Activision Lawsuits Show High Scrutiny Of Compensation Continues In 2022

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Boards should expect shareholders to cast a higher percentage of votes opposing comp plans that appear overly generous in say-on-pay votes.

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Lawsuits filed to block Microsoft’s $69 billion acquisition of Activision Blizzard are another indication that corporate boards will be under greater scrutiny regarding proposed compensation for C-suite executives and directors this year. Corporate board members should expect to see shareholders cast a higher percentage of votes opposing compensation plans that appear overly generous in say on pay votes. Boards may also find themselves served with lawsuits that attempt to claw back compensation from C-suite executives for a range of reasons.

In the case of Activision, the lawsuits allege that the company’s SEC filings prior to the sale lacked key information which made the documents “materially deficient” and prevented shareholders from making an informed decision about the transaction. Furthermore, the lawsuits object to the large “golden parachute packages” of company stock, options and equity awards that would be given to senior management, including Activision CEO Bobby Kotick ($14.6 million), chief financial officer Armin Zerza ($25.4 million) and chief operating officer Daniel Alegre ($29.1 million) if they are terminated under certain conditions after the merger is completed.

The complaint states, “The breakdown of the benefits of the deal indicate that Activision insiders are the primary beneficiaries of the Proposed Transaction, not the Company’s public stockholders such as plaintiff.” It goes on to accuse the board of having a conflict of interest that is detrimental to the company: “The board and the company’s executive officers are conflicted because they will have secured unique benefits for themselves from the proposed transaction not available to plaintiff as a public stockholder of Activision.”

The merger was announced in January and the lawsuits filed in February. Shareholders were quick to react to what they perceived as unfair compensation for executives especially since the lawsuits claim the Activision proxy statement omitted or misrepresented information about the sales process and potential conflicts of interests for management, Activision financial projections and company financial valuation analyses.

While Activision released a statement asserting, “We disagree with the allegations made in the complaint,” the impression left by the lawsuits could potentially cause damage to the reputations of executives and corporate directors. The lawsuits may also show that:

Both the Activision and Microsoft boards bear some responsibility for this mishap.

While lawsuits over mergers are very common, one wonders whether the allegations in this situation could have been avoided. Being accused of omitting information that is material to a sale is a serious charge which some might say speaks to the ability of the members of the board. Members of both boards must have read and approved these documents with the understanding that their shareholders would need to read and approve them as well. Apparently, there was very little objection to the data that was included in (or omitted from) the Activision proxy statement.

Revisiting details of how the sale was structured, why certain provisions were included and why certain information was omitted could very well harm the reputation of board members. Questions will be asked about each board’s process for determining conflicts of interest in financial transactions. This examination may play out in court or in an SEC investigation, which may lead to even more litigation.

Excessive compensation has been a red flag during the pandemic.

Shareholders have been sensitive to executives receiving huge payouts during the Covid-19 pandemic, when so many people have suffered economically. The Activision board should have taken this into consideration before approving large compensation packages to executives who were selling their company. Shareholders are happy when a company’s share price increases, but if selling the company is the only way management can improve the stock price, some would question whether a big reward is deserved. Defending higher compensation during a pandemic has been a difficult task.

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