Wayne County Employee's Retirement v. Corti: The Conflict of Interest that Wasn't (Part 1)

In the compensation area, we have often talked about how the Delaware courts took a traditional duty of loyalty claim (compensation paid to another director, the CEO) and transformed it into a duty of care case.  The effect was to eliminate any examination of the substantive fairness of the payments.  This has been discussed in Returning Fairness to Executive Compensation. 

In Wayne County Employees' Retirement System v. Corti, the court came up with yet another way to avoid a duty of loyalty analysis:  Ignore that a conflict exists.  The case arose out of the acquisition by Vivendi, a French corporation and owner of the World of Warcraft, of majority control of Activision (maker of Guitar Hero and Tony Hawk).  The majority stake was sold to Vivendi directly from Activision.  Shareholders of Activision were allowed, however, to participate in a tender offer for up to 50% of the remaining  shares.  The result of the transaction was that Activision shareholders were reduced to minority investors with no premium in the process. 

The negotiations on the Activision side were conducted by Robert Kotick, the chairman and CEO, and Brian Kelly, the co-Chairman.  The two men entered what the court described as "exclusive, nonpublic discussions" with Vivendi.  After four months, the two men informed the board of the discussions.  The board eventually authorized the nominating and corporate governance committee to review, evaluate or respond to any proposed transaction.  The committee, however, never retained "its own legal or financial advisors." 

Plaintiff alleged that the two negotiators breached their duty of loyalty because, while negotiating over the sale of the majority stake in the company, they were simultaneously negotiating employment benefits that would apply to the combined company.  Despite this apparent conflict, the court granted the motion to dismiss, refusing to even allow discovery on the issue.  We will have more to say about this in the next post.

For the opinion and assorted filings in this case, go the the DU Corporate Governance web site.