Brazen v. Bell Atlantic Corp.
| Decision Date | 22 April 1997 |
| Docket Number | No. 130,1997,130 |
| Parties | Lionel I. BRAZEN, Plaintiff Below, Appellant, v. BELL ATLANTIC CORPORATION, a Delaware corporation, and its individual directors, Raymond W. Smith, Lawrence T. Babbio, James G. Cullen, Frank C. Carlucci, Shirley Young, James H. Gilliam, Jr., William W. Adams, Thomas E. Bolger, William G. Copeland, Thomas H. Kean, John C. Marous, Jr., Rozanne L. Ridgeway, John F. Maypole, Joseph Neubauer, and Thomas O'Brien, Defendants Below, Appellees. . Submitted: |
| Court | United States State Supreme Court of Delaware |
Upon appeal from the Court of Chancery. AFFIRMED.
Court Below: Court of Chancery of the State of Delaware in and for New Castle County, C.A. No. 14976.
William Prickett (argued), Elizabeth M. McGeever, Ronald A. Brown, Jr., Prickett, Jones, Elliott, Kristol & Schnee, Wilmington; Clinton A. Krislov and William Bogot, of
counsel, Krislov & Associates, Ltd., Chicago, IL, for Appellant.
A. Gilchrist Sparks, III (argued), Alan J. Stone and S. Mark Hurd, Morris, Nichols, Arsht & Tunnell, Wilmington, for Appellees.
Before VEASEY, C.J., WALSH and BERGER, JJ.
In this appeal, the issues facing the Court surround the question of whether a two-tiered $550 million termination fee in a merger agreement is a valid liquidated damages provision or whether the termination fee was an invalid penalty and tended improperly to coerce stockholders into voting for the merger.
Although there are judgmental aspects involved in the traditional liquidated damages analysis applicable here, we do not apply the business judgment rule as such. We hold that the termination fee should be analyzed as a liquidated damages provision because the merger agreement specifically so provided. Under the appropriate test for liquidated damages, the provisions at issue here were reasonable in the context of this case. We further find that the fee was not a penalty and was not coercive. Accordingly, we affirm the judgment of the Court of Chancery, but upon an analysis that differs somewhat from the rationale of that Court.
In 1995, defendant below-appellee, Bell Atlantic Corporation, and NYNEX Corporation entered into merger negotiations. In January 1996, NYNEX circulated an initial draft merger agreement that included a termination fee provision. Both parties to the agreement determined that the merger should be a stock-for-stock transaction and be treated as a merger of equals. Thus, to the extent possible, the provisions of the merger agreement, including the termination fee, were to be reciprocal.
Representatives of Bell Atlantic and NYNEX agreed that a two-tiered $550 million termination fee was reasonable for compensating either party for damages incurred if the merger did not take place because of certain enumerated events. The termination fee was divided into two parts. First, either party would be required to pay $200 million if there were both a competing acquisition offer for that party and either (a) a failure to obtain stockholder approval, or (b) a termination of the agreement. Second, if a competing transaction were consummated within eighteen months of termination of the merger agreement, the consummating party would be required to pay an additional $350 million to its disappointed merger partner.
In the negotiations where such a fee was discussed, the parties took into account the losses each would have suffered as a result of having focused attention solely on the merger to the exclusion of other significant opportunities for mergers and acquisitions in the telecommunications industry. The parties concluded that, with the recent passage of the national Telecommunications Act of 1996, the entire competitive landscape had been transformed for the regional Bell operating companies, creating a flurry of business combinations. The parties further concluded that the prospect of missing out on alternative transactions due to the pendency of the merger was very real. The "lost opportunity" cost issue loomed large. The negotiators also considered as factors in determining the size of the termination fee (a) the size of termination fees in other merger agreements found reasonable by Delaware courts, and (b) the lengthy period during which the parties would be subject to restrictive covenants under the merger agreement while regulatory approvals were sought.
Bell Atlantic and NYNEX decided that $550 million, which represented about 2% of Bell Atlantic's approximately $28 billion market capitalization, would serve as a "reasonable proxy" for the opportunity cost and other losses associated with the termination of the merger. In addition, senior management advised Bell Atlantic's board of directors that the termination fee was at a level consistent with percentages approved by Delaware courts in earlier transactions, and that the likelihood of a higher offer emerging for either Bell Atlantic or NYNEX was very low.
