Summary
stating "[t]his [preliminary injunctive] relief is extraordinary and the test is stringent"
Summary of this case from Bertucci's Restaurant v. New Castle CountyOpinion
C.A. No. 17324, 17334.
Submitted: October 20, 1999.
Decided: October 27, 1999.
Stephen E. Jenkins, Richard D. Heins and Philip Trainer, Jr. of Ashby Geddes, Joseph A. Rosenthal, Norman M. Monhait of Rosenthal, Monhait, Gross Goddess. OF COUNSEL: Lester L. Levy and Chet B. Waldman of Wolf Popper, Arthur N. Abbey and Karin E. Fisch of Abbey Gardy Squitieri, Attorneys For Plaintiff in C.A. No. 17334.
Thomas A. Beck, Daniel A. Dreisbach, Robert J. Steam, Jr., Srinivas M. Raju, Peter B. Ladig, and James Tobia of Richards, Layton Finger, IXC Communications, Inc., Wolfe H. Bragin, Joe C. Culp, Carl W. McKinzie, Ralph J. Swett, Phillip L. Williams, Benjamn L. Scott, Richard Dirwin and John M. Zrno, For Defendants.
Martin P. Tully, Jon E. Abramczyk, and Christopher F. Carlton of Morris, Nichols, Arsht Tunnell. OF COUNSEL: John Beerbower of Cravath, Swaine Moore, For Ivory Merger, Inc.
CORRECTED OPINION
MEMORANDUM OPINION
One of the plaintiff shareholders of IXC Communications, Inc., in these two consolidated actions seeks to preliminary enjoin: (1) the October 29, 1999 vote of the IXC shareholders on a proposed merger with Cincinnati Bell, Inc. ("CBI"); and, (2) the enforcement of certain terms of the Merger agreement.
Plaintiff Crawford only moves for injunctive relief. Nonetheless, all plaintiffs appeared at argument to support his view so all plaintiffs are referred to in this Opinion.
Should the Court of Chancery intervene and enjoin a shareholder vote on a merger agreement submitted for their approval when that vote will be part of a democratic governance process: (1) in which shareholders are adequately informed; and, (2) in which shareholders will be free to exercise their judgment based upon their individual assessment of their own economic interests? No.
Where the plaintiffs fail to show that the IXC shareholders are either inadequately informed or are misinformed about either the terms of the merger or the process by which it came about and the vote will be a valid and independent exercise of the shareholders' franchise, without any specific preordained result which precludes them from rationally determining the fate of the proposed merger the Court of Chancery has no basis to intervene to frustrate the exercise of the shareholder franchise in law or equity. Plaintiffs do not present clear factual support for their contentions that the IXC directors' breached their fiduciary duties and thereby tainted the merger process. Plaintiffs, therefore, are not likely to succeed on the merits at trial. Therefore, I can not grant the extraordinary measure of injunctive relief. Plaintiffs' request for a preliminary injunction is denied.
Background
IXC is a telecommunications company which owns fiber-optic digital communications networks. In the latter half of 1998 IXC'S earnings growth failed to meet expectations, causing an erosion in the company's stock price and concer within the IXC board about the company's management. The IXC board focused its efforts on reevaluating IXC's business strategy and began considering the potential for strategic alternatives. On February 5, 1999 IXC publicly announced that it had retained Morgan Stanley Dean Witter in order to consider possible merger or sale options. This announcement was to send a message to the "universe" of players in the telecommunications market that IXC was interested in potential partners or acquirors, as the case might be, and to notify the financial world that IXC was serious about making dramatic changes to improve its financial condition. However, IXC made it clear it did not want Morgan Stanley making "outbound" solicitations which would make it appear that the company must be sold. Recognizing that the February 5 announcement came on the heels of negative financial reportings, IXC wanted to send a message that parties with enough interest could approach them for possible strategic partnering, but IXC did not want to appear to be desperate to sell.
In the ensuing months, IXC had various contacts with interested parties, some expressing interest enough to actually negotiate terms with IXC and leading IXC to perform due diligence review. The list of companies with whom IXC communicated in some capacity about a joint transaction reads like a who's who of telecommunications players: ATT, MCI WorldCom, Teleglobe, Bell Atlantic, Cable Wireless, Bell South, IDT, RSL, GTS, and Qwest.
