transaction id 56838590 case no. 8885 -vcl in the court of...

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN RE: ACTIVISION BLIZZARD, INC. ) Cons. C.A. No. 8885-VCL STOCKHOLDER LITIGATION ) REDACTED, PUBLIC VERSION

LEAD PLAINTIFF’S REPLY BRIEF IN FURTHER

SUPPORT OF APPROVAL OF THE SETTLEMENT, RECERTIFICATION OF THE CLASS, APPROVAL

OF THE FEE APPLICATION, AND APPROVAL OF THE SPECIAL AWARD TO LEAD PLAINTIFF

Joel Friedlander (#3163) Jeffrey M. Gorris (#5012) FRIEDLANDER & GORRIS, P.A. 222 Delaware Avenue, Suite 1400 Wilmington, Delaware 19801 (302) 573-3500 Co-Lead Counsel

OF COUNSEL: Lawrence P. Eagel Jeffrey H. Squire BRAGAR EAGEL & SQUIRE, PC 885 Third Avenue, Suite 3040 New York, New York 10022 (212) 308-5858 Co-Lead Counsel DATED: February 25, 2015

Jessica Zeldin (#3558) ROSENTHAL, MONHAIT & GODDESS, P.A. 919 Market Street, Suite 1401 Wilmington, Delaware 19801 (302) 656-4433 Delaware Liaison Counsel

REDACTED, PUBLIC VERSION: February 27, 2015

EFiled: Feb 27 2015 11:43AM EST Transaction ID 56838590

Case No. 8885-VCL

In re Activision Blizzard, Inc. Stockholder Litigation

C.A. No. 8885-VCL (consol.), red. pl. reply br. (Del. Ch. Feb. 27, 2015)

www.chancerydaily.com

TABLE OF CONTENTS

PAGE TABLE OF AUTHORITIES .................................................................................... ii PRELIMINARY STATEMENT ............................................................................... 1 ARGUMENT ............................................................................................................. 7 I. HAYES’S ARGUMENTS ARE FOUNDED ON THE FALSE

PREMISE THAT A “DAMAGES CLASS” POSSESSES VALUABLE CLAIMS .................................................................................... 7

A. An Appropriate Class Was Certified ...................................................10

B. Notice Was More Than Adequate .......................................................11

C. Former Stockholders Do Not Possess a Valuable

Class Damages Claim ..........................................................................13

D. There Is No Basis to “Reallocate” a Portion of the Fee Request to the Class ......................................................................22

E. Lead Plaintiff’s Request for a Special Award Is Not

an Indicia of Inadequacy of Representation ........................................24 II. COUNSEL FOR PFEIFFER AND BENSTON ARE

NOT ENTITLED TO SHARE IN A FEE AWARD .....................................25 CONCLUSION ........................................................................................................27




TABLE OF AUTHORITIES

CASE PAGE(s)

Allapattah Servs., Inc. v. Exxon Corp., 2006 WL 1132371 (S.D. Fla. Apr. 7, 2006) ........................................................... 4 Americas Mining Corp. v. Theriault,

51 A.3d 1213 (Del. 2012) .....................................................................................23 Brophy v. Cities Service Co.,

70 A.2d 5 (Del. Ch. 1949) ............................................................................. 25, 26 Carsanaro v. Bloodhound Techs., Inc.,

65 A.3d 618 (Del. Ch. 2013) ................................................................................17 Forsythe v. ESC Fund Mgmt. Co. (U.S.),

2012 WL 1655538 (Del. Ch. May 9, 2012) .....................................................3, 24 Geller v. Tabas,

462 A.2d 1078 (Del. 1983) ...............................................................................3, 12 Gentile v. Rossette,

906 A.2d 91 (Del. 2006) .......................................................................................17 In re Amsted Indus., Inc. Litig.,

521 A.2d 1104 (Del. Ch. 1986) .............................................................................. 3 In re Celera Corp. S’holders Litig.,

59 A.3d 418 (Del. 2012) .......................................................................................11 In re Checking Account Overdraft Litig.,

2012 WL 456691 (S.D. Fla. Feb. 14, 2012) .......................................................3, 4 In re Loral Space & Commc’ns Inc.,

2008 WL 4293781(Del. Ch. Sept. 19, 2008), aff’d, 977 A.2d 867 (Del. 2009) ...........................................................................18

In re Phila. Stock Exch. Inc.,

945 A.2d 1123 (Del. 2008) ............................................................................ 11, 14




In re TD Banknorth S’holders Litig.,

938 A.2d 654 (Del. Ch. 2007) ..............................................................................12 In re Triarc Cos., Inc. Class and Deriv. Litig.,

791 A.2d 872 (Del. Ch. 2001) ..............................................................................14 Linton v. Everett,

1997 WL 441189 (Del. Ch. July 31, 1997) ..........................................................18 Parnes v. Bally Entm’t Corp.,

722 A.2d 1243 (Del. 1999) ............................................................................ 16, 17 Schultz v. Ginsburg,

965 A.2d 661 (Del. 2009) .....................................................................................19 Smith, Katzenstein & Jenkins LLP v. Fidelity Mgmt. & Research Co.,

