Case: In re Toys "R" Us Inc Shareholder Litigation 877 A2d 975 (Del Ch 2005)
Outcome: cited
So called "break fees" have worn different names, particularly in the US ("termination fees", "inducement fees", "cancellation fees"). The amount payable sometimes varies according to the circumstances in which it becomes payable, the amount being less in the naked no vote situation. For example, In re Toys "R" Us Inc Shareholder Litigation 877 A2d 975 (Del Ch 2005) ( Toys "R" Us ), the break fee in one offer was described as follows (at 996): The Company offered to pay the KKR Group [the acquiring company] 3% of the Company's equity value, as implied by the final deal terms. The payment of the 3% was, from what I can discern, to be made only when: 1. the Company's board terminates the merger agreement to accept a higher bid or the KKR Group terminates because the board had withdrawn its recommendation of the merger; 2. another offer to acquire the Company exists at the time the Company's stockholders vote on the merger, the Company's stockholders do not approve the merger agreement, and the Company consummates an alternative transaction within the next year; or 3. another offer to acquire the Company exists at the time the merger agreement terminates automatically by having reached its termination date, September 15, 2005, and the Company consummates an alternative transaction within a year. In the event that the merger agreement was terminated simply because the Company's stockholders voted it down, the Company offered only to reimburse the KKR Group for a to-be-negotiated sum approximating its documented, out-of-pocket expenses. 23 In Toys "R" Us, the target company "agreed to pay only up to US$30 million in documented expenses", less than half of a percent of the equity value of the company, upon the occurrence of a naked no vote (at 997). On the other hand, a full termination fee "payable for the most part only if the company terminated the merger agreement in order to sign up another acquisition proposal within a year" was US$247.5 million (3.75 percent of equity value and 3.25 percent of enterprise value) (at 997). Although the Court did not scrutinize the naked no vote fee in its opinion, it did observe (at 1023): [T]he bottom line is that the public stockholders will have an opportunity tomorrow to reject the merger if they do not think the price is high enough in light of the Company's stand-alone value and other options. If the stockholders vote no, the only price will be the payment of $30 million to KKR Group, which is likely less than its actual expenses to date. 24 It seems to follow that in Toys "R" Us the Court did not view the naked no vote break fee provision with disapproval. 25 In 2007, a Project Report of the Mergers &amp; Acquisitions Market Trends Subcommittee of the Committee on Negotiated Acquisitions of the American Bar Association's Section of Business Law was released, entitled "2007 Strategic Buyer/Public Target Mergers &amp; Acquisitions Deal Points Study". The study relates to transactions and acquisitions announced in 2005 and 2006. It found that nine percent of 2005 and 2006 acquisitions involved naked no vote break fees. The report also found that out of the 18 transactions that contained a naked no vote trigger, 17 required reimbursement of expenses only (as was the case in Toys "R" Us, for example), rather than the higher break fee payable in other contexts.