate directors their influence and their performance. If you own a Stocker, retirement plan go to freefloat, analytics.com. And look up which of your elected directors are performing well and which aren't use your vote in the alternative democracy and get your data at free flow. Analytics.com. Now, back to the show, Welcome back to shareholder Primacy. I'm Anne Lipton here with Mike Levin, and we're going to look at the question of whether corporations are people. Yes, which is sounds on its surface to be kind of weird. but let me, let me tell you because I so I've been meaning to ask you about this one for many, many months now. Now that I have a law professor in my direction and it began back in 2012. A very different time and everyone's lives. And, and a little bit of the background is that at the time, you know, we both have the, our kind of blog. So, I don't know if you. Yeah, it's applied, you write apply at business law, professors, with other businesses love professors, right? There's other people, unless I get really excited about something and then I post, and it's a, it's a blood. The noun is, it's a black. Well, I have the substack that I write, which I still call a little bit of a block. Well, before that, before that I had a Blog, and then it was sort of just an email thing from about 2010 to 2616 and then I put it down for a while and picked it back up a few years ago. And and so this dates back to a blog post, I wrote in 2012, in that early time and I have been reposting, some of the old stuff. On the new substack, periodically. So I reposted this one and the title was corporations are people, people and I made an obscure reference to a couple of bits of cultural artifact, which I can refer to a little before. One of them was the movie. Soylent Green. Yeah. Or the other cultural reference was to the old. It was started as a record free to be you and me with Marlo, Thomas, where she talked about parents are people. so, At the time, Mitt Romney was the Republican presidential candidate and he was at a campaign stop in Iowa. And he was getting heckled to be able to balance our budget and not spend more than we take in. We have to make sure that the promises we make in Social Security Medicaid and Medicare are promises. We can keep and they're various ways of doing that one is we could raise taxes on people. That's not the ways. They are everything corporations to people. So so after that And I found that interesting at the time, I was very naive about what that stuff, Matt. And so, I kind of thought about a little bit and then after that, shortly after that Jack Welch, Who was the Then or he was at the time. He'd retired as CEO of General Electric and you know, he was a, you know, very famous. He's been a little. Is it reputation since taking a hit? if you want to see what happened in GE, well, he wrote a column in the A fairly weird column in the Wall Street Journal, a few months later, basically asserting the same thing. And saying no no corporations. Are people. And it wasn't quite clear what was going on. So I then wrote a blog post that was fairly critical and saying what's, what what could Mitt Romney or maybe Jack and Susie Walsh. If possibly meant, they couldn't have meant that. A corporations, like a human being. Okay, you know, that and and so what I what I was able to find out and this is where I'm really eager for some of your thoughts is that legal, Scholars of which I would include you and that August Call a corporation. The word I found was illegal fiction. Yeah. And and artificial entity that was sort of created for like a very specific and this appeals to me a specific economic purpose. Okay. And so, you know, a corporation, basically, as a legal structure, you know, it's basically allows multiple people or possibly other corporations or whatever investors. So Syndicate, your money and to kind of spread out the investment into limit your personal liability for its failure. And so forth. So what I, what I learned after that, was that, you know, corporations in fact, do have some of the same Rights and obligations I guess is real human people. So, you know, a corporation can enter into a contract and it can collect income and it pays taxes how much property it owns properties, right? Okay. However, a corporation can't like marry another person and a corporation can't have like custody over like a minor child type person that it does have First Amendment rights. Well, now it does and it's religious rights, right? Oh, religious rites how so that's Worth theorizing of the Supreme Court. Okay? So anyway so so there's so what I kind of wondered was whether kind of Mitt Romney at the time and Jack had sort of misunderstood Jack Welch had sort of misunderstood some of these legal rights and said that and what they really meant is not that corporations are people that's like absurd but what they may have met was that they Um have some of the same rights and obligations as people which we just talked about. Is that is that seem what legally plausible I mean? Yeah, illegally corporations are persons. They are legal persons. In a sense, we are called that we are. They are artificial persons as distinguished from natural person. Human flesh and blood people like parlance that is how you distinguish them. You would distinguish them artificial persons from natural persons, and they have the legal rights that are associated with personhood up to a point. They can see, they can know property. They have free speech rights. What? They don't have, I believe our fifth amendment rights. I mean, it's, it's just, you know, they don't have all the same rights as people, but from a legal perspective, yes they are