2014 WL 1599935 (Del. Ch. Apr. 16, 2014) ................................................ 25, 26 Strategic Asset Mgmt. v. Nicholson, Inc.,

2004 WL 1192088 (Del. Ch. May 20, 2004) .......................................................25

RULES Ct. Ch. R. 23(e) ........................................................................................................12




PRELIMINARY STATEMENT

The universe of potential objectors to the proposed settlement of this class

and derivative litigation was large and well-informed. Activision is a market-

leading company with 720 million shares outstanding and a market capitalization

of over $16 billion.1 The public announcement over three months ago of the basic

terms of the proposed settlement was national news.2 ASAC promptly filed with

the SEC an amended Schedule 13D setting forth those basic terms.3 Soon

thereafter, the monetary portion of the proposed settlement was ranked as the

largest cash derivative settlement in history.4 Two months ago, Activision filed a

Form 8-K summarizing and attaching the settlement stipulation and notice.5

Activision has been prominently featuring the settlement stipulation and notice on

the “Investor Relations” tab of its website.6 Additionally, Activision caused

180,000 notices to be mailed by a settlement administrator to class members.7

1 https://finance.yahoo.com/q/ks?s=ATVI+Key+Statistics 2 http://www.bloomberg.com/news/articles/2014-11-19/activision-directors-agree-to-275-million-buyout-accord; http://blogs.wsj.com/law/2014/11/19/vivendi-others-to-pay-275-million-to-settle-activision-shareholder-litigation/ 3 http://investor.activision.com/secfiling.cfm?filingID=1193125-14-419977 4 http://www.dandodiary.com/2014/12/articles/shareholders-derivative-litigation/largest-derivative-lawsuit-settlements/ 5 http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10381832-1142-10371&type=sect&TabIndex=2&dcn=0001104659-14-089153&nav=1&src=Yahoo 6 http://investor.activision.com/ 7 (MacDonald Aff. ¶ 6.)




Any class member or stockholder inclined to do so could have signed a

confidentiality stipulation and obtained access to the document productions and

deposition transcripts. Any objector could have submitted a supporting expert

report. No one did any of these things.

Only three objections have been filed, each of them by disappointed

litigants. Plaintiff Douglas M. Hayes, who sought to be named lead plaintiff, is the

sole objector to the proposed settlement. Hayes does not argue that he could have

extracted more wealth or non-monetary benefits from defendants than did counsel

for Lead Plaintiff Anthony Pacchia (“Lead Plaintiff’s Counsel”). Hayes aims to

deny Activision and its stockholders the extraordinary benefits of the proposed

settlement by attacking the integrity of Lead Plaintiff and Lead Plaintiff’s Counsel

for not allocating any settlement consideration to former stockholders. Virtually

any class settlement could be attacked on that ground (including the lesser

settlement Hayes proposed in 2013).

Our opening brief explained why the monetary claims on behalf of

Activision are very strong and the theoretical damage claims on behalf of former

stockholders (or their successors) are extraordinarily weak. Nevertheless, Hayes

asserts that continuous holders throughout the pendency of the Transaction own

damages claims of “the same strength” as does Activision itself and that Lead




Plaintiff’s Counsel is “fabricating excuses for giving the stockholders nothing.”

(Hayes Br. at 43, 47.)

Hayes provides no supporting analysis. Hayes could have dissected the

factual record contained in the Court papers, such as the banker books attached to

our pleadings or the fact discovery cited in the Atkins report, obtained objector

discovery, and proffered his own expert report. Instead, he asks the Court, “[a]t a

minimum … [to] permit discovery and hold an evidentiary hearing before

approving the Settlement.” (Hayes Br. at 5.) The law is to the contrary. See

Geller v. Tabas, 462 A.2d 1078, 1081 (Del. 1983) (“Given the extensive record …,

Objectors’ failure to demonstrate due diligence before hearing and a need for

further discovery, as well as the Court’s familiarity with the record, we find no

error in his refusal to hold an evidentiary hearing.”); In re Amsted Indus., Inc.

Litig., 521 A.2d 1104, 1109 (Del. Ch. 1986) (discussing availability of objector

discovery upon “timely application”) (Allen, C.). Any delay created by Hayes’s

pursuit of his objection would immobilize a large settlement fund that can be put to

better use.8

8 If the Court were to indulge Hayes’s request to delay consideration of the settlement, Hayes should be required to post a bond for the cost to Activision of each month that the prospective net settlement fund is immobilized. That would “force [Hayes] and [his] counsel to internalize the downside of not taking the proposal currently on the table.” Forsythe v. ESC Fund Mgmt. Co. (U.S.), 2012 WL 1655538, at *7 (Del. Ch. May 9, 2012). Cf. In re Checking Account Overdraft Litig., 2012 WL 456691, at *3 (S.D. Fla. Feb. 14, 2012) (requiring objector to post




