Case: Brazen v Bell Atlantic Corp 695 A2d 43 (Del Supr 1997)
Outcome: cited
In Brazen v Bell Atlantic Corp 695 A2d 43 (Del Supr 1997) ( Brazen v Bell ) the Supreme Court of Delaware made (at 49 50) the following observations that are pertinent to this question (the case concerned a stock for stock merger of equals, with reciprocal identical break fees): Plaintiff further argues that the termination fee provision was coercive. Plaintiff contends that (a) the stockholders never had an option to consider the merger agreement without the fee, and (b) regardless of what the stockholders thought of the merits of the transaction, the stockholders knew that if they voted against the transaction, they might well be imposing a $550 million penalty on their company. Plaintiff contends that the termination fee was so enormous that it "influenced" the vote. Finally, plaintiff argues that the fee provision was meant to be coercive because the drafters deliberately crafted the termination fees to make them applicable when Bell Atlantic's stockholders decline to approve the transaction as opposed to a termination resulting from causes other than the non-approval of the Bell Atlantic stockholders. We find plaintiff's arguments unpersuasive. First, the Court of Chancery properly found that the termination fee was not egregiously large. Second, the mere fact that the stockholders knew that voting to disapprove the merger may result in activation of the termination fee does not by itself constitute stockholder coercion. Third, we find no authority to support plaintiff's proposition that a fee is coercive because it can be triggered upon stockholder disapproval of the merger agreement, but not upon the occurrence of other events resulting in termination of the agreement. In Williams v Geier , this Court enunciated the test for stockholder coercion. Wrongful coercion that nullifies a stockholder vote may exist "where the board or some other party takes actions which have the effect of causing the stockholders to vote in favor of the proposed transaction for some reason other than the merits of that transaction [ Williams v Geier 671 A.2d 1368 (Del Supr 1996), 1382-83]. But we also stated in Williams v Geier that "[i]n the final analysis ... the determination of whether a particular stockholder vote has been robbed of its effectiveness by impermissible coercion depends on the facts of the case" [ Id at 1383]. 26 I referred at [11] above to Brazen v Bell in which a nearly naked no vote break fee was upheld by the Supreme Court of Delaware. The fee was US$200 million (less than one percent of the corporation's market capitalisation). I say "nearly", because another condition was that there must have been in existence a competing proposal, even though it was rejected or withdrawn. If the competing proposal came to fruition within one and a half years, however, an additional US$350 million was payable (the total of US$550 million was approximately 2 percent of the target's approximately US$28 billion market capitalisation). 27 A complicating factor was that the Supreme Court of Delaware tested the fee against a liquidated damages measure rather than the business judgment rule, because the agreement's provision had the effect of specifically requiring the application of that measure. The Supreme Court of Delaware held the fee of US$550 million to be in the nature of liquidated damages, not a penalty, because it was "within the range of reasonableness" (at 49).