like they're considered legal persons. Now separately as a matter of corporate Theory, There are essentially three views of what a corporation is. This is where this is really what I'm trying to ask. I think that you're getting what I want to talk about. Okay, go one view of a corporation is what's known as concession theory that they are essentially a state creation and the state and they have the Privileges that the state gives them another. And the state could be, the state could be in government, just state, law, or federal or whatever though. Most corporations exist under State underwater. There are some really short equipment and then so Inception View. Another view is the contractual theory of the corporation, which is essentially that the, that the corporation is a structure for the multiple different Contracting parties. Shareholders are one Contracting party lenders or another Contracting party employees vendors, right? Exactly. And it's sort of its sort of Nexus of Nexus of contracts. Yeah. All of these different parties to do business with each other, and that's contract contract Harry. And I think I see you is closest to person. It's called a real entity theory that the corporation is something greater than the sum of its parts. It's sort of a, you know, that it that it functions together as a whole and should be treated as a whole. I mean, not a human, but as a whole entity that sort of a thing that has, you know, will, if not right, okay? All right. So there's these and these three kind of, I've seen a little bit Of this kind of guide some of the legal arguments so forth. It's not a question of one of the other. It's like that. Duck Rabbit picture or the old lady? Oh, some of the optical illusions. It's what you can't answer the question until you understand why you're asking it and well and I'm glad I'm glad you brought that up that way because it's always, you know, there's among the investor class You know, we always talk about Investors are activists as owners, okay? You know, we want to behave like owners we want to put, you know, portfolio managers in the board because then you have an owner's perspective. You know, we're exercising our ownership rights but this kind of gives some more interesting if a little theoretical context for who the owners are and what exactly they own exactly because what view is that, you know, essentially if you have the residual claim, what shareholders claim, you are the owners and bankruptcy. Then the lenders would be owners because they have but I mean again I for me, you know, I think ownership You have to unpack while you're asking me. The first thing, a law student learns in property is that there's no such thing as owning a thing because there are usually limits on what you can do with it. Like you might own land but maybe somebody else has an easement you might own land, but that doesn't mean you could do anything you want on your property. You can't do things. That will create a nuisance to other people. So ownership is really just a bundle of rights with respect to any particular thing and you have some of those rights and you don't have others and it's the same thing with Cheryl like we call shareholders the owners and sometimes people like to get cute and call them share owners. But reality is is that what they have is a certain bundle of Economic and governance rights and whether you put the label on that or not, isn't really the point. It's you have a certain bundle of Economic and governance rights which may or may not have certain implications about interesting. You're moral claims or anything else. Okay? So so this I think this Informs much better this. Assertion that corporations are people then what at the time? 14, whatever years ago, I remember today. Don't even remember why it came up because I went and reviewed reviewed the whole thing. Again, when I reposted this thing was just a few months ago on the substack and then in preparation for talking about it today. I think the context was a tax argument related to the 2012 political campaign and he said, yeah, corporations pay taxes because corporations are people or something, which is like you just access distinctly from their shareholders, which is not right. Yeah. He's in Partnerships right. But, but in particular, The Wall Street Journal op-ed from the Welch's was especially silly because they started getting in all sorts of weirdness. About how corporations, you know, have people in them and then their feelings, it was really weird. So, anyways, so it's it's worth, it's worth a look, if you're if you next time, next time. It's some it's some part of the curriculum or the syllabus when we're talking about corporate personhood. I sign the Wall Street Journal column it's it's it's really it's a little fun actually. So anyway so that's that's kind of what this is great. So this is kind of what I wanted to bring up was this whole idea of that of how this corporate personhood idea concept was sort of probably a little misunderstood but nonetheless is is quite relevant and actually kind of useful. So all right, enough about my, my rehashing old I think for now so we can we can probably move on to some new stuff, which we will do sometime soon. So we can we can wrap up and and Return next week. This is shareholder Primacy hosted by in Lipton and me Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations and is Professor of law on the Lawrence WWE, chair of Business Law at the University of Colorado, law school. You can find me Mike, at the activist investor calm and an at law.com colorado.edu, our podcast is produced and distributed by free float media. Thanks for listening and we'll talk again soon.