Opinion ID: 1952344
Heading Depth: 1
Heading Rank: 3

Heading: Termination Fee as Liquidated Damages

Text: The Court of Chancery determined that the proper method for analyzing the termination fee in this merger agreement was to employ the business judgment rule rather than the test accepted by Delaware courts for analyzing the validity of liquidated damages provisions. In arriving at this determination, the Court of Chancery concluded that a liquidated damages analysis was not appropriate in this case because, notwithstanding section 9.2(e) of the merger agreement, which states that the $550 million fee constitutes liquidated damages, the event which triggers payment of the fees is not a breach but a termination. Liquidated damages, by definition, are damages paid in the event of a breach.... In addition, the Merger Agreement clearly provides that nothing in the Agreement (including the payment of termination fees) shall relieve any Party from liability for any willful breach hereof. Accordingly, the Boards' decision to include these termination fees, which are triggered by a termination of the Merger Agreement and payment of which will not hinder either party's ability to recover damages from a breach, is protected by the business judgment rule and the fees will not be struck down unless plaintiff demonstrates that their inclusion was the result of disloyal or grossly negligent acts. [8] Plaintiff argued below and argues again here that the proper analysis for determining the validity of the termination fee in section 9.2(c) of the merger agreement is to analyze it as a liquidated damages clause employing a test different from the business judgment rule. We agree. The express language in section 9.2(e) of the agreement unambiguously states that the termination fee provisions constitute liquidated damages and not a penalty. [9] The Court of Chancery correctly found that liquidated damages, by definition, are damages paid in the event of a breach of a contract. [10] While a breach of the merger agreement is not the only event that would trigger payment of the termination fee, the express language of section 9.2(c) states that a party's breach of section 7.2 (which provides that the parties are required to take all action necessary to convene a stockholders' meeting and use all commercially reasonable efforts to secure proxies to be voted in favor of the merger), coupled with other events, may trigger a party's obligation to pay the termination fee. Thus, we find no compelling justification for treating the termination fee in this agreement as anything but a liquidated damages provision, in light of the express intent of the parties to have it so treated. [11]