Plaintiff Mark S. Benston, who sought to be named Co-Lead Plaintiff, and

Milton Pfeiffer, a holder of two shares who filed a Section 220 action and then

declined to audition for a lead role, do not object to the proposed settlement or to

the fee request. Instead, they ask the Court to award their counsel 10% of the

requested fee award, based on (i) Pfeiffer’s unwillingness to join Hayes’s proposed

settlement (unless his lawyers were allocated 20% of the attorney’s fees) and (ii)

the supposed value of an insider trading claim that Benston unsuccessfully sought

to assert in this action. Pfeiffer and Benston speculate that their counsel’s conduct

caused defendants not to sign the Hayes settlement – a dubious proposition far

attenuated from the legal work by Lead Plaintiff’s Counsel that brought about the

benefits of the proposed settlement. When Benston applied to become a Co-Lead

Plaintiff, we explained to the Court that his insider trading claim was meritless, and

the Court denied his application. Since the insider trading claim was never

litigated and had no prospect of being litigated, it stands to reason that the

settlement consideration does not implicitly attribute any value to it.

appeal bond representing two years’ compounded interest on net settlement fund); Allapattah Servs., Inc. v. Exxon Corp., 2006 WL 1132371, at *18 (S.D. Fla. Apr. 7, 2006) (requiring objector to post $13.5 million appeal bond “to cover the damages, costs and interest that the entire class will lose as a result of the appeal”). Using Activision’s 8.9% WACC as calculated by Centerview, the per month cost to Activision of delaying use of a net settlement fund of at least $202.5 million is at least $1.5 million. (Ex. A hereto.)




The ASAC Defendants and the Vivendi Defendants have joined forces for

the purported purpose of advocating against Pacchia receiving $50,000 of the fee

award – even though they lack a financial incentive to spend money on that

objective or to rehash their previously rejected argument that Pacchia’s deposition

testimony is not credible. ASAC and Vivendi, as significant Activision

stockholders, do have a strong financial interest in seeing the fee award reduced,

since any differential would go to Activision. But the ASAC Defendants and the

Vivendi Defendants agreed not to “object to or otherwise take any position on” the

negotiated $72.5 million fee application. (Settlement Stip. § 4.1.) In light of their

contractual commitment, it is actionable that they oppose a special award to

Pacchia on the ground that he did not make “any effort to limit the $72.5 million

fee.” (ASAC/Viv. Obj. ¶ 17.) The ASAC Defendants and the Vivendi Defendants

go so far as to misleadingly characterize the negotiated fee application as

“approximately 40% of the ‘public stockholder’ net benefit of the settlement.”

(Id.) In fact, it represents 26.4% of the monetary benefit to Activision, and a lesser

percentage of the total value of the proposed settlement.

The great value of the proposed settlement and the weaknesses of the

objections vindicate the Court’s prior rulings on leadership. Lead Plaintiff’s

Counsel diligently and effectively pursued the right legal theories. Because we

pursued the right theories, we were able to maximize the benefits for Activision




and all of its stockholders, including important governance protections for the non-

ASAC stockholders.9

The disappointed litigants who advocated other theories and pursued other

deals make no cogent argument to block the proposed settlement, certify a different

class, appoint a new class representative, reduce or share in the fee award, or block

a special award to Pacchia, who devoted an unusual amount of time discharging

his responsibilities in this large and complex case.

9 Hayes owns stock in Activision but casually refers to the post-Settlement Board of Directors as a band of looters. (See Hayes Br. at 22-24 (“[I]t would not be surprising if some of the proceeds Activision receives in the Settlement end up in the directors’ pockets…. The Settlement may have put a few more chickens in the hen house, but the same foxes will be guarding it and they may be taking more chickens and more eggs for themselves.”)) BKBK operate a highly profitable company. The three Special Committee Defendants put together an accretive transaction in the face of threats from Vivendi and Kotick. Nolan and Wynn are not alleged to have committed any wrongs. The addition of two new directors independent of and unaffiliated with ASAC and BKBK allows for the creation of a majority independent board that can be presumed to act as effective stewards of the corporate treasury and a check on potential conflicts with ASAC, whose influence is further mitigated by the reduced voting power of BKBK. ASAC and its investors remain bound by the standstill provisions in ASAC’s Stockholders Agreement with Activision. Additionally, Hayes overstates the current voting power of Fidelity and incorrectly states that LGP owns Activision stock apart from its interest in ASAC. (Hayes Br. at 53.)




ARGUMENT

I. HAYES’S ARGUMENTS ARE FOUNDED ON THE FALSE PREMISE THAT A “DAMAGES CLASS” POSSESSES VALUABLE CLAIMS Hayes attacks the certification of the class, the settlement notice, the

substance of the settlement, the fee request, and the application of a special award

to Lead Plaintiff. All of these arguments share a common theme. According to

Hayes, there is a valuable “class damages claim” belonging to “public stockholders

who held during the pendency of the Transaction (i.e., between the announcement

of the Transaction on July 25, 2013 and the consummation of the Transaction on

October 11, 2013).” (Hayes Br. at 27.) Continuous holders during that 10-week

period supposedly own a claim as valuable as the claims belonging to Activision

itself (or the current public stockholders). That assumption enables Hayes to sneer

at settlement consideration far more valuable than what he ever hoped to obtain.

As discussed below, Hayes cites no law creating special rights for

continuous holders during the pendency of a challenged transaction. He cites no

case factually analogous to the challenged Transaction. He makes no serious effort

to engage the rich discovery record. He does not explain why one possible

permutation of a hypothetical alternative transaction compels the allocation of “at

least $100 million” to his proposed class. (Hayes Br. at 5.) Hayes barely looks

beyond pleaded publicly available facts about the terms of the challenged




Transaction and he makes abstract arguments about why direct and derivative

claims and remedies and measures of damages are somehow equivalent. He does

not explain why the Court would potentially award a fortune to a particular subset

of class members in lieu of or in addition to other potential remedies.

