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In re Activision Blizzard, Inc. Stockholder Litigation

Court of Chancery of Delaware, New Castle

February 21, 2014

IN RE ACTIVISION BLIZZARD, INC. STOCKHOLDER LITIGATION

Submitted February 11, 2014

Joel Friedlander, Jeffrey M. Gorris, Albert J. Carroll, BOUCHARD MARGULES & FRIEDLANDER, P.A., Wilmington, Delaware; Jessica Zeldin, ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware; Lawrence P. Eagel, Jeffrey H. Squire, BRAGAR EAGEL & SQUIRE, PC, New York, New York; Attorneys for Plaintiff.

Raymond J. DiCamillo, Susan M. Hannigan, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Joel A. Feuer, Michael M. Farhang, Alexander K. Mircheff, GIBSON, DUNN & CRUTCHER LLP, Los Angeles, California; Attorneys for Defendants Vivendi S.A., Philippe Capron, Fré dé ric Cré pin, Ré gis Turrini, Lucian Grainge, Jean-Yves Charlier, and Jean-Franç ois Dubos.

R. Judson Scaggs, Jr., Shannon E. German, Angela C. Whitesell, MORRIS, NICHOLS, ARSHT & TUNNELL, Wilmington, Delaware; Robert A. Sacks, Diane L. McGimsey, SULLIVAN & CROMWELL LLP, Los Angeles, California; William H. Wagener, SULLIVAN & CROMWELL LLP, New York, New York; Attorneys for Defendants Robert A. Kotick, Brian G. Kelly, ASAC II LP, and ASAC II LLC.

Collins J. Seitz, Jr., Garrett B. Moritz, Anthony A. Rickey, SEITZ ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; William Savitt, Ryan A. McLeod, WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Attorneys for Defendants Robert J. Corti, Robert J. Morgado, and Richard Sarnoff.

Edward P. Welch, Edward B. Micheletti, Sarah Runnells Martin, Lori W. Will, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; Attorneys for Nominal Defendant, Activision Blizzard, Inc.

OPINION

Page 532

LASTER, Vice Chancellor.

Plaintiff Anthony Pacchia has challenged a transaction through which Activision Blizzard, Inc. (" Activision" or the " Company" ) and an entity controlled by Activision's two senior officers acquired over 50% of the Company's outstanding shares from Vivendi S.A., its controlling stockholder, for approximately $8 billion in cash. The plaintiff contends that Vivendi and the members of the Activision board of directors (the " Board" ) breached their fiduciary duties by entering into the transaction. Six of the eleven individual defendants who served on the Board and approved the transaction were senior officers of Vivendi (the " Vivendi Directors" ).

Page 533

In response to document requests that the plaintiff served, Vivendi objected generally on the grounds that French law barred the production of discovery (i) except pursuant to the Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters (the " Evidence Convention" ) and (ii) unless electronic documents were handled in accordance with French Law No. 78-17 of January 6, 1978 on Information Technology, Data Files and Civil Liberties (the " Data Protection Act" ). With one exception, the Vivendi Directors joined in this objection. The exception was a Vivendi Director who lives in California and who agreed to search for and produce responsive documents located in the United States. Vivendi similarly offered to produce files located in the United States, but cautioned that all of its electronic documents were housed on servers in Paris, France, and could not be produced.

The plaintiff has filed a motion to compel seeking an order requiring Vivendi and the Vivendi Directors (together, the " Vivendi Defendants" ) to produce documents in their possession, custody, and control, wherever located, in accordance with the Court of Chancery Rules and without regard to any contrary provisions of French law (the " Motion to Compel" ). The Motion to Compel also seeks a ruling that depositions will be conducted in the United States in accordance with the Court of Chancery Rules. The Vivendi Defendants ask that the motion be denied and a protective order be entered providing that discovery only proceed in conformity with the Evidence Convention and that any production of electronic information comply with the Data Protection Act.

The Motion to Compel is largely granted. Discovery shall proceed as described in this decision.

I. FACTUAL BACKGROUND

The facts for purposes of the Motion to Compel are drawn from the allegations of the Verified Second Amended Class and Derivative Complaint (the " Complaint" ) and the exhibits, affidavits, and declarations submitted with the briefing on the Motion to Compel. What follows are not formal factual findings, but rather how the court views the record for purposes of a discovery ruling.

A. Activision And Vivendi

Activision is a Delaware corporation with its headquarters in Santa Monica, California. Its stock is listed on Nasdaq under the symbol " ATVI." The Company is a leading player in the interactive entertainment software industry and one of the largest video game publishers in the United States.

Vivendi is a socié té anonyme organized under the laws of France with its headquarters in Paris, France. Vivendi is a French multinational mass media and telecommunication company that operates in the music, television and film, publishing, telecommunications, the Internet, and video games sectors. Vivendi has experience litigating in the United States. In addition to the current litigation, it has been a plaintiff at least four times [1] and named a defendant at least twice.[2]

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On December 1, 2007, Activision, Vivendi, and certain of their wholly owned subsidiaries entered into a business combination agreement (the " Business Combination Agreement" or " BCA" ). Pursuant to the BCA, Activision acquired a Vivendi subsidiary, Vivendi Games, Inc., in exchange for issuing 295.3 million shares of Activision common stock to a different Vivendi subsidiary, VGAC LLC. In addition, Activision issued 62.9 million shares of its common stock to Vivendi for approximately $1.7 billion. This decision refers to the transaction as the " Business Combination."

