Last week, we broke one of the biggest stories in esports—the sale of substantially all of MLG’s assets to Activision Blizzard. Now, we want to fully explain this deal, which we’ve discovered significantly affects former employees of Gotfrag.

According to sources, back in 2007, when Gotfrag was purchased by MLG, Gotfrag shareholders were supposed to be paid in two parts: half up-front and half a year later as an “earnout payment” based on company performance in that year.

[perfectpullquote align=”right” cite=”” link=”” color=”” class=”” size=””]MLG refused to pay the cash portion, leading to a three-year impasse and eventual lawsuit[/perfectpullquote]

In that earnout payment, MLG refused to pay the cash portion, leading to a three-year impasse and eventual lawsuit, which was resolved in a settlement in 2012. That settlement, and the initial buyout, left Gotfrag with a substantial portion of stock in MLG.

The unfortunate final chapter of that stock allocation to Gotfrag was played out last month in MLG’s asset sale. To understand the implications, we now will explain the entirety of that asset sale.

The Business of MLG

The first step in understanding the asset sale is understanding MLG’s funding sources. As a startup that relies on venture, MLG has done equity sales, which are essentially selling off partial ownership of the company in return for funds to operate. In total, MLG has gained over $69 million in this fashion.

Another method for raising funds is taking out debt. So called debt financing is done typically by taking out a large loan from a bank, either offering collateral or having a cosigner (“guarantor”). MLG has turned to this method of fundraising increasingly over the years, albeit in lesser numbers, totaling $18 million.

Where has all this funding gone? To simplify: into asset generation. MLG’s assets are numerous and quite diverse. They include branding, contracts for broadcasting and tournament running, software, hardware, and much more. They include Gamebattles, MLG’s proprietary online tournament and ladder platform, and Agora Games, a company devoted to building online features and communities for a number of video games.

In total, MLG’s assets include basically everything you’d need to run a nationwide tournament series, including both a broadcast platform in MLG.tv and a robust online tournament system.

And that’s basically what MLG sold off.

The Sale Itself

The deal itself is simple. In order to describe it, we refer now to a full copy of the “Stockholder Written Consent,” a document we received prior to our initial report. It, along with a 228(e) notice, is replicated in full at the end of this article.

First, what parts of MLG were sold off? The “Sale” is defined as such (with legal mumbo jumbo removed):

[perfectpullquote align=”full” cite=”” link=”” color=”” class=”” size=””]”Major League Gaming Inc…. wishes to enter into an asset purchase agreement… with Activision Blizzard Media Networks, Inc…. pursuant to which the Corporation would sell substantially all of its assets (with the exception of its subsidiary Agora Games LLC) to Purchaser.”[/perfectpullquote]

What does “substantially” all of its assets include? Well, as we described above, basically everything the company had worked on building since 2002 (minus Agora Games). That means branding, contracts, software, hardware, etc.

Part of this sale even includes the “Major League Gaming” name. Here’s another excerpt from the consent:

[perfectpullquote align=”full” cite=”” link=”” color=”” class=”” size=””]”The Corporation wishes to amend the Certificate of Incorporation to change the Corporation’s name to a name that does not include “Major”, “League”, or “Gaming.” …The name of this corporation is [now] MLG Legacy Holdings, Inc.”[/perfectpullquote]

[perfectpullquote align=”right” cite=”” link=”” color=”” class=”” size=””]MLG is dead, long live MLG.[/perfectpullquote]

This explains much of the press surrounding the sale, particularly the press originating from Activision Blizzard sources. Headlines like “Activision Buys MLG” shouldn’t be read as “Activision Buys MLG (the company),” but rather as “Activision Buys MLG (the name and assets behind it).” MLG is dead, long live MLG.

This also explains seeming discrepancies between our reporting of MLG CEO Sundance DiGiovanni’s removal from his position, yet reports that he was remaining with MLG. The truth is that DiGiovanni is no longer the CEO of the old MLG (now MLG Legacy Holdings), but is now part of Activision Blizzard’s MLG.

This is also confirmed by the consent letter:

[perfectpullquote align=”full” cite=”” link=”” color=”” class=”” size=””]”Sundance DiGiovanni is hereby removed as the Corporation’s chief executive officer… Greg Chisholm is hereby appointed as the Corporation’s acting chief executive officer, chief operating officer, and secretary.”[/perfectpullquote]

All in all, this is a straightforward sale of assets. As we reported, $46 million in exchange for the assets defined above. However, what should be notable and interesting is what wasn’t sold. Particularly, equity. It’s time to get into the nitty gritty.