At the outset of the case, Hayes advanced the theory that holders during the

pendency of the Transaction were harmed because defendants improperly

“excluded” public stockholders from a supposed opportunity to buy Activision

common stock at a favorable price. (Hayes Am. Compl. ¶¶ 82, 128, 129, 146; see

Hayes Br. at 3 (“while denying the public stockholders a similar opportunity”); id.

at 39 (“to the detriment and exclusion of Activision’s public stockholders”).) Lead

Plaintiff’s Counsel never adopted that theory. Hayes himself appears to recognize

that there is no such thing as a “stockholder opportunity” claim. (See Hayes Br. at

45 (“Pacchia’s assertion that the public stockholders did not have ‘a right to be

included in a particular form of alternative transaction’ misses the point.”).)

Lead Plaintiff contended that certain potential alternative transactions were

superior to allowing ASAC to buy shares at $13.60 per share. Any alternative

transaction structure that allowed Activision to repurchase additional shares from

Vivendi at $13.60 per share (or buy shares at that price and immediately re-sell

them to third parties at a higher price) would be financially advantageous to

Activision itself. Secondary offerings and block trades by Vivendi would be




advantageous to public stockholders from a governance perspective, because they

would widely disperse the ownership of Vivendi’s control stake.

A particular permutation in Atkins’ expert report – a rights offering at a

discounted price – would create an immediate gain for the right holder who bought

shares at a discount. We featured that permutation at the class certification stage.

(See Hayes Br. at 17-18 (quoting oral argument).) But if, for example, a rights

offering was not priced at a discount, the gain would flow to Activision, not the

right holder. The other manner in which Atkins referred to damages to public

shareholders was the argued-for positive stock price effect from Activision

incurring $500 million in additional debt to repurchase shares. (Friedlander Aff.

Ex. 8 at 35-37 & Ex. C at 57.) Professor Cornell’s expert report was devoted to

attacking that claimed form of damages. Moreover, any increase in stockholder

wealth from a larger repurchase of stock by Activision at a favorable price is

derivative in nature.

The monetary claims belonging to Activision were far stronger than any

monetary claims belonging to any stockholders. Lead Plaintiff Counsel’s task was

to build a case that it was feasible for Activision to obtain the benefits of

eliminating Vivendi’s stake without any need for BKBK to personally invest $100

million and raise outside capital through ASAC. We believe we developed a

strong case for the feasibility of the Over-the-Wall Transaction, which could also




be pursued in conjunction with a secondary offering. These alternative transaction

structures would give rise to a claim by Activision for restitution against the ASAC

Defendants. Moreover, damages to Activision from not pursuing the Over-the-

Wall Transaction could be estimated in various ways, such as the effective price

paid by limited partners in ASAC, the estimated returns demanded by those

investors, estimates of Activision’s post-Transaction stock price, the actual market

price of Activision shares, and precedents from similar PIPE transactions. We did

not believe that the failure to pursue an Over-the-Wall Transaction or a secondary

offering lent itself to “class damages.” We also did not have any confidence that

we could demonstrate the feasibility of a rights offering at a discounted price.

Hayes’s fiction that continuous holders during the pendency of the

Transaction possessed a valuable damages claim taints all of his arguments.

A. An Appropriate Class Was Certified

Without citing any law, Hayes attacks the broad class definition drafted by

the Court in the Order Certifying Class of November 12, 2014. Hayes argues that

the class definition should be limited to persons “who suffered damages as a result

of the Transaction” (i.e., continuous holders during the pendency of the

Transaction) because they “were denied the opportunity to benefit from” Vivendi’s

below-market sale of shares to ASAC. (Hayes Br. at 25, 27-28.) Hayes ignores

the binding precedent presented at the class certification stage respecting the




appropriateness of including buyers, sellers and continuous owners in a class. See

In re Phila. Stock Exch. Inc., 945 A.2d 1123, 1139 (Del. 2008) (noting “that it is

commonplace for a certified class to include persons who held shares as of a given

date, and their transferees, successors, and assigns”) (internal quotation omitted).

See also In re Celera Corp. S’holders Litig., 59 A.3d 418, 429 (Del. 2012) (“This

Court has approved broad definitions of a proposed class before…. This is

consistent with a number of decisions of the Court of Chancery as well.”)

(footnotes omitted).

Hayes does not offer any legal basis or practical reason for rejecting the

standard formulation of a class. Why must current or former holders in street name

be able to determine whether the particular shares they purchased are deemed class

shares? (Hayes Br. at 25-26.) Since the proposed settlement does not call for any

direct payment to class members, the distinction is unimportant.

B. Notice Was More Than Adequate

Hayes devotes more than seven pages of his brief to challenging the

adequacy of notice of a proposed settlement of historic proportion that was

national news. (Hayes Br. at 29-36.) Hayes required no notice himself, and he

timely objected. No one in the entire class joined Hayes in objecting to the

proposed settlement. The singularity of Hayes’s objection cannot be attributed to

any material deficiencies in the notice, as there were none.