IXC negotiated with PSINET, the first serious suitor, during February and March, 1999. These negotiations reached a level of mutual due diligence review and a skeletal merger agreement. However, the parties never finalized the transaction and while it is not totally clear, PSINET apparently lost interest in merging with IXC. Like many of the facts in this case, the details surrounding the end of a PSINET-IXC deal are in dispute. Whatever the case, IXC decided not to pursue PSINET but continued to field inquiries from other companies.
Through the spring of 1999 inquiries from other companies also produced varying degrees of engagement between IXC and potential "partners." Some led to presentations to the IXC board and more rounds of discussions about a potential strategic transaction:
1. Discussions with RSL Communications, Ltd. led to consideration by the IXC board of offers which the board ultimately rejected.
2. Global Crossing, Ltd. contacted IXC in early February expressing an interest in paying a premium to IXC for a possible merger with consideration of a mix of cash and stock. No specific offer ever emerged.
3. Global Telesystems Group, Inc. ("GTS") made a presentation to the IXC board and preliminary steps were taken in hashing out a possible joint transaction of some sort. These never reached the stage that the RSL negotiations did. GTS pulled back before making any firm proposals.
4. In May, IXC's then CEO Benjamin L. Scott met with Joseph Nacchio, head of Qwest. Scott and Nacchio preliminarily discussed a share price in the low 40's that Scott considered inadequate. After this meeting, no more serious discussions occurred between IXC and Qwest.
In late May, Oak Hill Partners and CBI met with IXC's largest shareholder General Electric Pension Trust ("GEPT") to discuss the possibility of a merger between CBI and IXC. IXC director Richard Irwin took part, negotiating material terms with CBI, keeping the board abreast of the details. The parties entered into standstill and confidentiality agreements shortly thereafter. Through June and into early July, IXC and CBI performed mutual due diligence. In mid-July the parties began to fix the terms of a merger. From July 18-20 all of the relevant parties met to hammer out the final Merger Agreement, which they approved on July 20.
The relevant terms of the Agreement are:
1. The shareholders of IXC receive 2.0976 shares of CBI for every IXC share, with CBI as the surviving entity.
2. A mutual "no-solicitation" (or "no-talk") provision preventing the parties from entertaining other potential deals. The provision also contained a fiduciary out, permitting the board of IXC to ultimately oppose the merger, should it see fit. This provision was later amended, to permit either side to consider "superior proposals."
3. A $105 million termination fee and a cross-option agreement (which would be triggered with the termination fee) permitting CBI to purchase 19.9% of IXC's shares of common stock for $52.25 per share, with a profit cap of $26.25 million.
4. CBI and GEPT made a side deal through which GEPT agreed to support the merger on condition that CBI purchase one-half of its IXC holdings for $50 per share. This deal consisted of two agreements: the GEPT Stock Purchase Agreement and the GEPT Stockholder Agreement. The Stock Purchase Agreement effectuated the CBI purchase of 50% of GEPT's IXC shares and the Stockholder Agreement bound GEPT to support the merger. Apparently GEPT conditioned its support for the Stockholder Agreement on CBI's agreeing to the Stock Purchase Agreement. CBI conditioned its support for the Merger Agreement on GEPT's signing the Stockholder Agreement. The entire Merger Agreement rested upon this side transaction.
On September 14, 1999 IXC distributed proxy materials to its shareholders in anticipation of a special shareholder meeting to consider the Merger Agreement.
Contentions
PLAINTIFFS' CONTENTIONS
1) Breach of Fiduciary Duty of Care:
a. The board intended to avoid its fiduciary obligations by attempting not to trigger Revlon duties.
b. IXC drove away all suitors other than CBI.
c. The IXC board's gross negligence tainted the process.
d. IXC ignored the advice of its investment bankers.
e. IXC ignored the advice of its own due diligence team.
f. IXC agreed to a "no-talk" provision, preventing consideration of alternative merger offers.
g. IXC agreed to excessive termination fees/stock-option agreements.