Asset Sale vs. Equity Sale

There are two main types of transactions when selling a privately-held business: asset sales and equity sales.

[perfectpullquote align=”right” cite=”” link=”” color=”” class=”” size=””]An asset sale typically favors the buyer of the assets[/perfectpullquote]

An asset sale is basically the sale of a business’ stuff, and can range from a small, single asset, to “substantially all” of a business’ assets, such as the case of MLG’s sale to Activision Blizzard. Asset sales can be particularly complicated due to the difficulty of assigning value to a business’ various assets, which can include nonphysical things, like branding, and intangible things, like “goodwill.” Also of note is that an asset sale typically favors the buyer of the assets, because of the way taxes are handled for those assets.

An equity sale, conversely, is simply the sale of ownership of a business. If another company moves to purchase over 50% of a business, that company becomes the majority shareholder. If another company purchases every share of a business, that company now owns the business completely and can fully incorporate that business into itself. One example of this? Tencent’s purchase of the remainder of Riot Games’ shares late last year.

Equity sales are typically seller-favorable, and can be particularly complicated for buyers, especially if a shareholder is refusing to sell their shares. This also means that the buyer is taking upon the seller’s liabilities, including debt.

More can be read here if you’re really interested in this stuff.

Delaware General Corporation Law

Also to be discussed is the actual actions taken by MLG during this asset sale. We reference here Delaware’s Title 8 General Corporation Law:

[perfectpullquote align=”full” cite=”” link=”” color=”” class=”” size=””]Section 271(a): “Every corporation may at any meeting of its board of directors or governing body sell, lease or exchange all or substantially all of its property and assets, including its goodwill and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or other property, including shares of stock in, and/or other securities of, any other corporation or corporations, as its board of directors or governing body deems expedient and for the best interests of the corporation, when and as authorized by a resolution adopted by the holders of a majority of the outstanding stock of the corporation entitled to vote thereon or, if the corporation is a nonstock corporation, by a majority of the members having the right to vote for the election of the members of the governing body and any other members entitled to vote thereon under the certificate of incorporation or the bylaws of such corporation, at a meeting duly called upon at least 20 days’ notice. The notice of the meeting shall state that such a resolution will be considered.”[/perfectpullquote]

Basically, a company can sell assets if a majority of stockholders votes that it can. Typically, these kinds of votes happen at a stockholder meeting, but there are also definitions for votes that can happen outside of a stockholder meeting, as well as votes that don’t include all stockholders.

[perfectpullquote align=”right” cite=”” link=”” color=”” class=”” size=””]An asset sale can dramatically change the value of a company’s stock.[/perfectpullquote]

Section 228 of the law outlines these definitions. Particularly, it defines that actions may be taken “without a meeting, without prior notice and without a vote,” if consent of the “holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.”

Again, basically, a majority voting block of stockholders can make decisions without the rest of the stockholders, without any prior notice, and without holding a vote. Those minority stockholders do, however, have a right to be notified, which is handled after the meeting in a notice outlined in Section 228(e). This 228(e) notice is one of the documents that we received that led to our initial report.

This is especially important to note, because an asset sale can dramatically change the value of a company’s stock. In the case of selling off all the assets of a company, stockholders are basically left with whatever cash value is left over following the sale.

Why Delaware?

You may be wondering now what a minority stockholder could do in such a case, who didn’t have a say in the vote, or even notice, should a company sell assets under Section 228.

[perfectpullquote align=”right” cite=”” link=”” color=”” class=”” size=””]Delaware… does not have a statute protecting oppressed minority shareholders.[/perfectpullquote]

Well, the answer to that question lies in the state of Delaware. You may have noticed by this point that we keep referring to Delaware, rather than New York, the state where MLG had been headquartered in up until the sale. The reason for this is because MLG is incorporated under the laws of Delaware.

This isn’t uncommon. In fact, per Peter Mahler of the New York Business Divorce blog, Delaware “ranks 45th among the states in population but #1 in the incorporation of out-of-state entities.” The reason for this?