The sole case cited by Hayes stands for the proposition that a notice “cannot

omit fundamental information about settlement terms,” such as the actual

disclosures in a disclosure settlement, or the fact that individual defendants are

receiving the same monetary consideration as the class members. In re TD

Banknorth S’holders Litig., 938 A.2d 654, 670-71 (Del. Ch. 2007). Here, the basic

terms of the settlement were publicized in a Schedule 13D filing by ASAC on

November 20, 2014, and fuller and wider public dissemination took place upon the

finalization of the settlement a month later. See supra p. 1. There is no

requirement to mail a settlement notice to every single class member who ever

owned a share of a publicly held company. Ct. Ch. R. 23(e) (notice of settlement

of a class action may be given “by mail, publication or otherwise”).

The notice was drafted in a reader-friendly Q&A format. Any casual reader

of the notice would realize that breach of fiduciary duty claims challenging the

Transaction were being compromised for the payment of $275 million to

Activision and corporate governance changes. The law hardly requires

identification of each potential damages calculation put forward in an expert

report, many of which may not even be featured at trial. Because Hayes was

provided with the Atkins report, he “cannot be heard to say that the notice was

inadequate.” Geller, 462 A.2d at 1081.




Hayes’s laches is another reason why he cannot be heard to challenge

adequacy of notice. Hayes sought to avoid the cure of any perceived notice

problems before the settlement hearing. His letters to the settling parties in

January made only oblique reference to any issue respecting notice. (Juray Aff.

Ex. D at 5; id. Ex. F at 11.) Hayes refused to specify his arguments respecting

notice during the February 2, 2015 teleconference among counsel. Hayes waited

until the last day of the objection period to surface a multitude of objections

respecting notice, as part of an effort to hold up Court approval of the Settlement.

C. Former Stockholders Do Not Possess a Valuable Class Damages Claim

Hayes casts himself as the champion of damaged class members who are

receiving “no meaningful consideration” for their damage claims. (Hayes Br. at

38.) His “no consideration” mantra requires Hayes to ignore the valuable benefits

flowing to stockholders of Activision shares upon the consummation of the

settlement: control-transferring corporate governance changes and an indirect, pro-

rata interest in the $275 million derivative recovery. The market value of those

benefits began accruing to stockholders upon the public announcement of the

proposed settlement. The only class members who are receiving “no

consideration” from the proposed settlement are those former stockholders who

sold their shares on or before November 19, 2014.




Excluding former stockholders from a class action settlement is common. In

In re Philadelphia Stock Exchange, Inc., 945 A.2d 1123 (Del. 2008), the Delaware

Supreme Court approvingly discussed the same situation found here:

The case law supports his determination. For example, In re Triarc Cos., Inc. Class and Deriv. Litig.[, 791 A.2d 872 (Del. Ch. 2001),] involved a settlement of a shareholders class and derivative action. A person who held shares at the time of the alleged wrong but later sold those shares, objected to the settlement, which provided benefits only to the corporation. Those benefits were enjoyed indirectly by the current stockholders, but not at all by the former stockholders. The Court of Chancery held that the former stockholders could properly be bound to the settlement yet receive nothing, because where “claims are weak or of little or no probable value ... it is fair to bar those claims as part of the overall settlement.” The Court also observed that “there is nothing unfair or unreasonable about a judgment that bars [a] later assertion of an insubstantial claim....” If, as is argued, the transferees’ rights in the disputed claims are weak, the weakness of their rights will be taken into account in allocating the proceeds of the settlement, by distributing little (or possibly none) of the proceeds to them.

Id. at 1140 (footnotes omitted) (emphasis added). The Court continued in a

footnote: “It is also commonplace for the Court of Chancery to include persons

having weak claims in a settlement class, but to allocate little or none of the

proceeds to them.” Id. at 1140 n.31 (collecting cases).

Hayes himself, when he proposed a settlement in 2013, deprived former

Activision stockholders of any participation in the settlement consideration. His

MOU provided for a cash payment and stock distribution “[w]ithin thirty days

following the Effective Date” to Class members who are “holders of record … on




the Effective Date.” (Juray Aff. Ex. A § 1.a.) “Effective Date” was defined as the

date when the Court of Chancery Order approving the settlement “is finally

affirmed on appeal or is no longer subject to appeal and the time to petition for

reargument, appeal, or review, by leave, writ of certiorari, or otherwise, has

expired.” (Jurray Aff. Ex. A § 3.) “Class” was defined as anyone who owned

shares “at any time” between announcement and closing of the Transaction.

(Jurray Aff. Ex. A § 4.A.)

