## Facts

- Bell Atlantic Corporation and NYNEX Corporation negotiated a stock-for-stock “merger of equals” and included reciprocal deal-protection provisions.
- The merger agreement contained a two-tiered, reciprocal termination fee totaling $550 million.
- First tier: $200 million payable if a competing acquisition offer emerged for a party and the merger failed due to lack of stockholder approval or termination of the agreement.
- Second tier: an additional $350 million payable if, within 18 months after termination, a competing transaction was consummated.
- The agreement stated the termination fee was an integral term and constituted liquidated damages, not a penalty.
- The parties negotiated the fee with reference to anticipated losses from a failed merger, including opportunity costs and disruption; the amount was about 2% of Bell Atlantic’s market capitalization.
- A stockholder sued challenging the fee as an unreasonable liquidated damages clause and as coercive of the stockholder vote.
- The Court of Chancery upheld the provision and granted summary judgment for the corporation and directors; the stockholder appealed.

## Issues

1. Whether the termination fee should be analyzed under contract-law liquidated damages principles or the business judgment rule.
2. Whether the $550 million two-tier termination fee was a valid liquidated damages provision or an unenforceable penalty under Delaware law.
3. Whether the termination fee improperly coerced stockholders’ merger vote.

## Decision

- The Delaware Supreme Court affirmed summary judgment upholding the termination fee, though it relied on a contract-law analysis rather than the business judgment rule.
- The court held the termination fee was properly analyzed as liquidated damages because the agreement expressly characterized it that way.
- Applying Delaware’s liquidated damages test, the court held damages from a failed merger were difficult to estimate at contracting and the fee was a reasonable forecast of expected harm.
- The court rejected the claim that the fee was a penalty, holding it was not shown to be grossly disproportionate to reasonably anticipated loss.
- The court held the fee was not coercive of the stockholder vote given disclosure, reciprocity, conditional triggers tied to competing transactions, and magnitude relative to firm value.

## Legal Principles

- A contractual termination fee expressly designated as liquidated damages is evaluated under Delaware’s liquidated damages doctrine, not the business judgment rule as such.
- A liquidated damages clause is enforceable if (1) anticipated damages were difficult or impossible to estimate at the time of contracting and (2) the stipulated amount was a reasonable forecast of just compensation.
- Reasonableness may be assessed in context, including the scale and complexity of the transaction, negotiated reciprocity, and the amount’s relation to company value.
- A termination fee is not an unenforceable penalty merely because it exceeds easily measured out-of-pocket deal expenses; anticipated harm may include opportunity costs and foregone strategic benefits.
- A disclosed, reciprocal termination fee with limited, transaction-linked triggers is less likely to be deemed coercive of stockholder voting and does not invalidate the vote absent a showing that it effectively precludes alternatives.

## Conclusion

The Delaware Supreme Court upheld the Bell Atlantic–NYNEX reciprocal $550 million termination fee as valid liquidated damages because merger-failure damages were hard to quantify ex ante and the negotiated amount was reasonable in context; the court also found the provision neither penal nor coercive of the stockholder franchise.


Brazen v. Bell Atl. Corp., 695 A.2d 43 (Del. 1997)