Brazen v. Bell Atlantic Corp.
695 A.2d 43, 1997 WL 299550, 1997 Del. LEXIS 192 (1997)
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Rule of Law:
A merger termination fee that is explicitly designated as liquidated damages in the agreement will be analyzed under the traditional two-part test for liquidated damages, not the business judgment rule, and will be upheld if the damages are uncertain and the amount is a reasonable forecast of potential harm.
Facts:
- In 1995, Bell Atlantic Corporation and NYNEX Corporation entered into negotiations for a stock-for-stock 'merger of equals.'
- The merger agreement included a reciprocal, two-tiered termination fee of up to $550 million.
- The first tier required a $200 million payment if a party received a competing offer and its stockholders failed to approve the merger.
- The second tier required an additional $350 million payment if that party consummated a competing transaction within eighteen months of termination.
- The parties negotiated the fee to compensate for potential 'lost opportunity' costs in the rapidly changing telecommunications market and explicitly labeled the provision 'liquidated damages and not a penalty' in the agreement.
- The total $550 million fee represented approximately 2% of Bell Atlantic's market capitalization.
Procedural Posture:
- Lionel L. Brazen, a Bell Atlantic stockholder, filed a class action lawsuit against Bell Atlantic in the Delaware Court of Chancery.
- Brazen sought a declaration that the termination fee was an invalid 'lockup' fee and requested injunctive relief.
- The parties filed cross-motions for summary judgment in the Court of Chancery.
- The Court of Chancery granted summary judgment in favor of Bell Atlantic, holding that the board's decision to include the fee was protected by the business judgment rule.
- Brazen, as appellant, appealed the Court of Chancery's decision to the Delaware Supreme Court.
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Issue:
Does a two-tiered, $550 million termination fee in a merger agreement constitute a valid liquidated damages provision, or is it an unenforceable penalty that improperly coerces stockholders?
Opinions:
Majority - Veasey, Chief Justice
No, the termination fee is not an unenforceable penalty that improperly coerces stockholders; it is a valid liquidated damages provision. The court must analyze the provision as liquidated damages, not under the business judgment rule, because the parties expressly designated it as such in the contract. The fee satisfies the two-prong test for liquidated damages because the potential damages from a failed merger, particularly lost opportunity costs, were uncertain and difficult to calculate. Furthermore, the $550 million amount was a reasonable forecast of those damages, as it was negotiated at arm's length, represented a small percentage (2%) of Bell Atlantic's market capitalization, and fell within the range of fees upheld in prior Delaware cases. Finally, the fee was not impermissibly coercive because fully disclosing a valid and reasonable contract term to stockholders does not force them to vote for reasons other than the transaction's merits.
Analysis:
This decision clarifies that Delaware courts will respect the explicit contractual characterization of a termination fee as 'liquidated damages' and apply the corresponding legal test rather than the more deferential business judgment rule. It provides a clear framework for drafters of merger agreements, confirming that reasonably calculated termination fees (often in the 1-3% range of transaction value) will be upheld as valid risk-allocation tools. By doing so, the court reinforces the enforceability of such provisions while ensuring they serve a compensatory purpose rather than becoming a punitive or coercive device that improperly limits shareholder choice.