In other words, the only class members to be paid in Hayes’s proposed

settlement were continuous owners from the date of consummation of the

Transaction through an undetermined date months later. Anyone who sold prior to

consummation of the Transaction would receive nothing. Anyone who sold during

the pendency of the settlement process also would receive nothing. Hayes does not

explain why he is now championing the cause of class members who would have

received nothing from his own proposed settlement of his own class claims.10

The reality is that former stockholders suffered no “unique harm”

compensable in damages. (Hayes Br. at 41.) Activision was harmed by BKBK

10 Hayes says the class of distributees in his proposed settlement was “carefully defined” and excluded “Vivendi, ASAC and all Activision directors.” (Hayes Br. at 9.) The proposed class was carefully defined by the defendants to include affiliates of named defendants Fidelity and Davis and to include trusts in which any person other than an individual defendant had a beneficial interest. (Juray Aff. Ex. A § 4.A.) Trusts for the benefit of family members of BKBK held over 1,600,000 Activision shares. (Juray Aff. Ex. B at 90.)




having taken Activision’s relationships, resources, and information to get an

investment opportunity for ASAC on below-market terms. Activision’s fiduciaries

should have negotiated a better transaction for Activision given Activision’s role in

financing the bulk of the buyout and the opportunity posed by Vivendi’s desire to

sell its stake. Public stockholders were directly harmed by BKBK’s resultant

control, but they were only indirectly harmed by BKBK’s usurpation of

Activision’s opportunity to negotiate a better transaction for itself.

When seeking class certification Lead Plaintiff did not “forcefully argue[]”

the strength of a potential claim for damages payable to public stockholders.

(Hayes Br. at 42.) Nor did Lead Plaintiff tell the Court that a class claim was

“worth approximately $600 million.” (Id. at 43.) Rather, Lead Plaintiff’s Counsel

“posited” that a below-market rights offering was a feasible and superior

alternative transaction, and that class damages for that alternative could be as high

as $641.6 million. (Id. at 18 (quoting oral argument).) At the conclusion of the

oral argument, Lead Plaintiff’s Counsel forcefully argued in favor of the logic of a

derivative damages claim based on the Over-The-Wall Transaction alternative.

(10/13/14 Tr. at 68-69.)

Hayes cites no analogous case for why the Over-The-Wall Transaction

alternative could lead to class damages. Hayes notes Lead Plaintiff’s reliance on

Parnes v. Bally Entm’t Corp., 722 A.2d 1243 (Del. 1999), which concerned a




challenge to a management-negotiated below-market side deal to a merger. (Hayes

Br. at 42-43.) A class claim existed in Parnes only because the plaintiff “directly

challenges the fairness of the process and the price in the Bally/Hilton merger.”

722 A.2d at 1245. Unlike the merger in Parnes, public stockholders in Activision

were not third-party beneficiaries of the Transaction who received any

consideration at an artificially depressed value.

It is insufficient that harm to Activision “would necessarily be felt at the

stockholder level.” (Hayes Br. at 41.) Hayes cites equity dilution cases such as

Gentile v. Rossette, 906 A.2d 91 (Del. 2006), and Carsanaro v. Bloodhound

Techs., Inc., 65 A.3d 618 (Del. Ch. 2013), but those cases involved the issuance of

new shares to a corporate insider for inadequate consideration. Public stockholders

suffered direct economic harm because the new shares “extract[] from the public

shareholders … a portion of the economic value … embodied in the minority

interest” by diluting the public stockholders’ interest in the corporation. Gentile,

906 A.2d at 100. Here, no new Activision shares were issued, and public

stockholders did not suffer dilution.

Certain cases cited by Hayes undermine his argument that a settlement must

involve a monetary payment to class members. The “stockholder level” remedy

contemplated by those cases involves “adjusting the rights of the stock or

invalidating a portion of the shares” issued at a discount. Carsanaro, 65 A.3d at




657 (citing In re Loral Space & Commc’ns Inc., 2008 WL 4293781, at *32 (Del.

Ch. Sept. 19, 2008) (reforming securities purchase agreement to convert preferred

stock into non-voting common stock), aff’d, 977 A.2d 867 (Del. 2009), and Linton

v. Everett, 1997 WL 441189, at *7 (Del. Ch. July 31, 1997) (invalid[at]ing shares

that directors issued to themselves for inadequate consideration)). Here, the Court

could have reformed the Stock Purchase Agreement to remedy the economic

damage flowing from the Transaction. Lead Plaintiff could have prevailed at trial

and obtained full relief without the payment of any damages award to anyone.

The fundamental problem with Hayes’ argument is that it rests on his

incorrect assertions that the class damages claims and derivative damages claims

are “essentially the same” and they “had the same liability and damage theories”

and “had the same strength.” (Hayes Br. at 2, 43.) Derivative damages depend on

the feasibility of the Over-The-Wall Transaction. Restitution to Activision

depends largely on the feasibility of (i) the Over-The-Wall Transaction, (ii) the

secondary offering alternative, or (iii) a hybrid of those two alternatives. Class

damages rest on establishing the feasibility of a rights offering priced at a discount.

As explained on pages 51-53 of the opening brief, we thought it highly unlikely

that the Court would award class damages based on the feasibility of that particular

alternative transaction structure.




Pacchia had no “conflicting interest” in supporting a settlement that

allocated proceeds solely to the derivative damages claim. (Hayes Br. at 44.) As a

continuous holder who sold shares subsequent to the announcement of the

Transaction, Pacchia stood to make more money if the settlement consideration

was allocated entirely in the manner Hayes favors. In Schultz v. Ginsburg, 965

A.2d 661 (Del. 2009), the Delaware Supreme Court held that the class

representative, “as an unbiased Continuous Stockholder,” was well situated to

propose a plan of allocation for buyers, holders and sellers based on the “varying

degrees of injury and the relative value” of the claims and “the best interests of the

class as a whole.” Id. at 668, 671. Pacchia is similarly well situated.