The Business Combination closed in 2008. As part of the transaction, Vivendi gained the right to appoint six directors to the eleven-member Board.

B. The Challenged Transaction And This Litigation

On July 25, 2013, Activision, Vivendi, and defendant ASAC II LP (" ASAC" ) entered into a stock purchase agreement (the " Stock Purchase Agreement" or " SPA" ). Pursuant to the SPA, Activision agreed to purchase a Vivendi subsidiary for $5.83 billion, and ASAC agreed to purchase 171,968,042 shares of Activision common stock from Vivendi at $13.60 per share. ASAC is an entity controlled by defendants Robert Kotick and Brian Kelly, the Company's two most senior executives. The transaction closed in October 2013. This decision refers to that transaction as the " Restructuring."

During the time when the Restructuring was being negotiated, and when it was approved, the Vivendi Directors who served on the Activision Board were Philippe Capron, Fré dé ric Cré pin, Ré gis Turrini, Lucian Grainge, Jean-Yves Charlier, and Jean-Franç ois Dubos. Each of the Vivendi Directors was a senior executive officer of Vivendi or one of its U.S. subsidiaries.

The Complaint alleges that Vivendi caused Activision to enter into the Restructuring because Vivendi desperately needed liquidity. It alleges that the Vivendi Directors threatened to take actions to generate liquidity for Vivendi if a sale of Vivendi's control position was not promptly achieved. The Complaint asserts that after the Board created a special committee to negotiate with Vivendi, the Vivendi Defendants forced the committee to disband. According to the Complaint, Vivendi then negotiated directly with Kotick and Kelly to structure the Restructuring to their mutual benefit. Through the transaction, Vivendi got the liquidity it needed, Kotick and Kelly got control of Activision, and their investment vehicle, ASAC, got to purchase shares of stock from Vivendi at a discount to the market price. The announcement of the transaction led to an increase in Activision's stock price. As a result of the transaction bump and the discounted price, ASAC had an unrealized gain of over $725 million as of the first day of public trading after the transaction closed. The Complaint alleges that faithful fiduciaries would have sought and obtained a transaction that generated greater value for Activision and its stockholders.

C. The Document Requests And The Objections

On October 14, 2013, the plaintiff served a first request for production of documents on the Vivendi Defendants. On December 11, the plaintiff served a second request. The document requests call for the Vivendi Defendants to produce documents relating to the Restructuring.

On January 3, 2014, counsel for the Vivendi Defendants emailed the plaintiff's counsel and noted that the Vivendi Defendants would object to producing documents

Page 535

located in France. Vivendi's counsel took the position that French Statute No. 68-678 of July 26, 1968, as amended in 1980, commonly known as the " Blocking Statute," made it a criminal offense for the Vivendi Defendants to respond to the document requests. See Law No. 68-678 of July 26, 1968 relating to the Communication of Economic, Commercial, Industrial, Financial or Technical Documents and Information to Foreign Individuals or Legal Entities, as modified by Law No. 80-538 of July 16, 1980, available at Affidavit of Justice Jean-Paul Beraudo (" Beraudo Aff." ) Ex. 2. Vivendi's counsel also asserted that the plaintiff only could take discovery from the Vivendi Defendants by using the procedures and abiding by the limitations on discovery set forth in the Evidence Convention. See Evidence Convention, opened for signature Mar. 18, 1970, 23 U.S.T. 2555, 847 U.N.T.S. 241.

On January 17, 2014, the Vivendi Defendants served formal responses to the plaintiff's document requests. General Objection No. 2 objected to the plaintiff's document requests

to the extent they seek or call for information or documents located in foreign countries without . . . complying with any legal prerequisites to production from such foreign jurisdictions, including without limitation (i) the 1970 Hague Evidence Convention; (ii) French Statement n ° 68-678 of 26 July 1968 (as amended in 1980) (also sometimes referred to as the " French Blocking Statute" ) . . . ; and (iii) the French Data Protection Act N ° 78-17 of January 6, 1978 as amended in August 2004, governing the processing and transfer of personal data outside France. In light of the competing interests of the nations whose laws are in conflict, the hardship of compliance on the Vivendi Defendants, the relative importance of the information requested compared with information readily available from parties within the U.S., and the Vivendi Defendants' good faith willingness to provide responsive materials following a reasonable search, any discovery of the Vivendi Defendants should be made in compliance with the foregoing laws. Otherwise, complying with the Document Requests would pose a material risk of criminal liability.

Pl.'s Mot. Compel Ex. D at 3-4 (citations omitted); accord Pl.'s Mot. Compel Ex. E at 3-4 (citations omitted). This objection confirmed the Vivendi Defendants' earlier, informal objection based on the Blocking Statute and added an objection based on the Data Protection Act.