2) Breach of Fiduciary Duty of Loyalty — Vote Buying: the board breached its duty by approving a separate and better deal for GEPT; the transaction by which CBI paid $50 per share for half of GEPT's IXC shares was a preferential deal, unfair to the other IXC shareholders, and was an illegal vote-buying arrangement.
3) Plaintiffs will be denied a fully informed, fair vote absent an injunction:
a. IXC shareholders should be able to know of superior proposals.
b. The CBI merger is rigged by vote-buying.
c. Money damages will likely be uncollectible from director defendants.
d. Shareholders have no appraisal rights.
DEFENDANT'S CONTENTIONS
1) Balance of the Hardships weighs against an injunction
a. The CBI merger is a unique and invaluable opportunity for IXC.
b. IXC may lose the only transaction available in the CBI deal.
c. An injunction would cause immediate harm to IXC shareholders.
2) Plaintiffs cannot establish any harm
a. "The GEPT agreement does not bind the public stockholders to accept an "inferior" deal.
b. Plaintiff's disclosure violation allegations lack merit and in any event are moot.
c. Money damages would be an adequate remedy for any injury.
3) Plaintiffs do not have a reasonable probability of success on the merits
a. IXC board decisions are entitled to the protection of the business judgment rule.
1. IXC board is disinterested and independent.
2. IXC board satisfied its duty of care.
3. IXC board acted in good faith.
b. The termination fee, stock option agreements, and the "no solicitation" provision are not defensive measures that trigger enhanced scrutiny.
c. The termination fee provision is valid and enforceable.
d. The cross-option agreement is reasonable.
e. The "no solicitation" provision is valid.
f. The GEPT agreement is neither illegal per se because it is "vote buying" nor is it voidable because it neither defrauds nor disenfranchises the other "independent" shareholders.
Revlon, Inc. v. MacAndrews Forbes Holdings, Inc., Del. Supr., 506 A.2d 173 (1986).
Discussion
Plaintiffs may obtain a preliminary injunction if they establish the following three elements: (I) a reasonable likelihood of success on the merits, (2) imminent, irreparable harm will result if an injunction is not granted and (3) the damage to Plaintiff if the injunction does not issue will exceed the damage to the defendants if the injunction does issue. This relief is extraordinary and the test is stringent. I find that the plaintiffs have made certain colorable claims, however, they have failed to convince me that the circumstances here warrant preliminary injunctive relief.Reasonable Likelihood of Success On The Merits
1. Fiduciary Duty Claims
Under Delaware law a breach of fiduciary duty analysis in the context of a merger begins with the rebuttable presumption that a company's board of directors has acted with care, loyalty, and in "good faith." Unless this presumption is sufficiently rebutted, by showing either (1) the board did not fulfill its duties by acting to inform itself fully; or, (2) the board's actions were driven by some interest other than those of the shareholders, then this Court must defer to the discretion of the board and acknowledge that the board's decisions are entitled to the benefit of the business judgment rule. if either failure to act with care or misplaced loyalty are shown, then heightened judicial scrutiny attaches and the burden shifts to the board to show that its actions were entirely fair to the shareholders.
Given the rather limited record, the expedited nature usually associated with preliminary injunctions, as well as the stringent standard for such relief, this Court must find that the claims supporting the request for injunction have a basis in at least clear, if not egregious, acts by the defendant board in contravention of its fiduciary duties. This often requires sifting through many genuine disputes on material facts, arguments about conflicting inferences and attempting to resolve them all while acknowledging the burden on the plaintiff to establish claims so meritorious that I am satisfied they could ultimately succeed at a later full hearing.
After having evaluated the facts and arguments offered by both sides and the merit of the claims underlying the motion here I do not find that the plaintiffs have met the standard required for such extraordinary relief. The plaintiffs have not demonstrated sufficiently that the actions of the IXC board in seeking out a strategic partner or in fashioning the CBI merger were either uninformed or disloyal such that heightened scrutiny applies. Therefore, I feel obligated to defer to the board's substantive business judgment and allow the shareholders to pass ultimate judgment on their actions at the October 29 vote.