Hayes attacks the asserted bases for the allocation as contrived,

unconvincing, and not credible. (Hayes Br. at 45-49.) There is little substance to

Hayes’s attack. Much of it is based on the fact that Atkins’ expert report of August

29, 2014 put forward the theoretical feasibility of a backstopped rights offering

priced at $13.60 per share. Even though that alternative allowed for the highest

damages calculations, there are reasons why it is listed last among the various

alternatives.

One reason is the absence of any mention in the discovery record of a

potential rights offering to Activision stockholders. That lacuna in the record

cannot be dismissed with the argument that “Kotick and Kelly foreclosed




BKBK’s proposal. (Id. at 20.) A hybrid of the Over-The-Wall Transaction and a

secondary offering is a variant of what JP Morgan put forward on January 16,

2013. (Friedlander Aff. Ex. 12 at 11.)

Additionally, Atkins did not identify any multi-billion dollar domestic rights

offerings. Atkins did identify several precedents suggesting that Activision could

profitably undertake an Over-the-Wall Transaction, including a recent transaction

in which Alibaba repurchased a block of its shares from Yahoo! and resold shares

at a higher price. (Friedlander Aff. Ex. 8 Ex. C at 13-17.)

Furthermore, Vivendi was attracted to a secondary offering because it gave

Vivendi access to a wide market for its shares and avoided a scenario in which

Vivendi was selling stock to specified non-Vivendi investors at a discount.

(Capron Dep. at 40.) Kotick expressed opposition to a secondary offering on the

ground that levering Activision and allowing Vivendi to dump shares into the

market “is the worst thing we could do as a company.” (Friedlander Aff. Ex. 14 at

1.) A discounted rights offering could be seen as the worst of both worlds.

Vivendi would face criticism from its own investors for making its Activision

shares available for purchase at a discount to Activision’s stockholders rather than

its own stockholders. Activision would be exposed to the risk that a multi-billion

dollar rights offering would dampen the stock price. These factors made it difficult

to argue that a discounted-priced rights offering would be the logical outcome of a




hypothetical negotiation among Activision’s fiduciaries acting loyally but at arms-

length.

In sum, the Atkins report creates no basis to question the merits of Lead

Plaintiff’s Counsel’s attribution of significant value to Activision’s claims for

damages and restitution and no value to the potential alternative of a discounted-

price rights offering on a standalone basis. We did not highlight flaws in the

discounted rights offering alternative in our own expert report. Over the eleven

weeks that passed between the delivery of Atkins’ opening report on August 29,

2014 and the agreement on basic terms of settlement on November 13, 2014, Lead

Plaintiff’s Counsel studied the opening and rebuttal reports of defendants’ experts,

served a rebuttal expert report by Atkins, took or defended the depositions of the

experts, drafted and read mediation statements, engaged in extensive mediation-

related discussions, prepared for trial, and analyzed the probabilities of what could

be obtained at trial and what could be obtained in mediation. The proposed

settlement reflects our extended diligence of a full pre-trial record.

D. There Is No Basis to “Reallocate” a Portion of the Fee Request to the Class

Hayes contends that “the Court should reallocate a substantial portion of the

proposed fee to the benefit of the public stockholders of Activision during the

pendency of the Transaction.” (Hayes Br. at 55.) There exists no basis for




reallocation. For the reasons discussed above, there was no valuable damages

claim possessed by any class of present or former stockholders. Nonetheless,

current stockholders will immensely benefit from approval of the Settlement.

There is also no mechanism for reallocation. If the Settlement is not approved,

there will be no consideration of the fee request and the litigation will go forward.

If the Settlement is approved, any reduction in the fee award will redound to the

benefit of Activision itself.

Hayes invokes Americas Mining Corp. v. Theriault, 51 A.3d 1213 (Del.

2012) (“Southern Peru”), as a rationale for reducing and reallocating the fee

award, in light of Lead Plaintiff’s Counsel’s supposed “less than diligent

representation of the Class.” (Hayes Br. at 55.) There was no lack of diligent

representation here, and the beneficiary of the fee award reduction in Southern

Peru was the nominal defendant. There was no reallocation to a class. Moreover,

the two bases for the fee reduction in Southern Peru to 15% are inapplicable.

Unlike the years-long delay by plaintiff’s counsel that led the Court to award lower

damages in Southern Peru than otherwise could have been merited, 51 A.3d at

1262, here, Lead Plaintiff’s Counsel’s alacrity allowed the Class to reap

tremendous corporate governance protections during the life span of ASAC. The

other basis for a percentage reduction in Southern Peru was the size of the

judgment, over $2 billion, which far exceeds the “megafund” demarcation of $500




million. Id. at 1260, 1262. The Supreme Court made clear that even for

megafunds any decision to reduce the otherwise applicable percentage of recovery

is discretionary. Id. at 1261.

E. Lead Plaintiff’s Request for a Special Award Is Not an Indicia of Inadequacy of Representation

Hayes asserts that Lead Plaintiff’s request for a special award suggests that

he “is not an adequate class representative.” (Hayes Br. at 57.) Hayes also asserts

that Lead Plaintiff is improperly seeking an award for “customary responsibilities.”