The termination fee provision states If (I) this Agreement (A) is terminated by NYNEX pursuant to Section 9.1(f) hereof or NYNEX or Bell Atlantic pursuant to Section 9.1(g) hereof because of the failure to obtain the required approval from the Bell Atlantic stockholders or by Bell Atlantic pursuant to Section 9.1(h) hereof, or (B) is terminated as a result of Bell Atlantic's material breach of Section 7.2 hereof which is not cured within 30 days after notice thereof to Bell Atlantic and (ii) at the time of such termination or prior to the meeting of Bell Atlantic's stockholders there shall have been an Acquisition Proposal (as defined in Section 6.3 hereof) involving Bell Atlantic or any of its Significant Subsidiaries (whether or not such offer shall have been rejected or shall have been withdrawn prior to the time of such termination or of the meeting), Bell Atlantic shall pay to NYNEX a termination fee of $200 million (the "Initial Bell Atlantic Termination Fee"). In addition, if, within one and one-half years of any such termination described in clause (I) of the immediately preceding sentence that gave rise to the obligation to pay the Initial Bell Atlantic Termination Fee, Bell Atlantic, or the Significant Subsidiary of Bell Atlantic which was the subject of such Acquisition Proposal (the "Bell Atlantic Target Party"), becomes a subsidiary of the person which made (or the affiliate of which made) an Acquisition Proposal described in clause (ii) of the immediately preceding sentence or of any Offering Person or accepts a written offer to consummate or consummates an Acquisition Proposal with such person or any Offering Person, then, upon the signing of a definitive agreement relating to any such Acquisition Proposal, or, if no such agreement is signed then at the closing (and as a condition to the closing) of such Bell Atlantic Target Party becoming such a subsidiary or of any such Acquisition Proposal, Bell Atlantic shall pay to NYNEX an additional termination fee equal to $350 million. 1
In addition, section 9.2(e) of the merger agreement states,
NYNEX and Bell Atlantic agree that the agreements contained in Sections 9.2(b) and (c) above are an integral part of the transactions contemplated by this Agreement and constitute liquidated damages and not a penalty. If one Party fails to promptly pay to the other any fee due under such Sections 9.2(b) and (c), the defaulting Party shall pay the costs and expenses (including legal fees and expenses) in connection with any action, including the filing of any lawsuit or other legal action, taken to collect payment, together with interest on the amount of any unpaid fee at the publicly announced prime rate of Citibank, N.A. from the date such fee was required to be paid. 2
Finally, section 9.2(a), also pertinent to this appeal, states,
In the event of termination of this Agreement as provided in Section 9.1 hereof, and subject to the provisions of Section 10.1 hereof, this Agreement shall forthwith become void and there shall be no liability on the part of any of the Parties except (I) as set forth in this Section 9.2 ... and (ii) nothing herein shall relieve any Party from liability for any willful breach hereof. 3
Plaintiff below-appellant, Lionel L. Brazen, a Bell Atlantic stockholder, filed a class action against Bell Atlantic and its directors for declaratory and injunctive relief. Plaintiff alleged that the termination fee was not a valid liquidated damages clause because it failed to reflect an estimate of actual expenses incurred in preparation for the merger. Plaintiffs alleged that the $550 million payment was "an unconscionably high termination or 'lockup' fee," employed "to restrict and impair the exercise of the fiduciary duty of the Bell Atlantic board and coerce the shareholders to vote to approve the proposed merger...." 4
The parties filed cross-motions for summary judgment. Bell Atlantic sought a declaration that the decision to include and structure the termination fee was a valid exercise of business judgment. The Court of Chancery denied the relief sought by plaintiff after concluding that the termination fee structure and terms were protected by the business judgment rule and that plaintiff failed to rebut its presumptions. 5
On appeal, this Court reviews de novo both as to the facts and the law a Court of Chancery decision on a motion for summary judgment. 6 "Where the court is presented with cross-motions for summary judgment, neither party's motion will be granted unless no genuine issue of material fact exists and one of the parties is entitled to judgment as a matter of law." 7
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