A. Duty of Care — Failure of the Board to Inform Itself Adequately
I find, based upon the record before me, that the plaintiffs fail to demonstrate that IXC board inadequately informed itself about and inadequately evaluated numerous potential suitors over the course of its search for a strategic partner. The details of the board's endeavors are outlined in both sides' proposed findings of fact. It is fair to say that those respective proposed findings demonstrate substantial disagreement about pre-merger agreement contacts and discussions with other potential suitors and raise in fact and by inference genuine disputes about material issues of fact. The board adopted a rather tenuous methodology apparently out of concern that the company's perceived financial difficulties would be quickly discerned after due diligence by interested suitors and out of a fear that actively soliciting merger partners would create a "fire sale" atmosphere that, in the board's judgment, would not be in the best interest of the shareholders.
Admittedly not every potential deal became subject to intense scrutiny or involved mutual due diligence. The IXC board could not control which interested suitor left the table and which remained. It bears noting that GEPT's representative on the board and Directors Irwin, McKenzie and Swett, collectively represented the economic interests of 30% of the common stock directly as well as the entire community of shareholders indirectly. It seems that at this preliminary stage that, absent a complete review of the facts, that the IXC board's judgments about what deals and offers might have been more or less viable than others reflect a vigorous process for maximizing shareholder value.
I have not been presented facts that would allow me to conclude that the IXC board did not exercise its best judgment in deciding which suitors merited serious consideration and which ones perhaps did not. Time does not permit nor does the record merit, detailed examination of each expression of interest by prospective merger partners and the reasons those respective discussions collapsed. Defendants' proposed findings of fact and the exhibits supporting them outline a series of contacts with varying degrees of interest expressed and efforts undertaken in pursuit of those expressions. This outline materially disputes plaintiffs' conclusory contentions that the board acted with gross negligence in turning away potential suitors, ignored the advice of investment bankers, ignored the advice of its "own due diligence team" and entered into "no talk" and termination provisions designed to frustrate viable alternative suitors to CBI.
The evidence seems equally susceptible to, if not, indeed far more plausibly consistent with, the difficulties IXC faced with the reliability of the financial projections of its management team, its (disputed) cash shortfall, the need to avoid the appearance of a company in trouble, subject to a "fire sale" atmosphere and the perceived need to combine in a strategic deal with long term value rather than engage in an auction for questionable short term gain.
The plaintiffs' rather strained allegations, often far removed from context, that the IXC board charged ahead with the CBI deal, in complete ignorance of or in disregard of the counsel of its financial advisors is equally conclusory and subject to dispute. But even if I accepted these particular allegations as true, no board is obligated to heed the counsel of any of its advisors, and with good reason. Finding otherwise would establish a precedent by which this Court simply substitutes advice from Morgan Stanley or Merrill Lynch for the business judgment of the board charged with ultimate responsibility for deciding the best interests of the shareholders.
The plaintiffs contend that the now defunct no-talk provisions in the Merger Agreement, highlight a pattern of "willful blindness." The no-talk provisions emerged late in the process. IXC and CBT later retracted the provision, permitting the Board to hear any proposals it sees fit and continued the Board's receptivity to a fiduciary out concept without shopping the company under perceived adverse circumstances. No superior offers were received and therefore none were turned away. Further, the assertion that the board "willfully blinded" itself by approving the now defunct "no-talk" provision in the Merger Agreement is unpersuasive, particularly considering how late in the process this provision came. Provisions such as these are common in merger agreements and do not imply some automatic breach of fiduciary duty. Even so, IXC and CBI since retracted the provision, permitting the Board to hear any proposals it sees fit.
I am comfortable concluding that the IXC board met its duty of care by informing itself over the nearly six months lasting from the February 5 public announcement to the late July approval of the IXC-CBI merger, where the record reflects no incoming interest from May 1999 and a fiduciary out provision in the merger agreement which would have allowed the board to entertain any proposal superior to CBI's.