(Id. at 58.) Hayes submits no case law or evidence suggesting that it is customary

for a representative plaintiff to devote four days to attending mediation sessions,

two days to attending hearings in Delaware, an additional day for a deposition, plus

significant time for document retrieval, attendance of a meeting with an expert, and

extensive and ongoing consultations with counsel and reviews of filings in a large

case involving complex facts and proceedings. In Forsythe v. ESC Fund Mgmt.

Co., 2012 WL 1655538 (Del. Ch. May 9, 2012), this Court approved a special

award of $35,000 to a plaintiff who engaged in the same type of activities –

traveling to Wilmington, testifying, and attending mediation sessions.12 Id. at *8.

12 This Court’s recent decision in Forsythe, which we cited in our opening brief, is nowhere mentioned in the heavily researched objection that the ASAC Defendants and Vivendi Defendants filed for the purported purpose of establishing that Lead Plaintiff “should be awarded no special fee” because he “performed at most the




The sole case cited by Hayes involved a “small settlement” that was rejected

by the Court because of concerns that a requested award to the institutional

stockholder plaintiff was “integral to the settlement” and a necessary component

for all parties to “seek approval of the settlement.” Strategic Asset Mgmt. v.

Nicholson, Inc., 2004 WL 1192088, at *2 & n.7 (Del. Ch. May 20, 2004). Here,

defendants reserved the right to oppose a special award to Lead Plaintiff, and

proceeded to do so, rendering Strategic Asset Mgmt. particularly inapt.

II. COUNSEL FOR PFEIFFER AND BENSTON ARE NOT ENTITLED TO SHARE IN A FEE AWARD In order to establish entitlement to a portion of the fee award, counsel for

Pfieffer and Benston must show that (i) the insider trading claim they advocated

was meritorious, and (ii) there exists a causal connection between their litigation

efforts and the benefits of the proposed settlement. Smith, Katzenstein & Jenkins

LLP v. Fidelity Mgmt. & Research Co., 2014 WL 1599935, at *9 (Del. Ch. Apr.

16, 2014). They fail on both elements.

When Benston sought a leadership role for the express purpose of bringing

his so-called Brophy claim, Lead Plaintiff’s Counsel argued that the claim was not

being pursued because Brophy v. Cities Service Co., 70 A.2d 5 (Del. Ch. 1949),

and its progeny have no application to a transaction negotiated among fiduciaries

normal obligations of class representative.” (ASAC/Viv. Obj. ¶¶ 12, 20 (internal quotation and citation omitted).)




with equivalent access to confidential information. The Court ruled as follows: “I

do not believe that the absence of a claim particularly and specifically titled

‘Brophy’ materially alters the risk/reward profile of this case in such an extreme

fashion that it would cause me to see a need to second-guess the judgment of the

current leadership team. So I will deny the motion on that basis.” (6/6/14 Tr. at

134-35.) Benston was never heard from again, and Lead Plaintiff never pressed a

Brophy claim.

Pfieffer and Benston have not demonstrated any causal connection between

their advocacy of a Brophy claim and anything defendants have done. They have

not put forward any evidence that their advocacy of the insider trading claim

played any role in defendants’ decisions not to sign the Hayes-proposed settlement

on October 2013 or to enter into the current proposed settlement in November

2014. In Smith, Katzenstein, causation turned on the following findings: “New

Counsel prevented the original settlement from being approved, then engaged in

discovery and pushed the case forward. New Counsel’s diligence brought Revlon

to the settlement table with Fidelity.” 2014 WL 1599935, at *13. No similar

findings can be made here. Pfieffer and Benston have not shown that defendants

considered their claim as having any marginal value whatsoever, as compared to

the claims being actively litigated by Lead Plaintiff’s Counsel.




CONCLUSION

Lead Plaintiff’s Counsel obtained unprecedented relief for Activision and its

stockholders by building a factual and expert case along lines no one else

envisioned. For all the foregoing reasons, and those set forth in the opening brief,

Lead Plaintiff respectfully requests that the Court approve the settlement, recertify

the class, approve the fee application, and approve the special award to Lead

Plaintiff.

/s/ Joel Friedlander

Joel Friedlander (#3163) Jeffrey M. Gorris (#5012) FRIEDLANDER & GORRIS, P.A. 222 Delaware Avenue, Suite 1400 Wilmington, Delaware 19801 (302) 573-3500 Co-Lead Counsel

OF COUNSEL: Lawrence P. Eagel Jeffrey H. Squire BRAGAR EAGEL & SQUIRE, PC 885 Third Avenue, Suite 3040 New York, New York 10022 (212) 308-5858 Co-Lead Counsel DATED: February 25, 2015

/s/ Jessica Zeldin Jessica Zeldin (#3558) ROSENTHAL, MONHAIT & GODDESS, P.A. 919 Market Street, Suite 1401 Wilmington, Delaware 19801 (302) 656-4433 Delaware Liaison Counsel

REDACTED, PUBLIC VERSION: February 27, 2015




transaction id 56838590 case no. 8885 -vcl in the court of...

Documents