Law School Case Brief
Brazen v. Bell Atl. Corp. - 695 A.2d 43 (Del. 1997)
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.
In 1995, defendant-appellee, Bell Atlantic Corporation, and NYNEX Corporation entered into merger negotiations. In January 1996, NYNEX circulated an initial draft merger agreement that included a termination fee provision. Both parties to the agreement determined that the merger should be a stock-for-stock transaction and be treated as a merger of equals. Thus, to the extent possible, the provisions of the merger agreement, including the termination fee, were to be reciprocal. Representatives of Bell Atlantic and NYNEX agreed that a two-tiered $ 550 million termination fee was reasonable for compensating either party for damages incurred if the merger did not take place because of certain enumerated events. Bell Atlantic and NYNEX decided that $ 550 million, which represented about 2% of Bell Atlantic's approximately $ 28 billion market capitalization, would serve as a "reasonable proxy" for the opportunity cost and other losses associated with the termination of the merger. In addition, senior management advised Bell Atlantic's board of directors that the termination fee was at a level consistent with percentages approved by Delaware courts in earlier transactions, and that the likelihood of a higher offer emerging for either Bell Atlantic or NYNEX was very low. Lionel Brazen, a Bell Atlantic stockholder, filed a class action against Bell Atlantic and its directors for declaratory and injunctive relief. The stockholder alleged that the termination fee was not a valid liquidated damages clause because it failed to reflect an estimate of actual expenses incurred in preparation for the merger. He alleged that the payment was an unconscionably high termination or lockup fee, employed to restrict and impair the exercise of the fiduciary duty of the corporation's board and coerce the shareholders to vote to approve the proposed merger. On the other hand, Bell Atlantic asserted that the termination fee was a valid exercise of business judgment. The parties cross-moved for summary judgment. The Court of Chancery denied the relief sought by Brazen.
Was the two-tiered termination fee a valid liquidated damages provision?
The Court held that the termination fee was to be analyzed as a liquidated damages provision because the merger agreement specifically so provided. The Court averred that, under the reasonableness test for liquidated damages, the provision was reasonable in the context of the case. It further found that the fee was not a penalty and was not coercive. Thus, the judgment of the Court of Chancery was affirmed.
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