B. Duty of Loyalty — Board's Failure to Act in the Inerest of IXC Shareholders
I do not find in the facts alleged that the IXC board acted in a manner inconsistent with the best interests of the IXC shareholders, nor that the IXC board has been shown to have some personal interest that compelled that conduct. The plaintiffs' attempts to portray the board as somehow self-interested in a manner adverse to the IXC shareholders stretch the facts to a logical breaking point and fail to support their claims that the board breached its duty of loyalty. At least three members of the board, Messrs. Irwin, McKenzie and Swett, together hold at least 16.3% of IXC's outstanding shares. Plaintiff has not demonstrated how the rational economic self-interest of these large shareholders differs from all IXC shareholders, nor that they would receive anything more for their shares than even the numerically smallest IXC shareholder.
The plaintiff alleges nothing about the genesis of this proposed merger, whether in the negotiations or in the proposed terms, to lead me to conclude that the actions of the board as a whole (as well as the self-interest of the director-shareholders) were not in alignment with the interests of all IXC shareholders
I feel compelled to comment briefly on the plaintiffs' allegations that the board willfully left itself uninformed in order to serve its "self-interest" in avoiding duties under Revlon . While the plaintiffs do not clearly articulate whether these breaches are of care, loyalty or disclosure, I assume they relate to the plaintiffs' view that IXC should have been shopped in order to maximize shareholder value and that the board's contention that it feared a diminution of value from a "fire sale" approach constituted nothing more than a sham attempt to mask the board's desire to avoid a court's "enhanced scrutiny" of the process and its product. Only in the mind of the most aggressive legal advocate could the claim be made, with a straight face and absent any serious factual support, that a board of directors, consisting, in part, of three of the largest individual shareholders in the corporation and the largest single institutional investor, would completely ignore the best economic interests of the shareholders in order to avoid so-called "onerous" Revlon duties found in Delaware common law. To say that this claim is a serious factual stretch is as understated as I can be. I simply cannot accept a scenario that suggests that such a twisted self interest could even exist; namely, so intense a desire to avoid an artifice of perceived legal duties (duties which in actuality this Court determines from the context, after the fact) that the directors would actively shirk their fiduciary obligations and in the process ignore their own economic self-interest. Plaintiffs need a serious reality check. Every court which must respond to a request to review a proposed business judgment of a fiduciary in whom investors have placed their trust should review the judgment within the context of the environment in which it was made and in regard to the opportunity for the investors themselves to accept or reject that judgment with the investors own economic interests in mind. The reasons offered by the board for support of the merger agreement, the circumstances surrounding it and the interplay of the principals in the voting agreement have been fully disclosed to the shareholders. Absent convincing evidence that the board skewed the process in order to prevent a shareholder from voting knowledgeably and intelligently on the merger agreement, no court should apply an artificial barrier to market consideration of that business judgment. The plaintiff's Revlon "self-interest" allegation is baseless at best.
In my view of the facts, it is not likely that the plaintiff can fairly dispute that the approval the IXC board seeks from shareholders is the product of the board's best, informed judgment. The plaintiffs advancement of the alleged breaches of the directors' duties of care and loyalty have no reasonable likelihood of success on the merits.
2. The "Vote-Buying" Arrangement
A. Disenfranchisement Caused by the GEPT Deal
Plaintiffs allege that a deal by which: (1) CDI acquired 5 million of GEPT's IXC shares for $50 cash per share (half of GEPT's total IXC holdings); and, (2) CBI secured GEPT's promise to support the merger with its remaining shares, constituted illegal "vote-buying" (the "GEPT deal"). Vote-buying can be defined as simply as any transaction by which a parry directs a shareholder's vote for consideration personal to that shareholder. Generally speaking, courts closely scrutinize vote-buying because a shareholder who divorces property interest from voting interest, fails to serve the "community of interest" among all shareholders, since the "bought" shareholder votes may not reflect rational, economic self-interest arguably common to all shareholders.
Plaintiffs have shown that the GEPT deal has all the appearance of a vote-buying arrangement. Clearly CBI secured GEPT's promise to support the merger in exchange for a $50 cash per share offer for one-half of GEPT's shares. No other IXC shareholders received the same or a comparable cash offer.