1. The Blocking Statute

France adopted its initial blocking statute in 1968 as part of the French government's resistance to the antitrust investigations and enforcement actions by the United States government against international shipping cartels. The original statute prohibited the communication, " to foreign public authorities, [of] documents or information relating to carriage by sea defined by Ministerial order issued by the Ministry in charge of the merchant navy." Law No. 68-678 of July 26, 1968 relating to the Communication of Documents and Information to Foreign Authorities in the Field of Maritime Trade, available at Beraudo Aff. Ex. 1.

In 1980, the French government adopted the current Blocking Statute, which is more expansive in scope. Article 1 bis addresses the gathering of evidence in France. As translated by Vivendi for purposes of the Motion to Compel, it states:

Without prejudice to international treaties or agreements and laws and regulations in force, it is prohibited for any

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person to request, search for or communicate, in writing, orally or in any other form, documents or information of an economic, commercial, industrial, financial or technical nature for the purposes of establishing evidence in view of foreign judicial or administrative proceedings or in relation thereof.

Blocking Statute, art. 1 bis. Article 2 requires that persons subject to the Blocking Statute " promptly inform the competent Minister, upon the receipt of any request concerning such communications." Id. Article 3 makes a violation of the statute a criminal offense punishable by imprisonment of up to six months and a fine of up to € 18,000. Id.

By its terms, the Blocking Statute prohibits the collection and production of materials in France for use outside of France in civil discovery, except in compliance with French law or an international convention such as the Evidence Convention. Its application is not limited to responses to document requests. Read literally, it encompasses any attempt by a party to transmit its own evidence outside of France for purposes of a foreign judicial proceeding. " If taken seriously the law would effectively prevent French parties from suing their foreign counterparts, even legitimately, because they could be barred from exporting their supporting evidence." Pierre Grosdidier, The French blocking statute, the Hague Evidence Convention, and the case law: lessons for French parties responding to American Discovery, Haynes & Boone, LLP 4 (Jan. 31, 2014), available at http://www.haynesboone.com/french_blocking_statute/ (citing Adidas (Can.) Ltd. v. S.S. Seatrain Bennington, 1984 WL 423, at *3 (S.D.N.Y. May 30, 1984) (refusing to take law " at face value" as a " blanket criminal prohibition against exporting evidence for use in foreign tribunals" )).

As currently applied, the recipient of a request for documents or information prohibited by the Blocking Statute is obligated to inform the Ministry of Foreign Affairs. Beraudo Aff. ¶ 19. Some United States courts have observed that the recipient should be able to seek and obtain a waiver of the statute or some assurance against prosecution. One of Vivendi's experts on French law, Justice Jean-Paul Beraudo, categorically rejects this possibility: " It is not possible to obtain permission to disclose documents, the disclosure of which would otherwise be prohibited by [the Blocking Statute.]" Id. ¶ 20.

At least one violation of the Blocking Statute has been prosecuted. See In re Avocat " Christopher X" , Cour de cassation [Cass.] [Supreme Court for Judicial Matters] Paris, crim., Dec. 12, 2007, No. 07-83228, available at Beraudo Aff. Ex. 7 [hereinafter Christopher X ]. The Christopher X case did not involve compliance with an ordinary discovery request. Instead, a French attorney contacted a witness and sought to elicit information for use in litigation in the United States by making false suggestions about what the evidence would show. The witness responded by disputing the false account and confirming his view in writing. The attorney then used the written statement in the U.S. case. The Criminal Chamber of the French Supreme Court affirmed the attorney's conviction for violation of the Blocking Statute and the imposition of a criminal sanction of € 10,000. Id.; accord Beraudo Aff. ¶ 26.

2. The Evidence Convention

The language of the Blocking Statute does not apply to parties' efforts to take evidence in France under any " international treaties or agreements and [the] laws and regulations in force." Blocking Statute, art. 1 bis. Both the United States and

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France are parties to the Evidence Convention.

The Evidence Convention identifies two primary mechanisms for obtaining evidence located abroad. The first method is a Letter of Request sent by a court in the requesting state. Evidence Convention, art. 1 (" [A] judicial authority of a Contracting State may, in accordance with the provisions of the law of that State, request the competent authority of another Contracting State, by means of a Letter of Request, to obtain evidence, or to perform some other judicial act." ). Article 3 of the Evidence Convention identifies items that the Letter of Request should contain, including, where appropriate " the questions to be put to the persons to be examined or a statement of the subject-matter about which they are to be examined" and " the documents or other property, real or personal, to be inspected." Id. art. 3(f)-(g). When responding to a Letter of Request, the recipient judicial authority " shall apply its own law as to the methods and procedures to be followed." Id. art. 9. The Evidence Convention contemplates, however, that the recipient judicial authority " will follow a request of the requesting authority that a special method or procedure be followed, unless this is incompatible with the internal law of the State of execution or is impossible of performance by reason of its internal practice and procedure or by reason of practical difficulties." Id. Article 9 states that " [a] Letter of Request shall be executed expeditiously." Id.

The second method authorizes diplomatic officers, consular agents, or appointed commissioners of the requesting state to collect evidence. Id. arts. 15-17. Under these provisions, the collection of evidence must ...


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