St. Jude Medical, Inc. v. Medtronic, Inc.
| Decision Date | 22 August 1995 |
| Docket Number | No. C4-95-183,C4-95-183 |
| Citation | 536 N.W.2d 24 |
| Parties | ST. JUDE MEDICAL, INC., Appellant, v. MEDTRONIC, INC., et al., Respondents. |
| Court | Minnesota Court of Appeals |
Syllabus by the Court
1. A termination fee provision is not, per se, a liquidated damages provision.
2. A termination fee provision in a merger agreement is a valid and enforceable contract, not an unenforceable penalty, so long as the fee is reasonable, is negotiated in good faith, and enhances bidding for the purchase.
Richard Ihrig, Terrence J. Fleming, Michael D. Olafson, Lindquist & Vennum, P.L.L.P., Minneapolis, for appellant.
William Z. Pentelovitch, Richard G. Wilson, Alain M. Baudry, Maslon, Edelman, Borman & Brand, P.L.L.P., Minneapolis, for respondents.
Michael J. Wahoske, David Y. Trevor, Dorsey & Whitney, P.L.L.P., Minneapolis, for amicus curiae Securities Industry Ass'n.
Considered and decided by HUSPENI, P.J., and PETERSON and SCHULTZ, * JJ.
In seeking to enforce a "termination fee" provision in a proposal to acquire another company, appellant contends the district court erroneously granted summary judgment for respondents. Because we conclude that the termination fee is a valid and enforceable contract, we reverse summary judgment and direct the district court to enter judgment in favor of appellant. We affirm the trial court's dismissal of the unjust enrichment and tortious interference with contract claims.
This case arises out of the merger and acquisition of respondent Electromedics, Inc., a company which designs, manufactures, and markets medical equipment and disposable devices, focusing on blood therapy and surgical care. Both appellant St. Jude Medical, Inc., and respondent Medtronic, Inc., sought to acquire Electromedics.
Medtronic purchased 346,359 shares of Electromedics' stock between March and August 1993. In July 1993, Medtronic presented an unsolicited merger proposal of $5.50 per share; Electromedics rejected the offer outright, but realized that the company was on the market despite the fact that it had "not plan[ned] to be for sale."
Electromedics hired Dain Bosworth as its financial advisor to consider "strategic alternatives" for the company's future. Eighteen potential buyers surfaced. The Electromedics board of directors decided to auction off the company to secure the best price for the shareholders.
St. Jude hired Piper Jaffray Inc. as its financial advisor for the exclusive purpose of proposing the acquisition or merger with Electromedics. As of November 4, 1993, St. Jude was an active contender in the competition for merger. St. Jude expressed a strong interest in purchasing Electromedics under the condition that St. Jude would have an exclusive right to negotiate and would receive a termination fee, which would be $2-4 million, in the event negotiations fell through.
On November 12, Medtronic formally proposed a merger at $6.125 per share. The Electromedics board considered the offer inadequate, but did not give Medtronic an answer.
By December 6, Electromedics entered into a final agreement and merger plan with St. Jude. The exclusive agreement required Electromedics to refrain from marketing the sale of the company or contacting other "suitors." The agreement also included the following "termination fee" provision:
In recognition of the efforts and expenses expended and incurred by [St. Jude] with respect to Electromedics and the opportunity Electromedics presents to [St. Jude], if (i) this Agreement is terminated * * *, Electromedics will pay to [St. Jude] within five business days after demand by [St. Jude] * * * a termination fee equal to $3,000,000.
No fee would be due if a court prohibited the merger, if the Electromedics board did not approve the merger, or if St. Jude breached the agreement. St. Jude's final bid was $6.375 per share.
The day after news of the merger reached the press, Medtronic sent Electromedics a new formal offer of $6.75 per share. St. Jude agreed to match that bid. Medtronic then increased its bid to $6.875 per share and put $3 million in escrow to cover the possible termination fee to St. Jude. 1 St. Jude made it clear that it expected Electromedics to pay the $3 million termination fee if it accepted Medtronic's bid.
On December 22, the Electromedics board authorized a merger with Medtronic at $6.875 per share, for a total of $97 million. When Electromedics informed St. Jude of its decision, St. Jude demanded payment of the termination fee. The merger agreement with Medtronic prohibited Electromedics from paying the fee without Medtronic's prior written consent. When Electromedics failed to pay the fee, St. Jude brought this action, alleging breach of contract, unjust enrichment, tortious interference with contract, and a claim for attorney fees and costs.