[perfectpullquote align=”full” cite=”” link=”” color=”” class=”” size=””] “Most states, including New York, long ago enacted judicial remedies for minority shareholders in cases of “oppressive” conduct by controlling shareholders. The New York statutory scheme… authorizes the court to dissolve a closely-held corporation while giving the controlling shareholders the option to avoid dissolution by purchasing the petitioning owner’s shares for “fair value” which the court will determine if the parties cannot agree on a price….” [/perfectpullquote] [perfectpullquote align=”full” cite=”” link=”” color=”” class=”” size=””]”Delaware… is not one of those states. Delaware, known for its management-friendly business laws, does not have a statute protecting oppressed minority shareholders of closely-held corporations. Except in cases of deadlock between two 50/50 shareholders, Delaware does not have a statute authorizing judicial dissolution of a closely-held corporation at the behest of a shareholder. Neither Delaware statute nor case law recognizes an oppressed minority shareholder’s right to be bought out.”[/perfectpullquote]

Essentially, if you are a minority stockholder in a Delaware-incorporated company, you can’t do much. Unless you have extended rights per a company’s Certificate of Incorporation, or some other means, you don’t have them. While other states provide for “stock buyback” if minorities are being “oppressed,” Delaware doesn’t.

Wrapping it all up

So, what does that all mean for minority stockholders in MLG Legacy Holdings?

[perfectpullquote align=”right” cite=”” link=”” color=”” class=”” size=””]Gotfrag’s stock is now worth significantly less—possibly close to nothing.[/perfectpullquote]

To repeat, MLG had received in total about $69 million in equity funding, along with carrying a liability of about $18 million in debt funding. This asset sale for MLG was “substantially all” of the company, but was only for $46 million.

Per the 228(e) notice, $15 million of that sale is being held for “potential claims of indemnification” (i.e. lawsuits against MLG Legacy Holdings), and the remaining $31 million is going to MLG Legacy Holdings, part of which is to be used to pay off liabilities.

Also per the 228(e) notice, “the net proceeds from the transaction are insufficient to satisfy the liquidation preference of the Corporation’s Series B Preferred Stock.” However, with the consent of the Series B Preferred Stock, MLG Legacy Holdings is implementing what it calls a carve-out plan.

The carve-out plan states that the remainder of the cash from the purchase, after liabilities have been paid and after any claims of indemnification are dealt with, is going to be paid out to the rest of the stockholders, including Series A Common Stock, Series A Preferred Stock, Series B Common Stock, Series B Preferred Stock, Series B-1 Preferred Stock, and Series B-2 Preferred Stock.

How will the breakdown go under that carve-out plan? “The definitive terms of this plan have not yet been finalized”—nobody knows. There are, however, some easy assumptions to make.

First assumption: there won’t be enough money to pay back investors. This one is easy—$69 million, the amount of equity funding, is more than $46 million, the amount of the sale. But it’s actually even worse, since that equity isn’t all the company held (some, as you’ll recall, went to Gotfrag staff as part of the purchase agreement in 2007). It also doesn’t account for the cash amount going towards liabilities and indemnification, which will assuredly dip deeply into that $46 million, leaving little else to go around.

Since we don’t have any clear details of the carve-out plan, we are then left to guess at how the stockholders will be paid out. Assumption number two, then, is easy: the stockholders that didn’t get to vote, probably won’t be paid favorably for their stock.

Let’s now identify who those minority stockholders are. Per the 228(e) notice, the asset purchase was approved by a voting block consisting of “Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series B-2 Preferred Stock and the Series A Common Stock.” Basically, all but Series B Common Stock—making them the minority stockholders.

It should be unsurprising at this point to esports fans reading this that Gotfrag’s stock was indeed Series B Common Stock. We can confirm that in October, this stock was valued at over $27 per share. We also can state that Gotfrag members held several thousand shares, putting the company’s purchase in 2007 would be valued today well into six digits.

However, putting everything together, Gotfrag’s stock is now worth significantly less—possibly close to nothing.

[perfectpullquote align=”right” cite=”” link=”” color=”” class=”” size=””]Esports has to accept the mainstream way of doing things.[/perfectpullquote]

Altogether, this is a cruel lesson for esports to learn, an unwelcome end to a story that began in the “good old days” of the industry. The realities of esports are the same as in any other realm. There’s no escaping that the acceptance of esports into the mainstream also means that esports has to accept the mainstream way of doing things.

And the bottom line is that this MLG asset sale is very much the way of doing things when it comes to modern business.

Appendix

MLG 228(e) Notice

Stockholder Written Consent