In March 1994, St. Jude moved for summary judgment and Electromedics/Medtronic moved to dismiss St. Jude's claims. In denying both motions, the district court, noting that "many [jurisdictions] have upheld termination fees," chose to use a "liquidated damages analysis to determine the validity of the fee provision in question." After addressing the factors used to determine whether a liquidated damages provision is, in fact, a penalty rather than a reasonable estimate of actual damages, the court stated:
[I]nsufficient evidence has been presented to the Court to allow it to conclude, as a matter of law, that the termination fee is a penalty rather than a valid liquidated damages provision.
After a December 1994 hearing before a second district court judge, Electromedics/Medtronic's motion for summary judgment was granted. This court concluded:
Electromedics did not intend to liquidate [St. Jude's] damages when they agreed to the three million dollar penalty fee. [St. Jude's] candid concession through its counsel at oral arguments is a binding judicial admission evincing the intent of the parties in regards to the liquidated damages. Accordingly, [St. Jude] cannot carry its burden of establishing the first element of its first claim for relief. Therefore, the three million dollar penalty provision is void and will not be enforced.
Did the district court erroneously apply a liquidated damages analysis to the termination fee issue and determine that the termination fee was an unenforceable penalty?
On appeal from summary judgment, this court must determine whether any genuine issues of material fact exist and whether the district court erred in its application of the law. Wartnick v. Moss & Barnett, 490 N.W.2d 108, 112 (Minn.1992). Construing and giving effect to the plain meaning of contract language is a question of law. Hydra-Mac, Inc. v. Onan Corp., 450 N.W.2d 913, 916-17 (Minn.1990). This court reviews questions of law de novo. 2 Jadwin v. Minneapolis Star & Tribune Co., 367 N.W.2d 476, 483 (Minn.1985).
In the corporate world, termination fees are a common and generally accepted method to "reimburse the prospective purchaser for expenditures incurred in pursuing the transaction." Gray v. Zondervan Corp., 712 F.Supp. 1275, 1276-77 n. 1 (W.D.Mich.1988).
Cancellation fee provisions typically require the [seller] to pay the bidder a specified dollar amount. * * * [T]he fee ordinarily ranges from one to five percent of the proposed acquisition price. A cancellation fee reduces the risk of entering a negotiated merger by guaranteeing the initial bidder reimbursement for the out of pocket costs associated with making the offer and, in some instances, for the bidder's lost time and opportunities. Accordingly, they are increasingly common in negotiated acquisitions.
Stephen M. Bainbridge, Exclusive Merger Agreements and Lock-Ups in Negotiated Corporate Acquisitions, 75 Minn.L.Rev. 239, 246 (1990).
Contrary to Electromedics/Medtronic's assertion that termination fees are inherently invalid and unenforceable, 3 the law generally accepts them as long as they do not encroach upon the ultimate purpose of the acquisition process: to sell a company to the highest bidder and maximize the shareholders' profits. See CRTF Corp. v. Federated Dep't Stores, Inc., 683 F.Supp. 422, 440 (S.D.N.Y.1988) (); Samjens Partners I v. Burlington Indus., Inc., 663 F.Supp. 614, 624 (S.D.N.Y.1987) (); cf. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 184 (Del.1986) ().
State and federal courts have upheld termination fees when a well-informed board negotiated the fee in good faith, with no apparent conflict of interest, and followed responsible procedure, In re J.P. Stevens & Co., 542 A.2d 770, 783 (Del.Ch.1988); when the amount of the termination fee is reasonable in relation to the bidder's efforts and the magnitude of the transaction, Cottle v. Storer Communication, Inc., 849 F.2d 570, 578 (11th Cir.1988); and when the reasonable and fully-disclosed fee does not hinder a board vote on the overall merger/sales transaction, Beebe v. Pacific Realty Trust, 578 F.Supp. 1128, 1150-51 (D.Or.1984).
The parties here, with the benefit of legal counsel and financial advisors, negotiated the termination fee as part of the merger agreement. The $3 million fee is reasonable as it is only a small percentage of the total $90 million contract sales price. Most importantly, the termination fee provision brought St. Jude into the auction as a committed bidder for purchase, and was a catalyst for the bidding contest that ultimately resulted in Electromedics receiving a bid close to its market value. For these reasons, we conclude the termination fee provision was valid and enforceable. See Beebe, 578 F.Supp. at 1150-51 (...
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