The parties do dispute the material fact that die shares value at the time was $52 as opposed to $42 — an eight dollar differenec — a dispute that highlights the defendants' contention that GEPT got discounted value in exchange for immediate cash and the plaintiffs' view that GEPT got a puemiutvi not available to other shareholders. The preliminary injunction stage of this proccediug seems far too un\vieldy to resolve this dispute about value with any level of confidence.
I can not agree, and our case law does not support the conclusion, that under the circumstances the plaintiffs can likely demonstrate that this voting agreement is illegal. This Court in Schreiber v. Carney found hat "vote-buying" arrangements are not illegal per se and therefore void, but are only voidable. Only when the vote-buying agreement defrauds or disenfranchises other shareholders can it be said that the agreement is illegal and therefore void. Absent these deleterious purposes, a shareholder may commit his vote as he pleases.
Dcl. Ch. 447 A.2d 17 (1982).
Since plaintiffs do not maintain that the GEPT deal defrauds other shareholders, I need only examine whether the GEPT deal disenfranchises other shareholders. Plaintiffs argue that knowledge of the total number of outstanding shares committed to vote for the merger before the scheduled October 29, 1999 vote will cause IXC's remaining independent majority, of shareholders to believe their vote to be meaningless and that they, therefore, could not effectively oppose the merger, since the critical block of GEPT votes, bought and paid for by the merger's proponents, have "locked up" the deal. The facts make this conclusion illogical.
Here, an admittedly independent majority of IXC's shareholders (owning nearly 60% of all IXC shares) may still freely vote for or against the merger, based on their own perceived best interests, and ultimately defeat the merger, if they desire. The defendants have not, in fact, "locked up" an absolute majority of the votes required for the merger through the GEPT deal. Plaintiffs themselves, notwithstanding vigorous argument questioning the fairness of the GEPT deal, tacitly admit that the vote-buying agreement does not make the outcome of the vote a foregone conclusion. They can only say that the GEPT deal " almost completely lock[s] up the vote — thus giving shareholders scant power to defeat the Merger . . ." (emphasis added). " Almost locked up" does not mean "locked up," and " scant power" may mean less power, but it decidedly does not mean "no power."
The fact that a numerical majority of IXC shareholders are still in a position independently to void the allegedly onerous effect of this vote-buying transaction by voting against the merger leads me to conclude that this agreement does not, in fact, have the purpose or effect of disenfranchising this remaining majority of shareholders. In fact, plaintiffs seek to enjoin the very vote that would permit informed, rational shareholders to defeat the merger and frustrate the GEPT deal's objective, should they, based on the total mix of information available to them conclude that it is in their best interest to do so.
Institutional investors (169 in number) constitute more than 60% of the shareholders of record eligible to vote on the merger) All of the shareholders of record have the plaintiffs' complaints in their hands, via supplemental proxy materials. They can decide the fairness of the voting agreement and, ultimately, the desirability of the merger itself consistent with their own economic interests. Regardless of the votes secured in the GEPT deal and any other votes pre-committed to support the merger, the independent IXC shareholders, through their ability to exercise an informed shareholder franchise, possess the power to decide the relative fairness of the GEPT deal and whether their long term investment interests seem consistent with an IXC merger with CBI.
Source: Vickers Institutional Research
B. Fiduciary Duty of IXC Board concerning the GEPT Deal
I am also not convinced that the IXC board breached its fiduciary duty of loyalty by "blessing" the voting arrangement and the stock purchase agreement, and that their actions taint the scheduled vote. The arrangement is arguably a third party transaction between two entities dealing at arms-length, which in and of itself requires no explicit approval by the IXC board. The board's approval of the Merger Agreement after the fact of the GEPT deal does not support the allegation that they had some duty to stop that deal, let alone the power to do so. GEPT shares committed to the merger is no different than the commitments of certain directors to vote for the Merger Agreement and those commitments are not challenged. The facts that: (1) the GEPT deal was a precursor to CBI's entering into the Merger Agreement; and, (2) the IXC board approved of (though not actually approved) the transaction, by ultimately approving the Merger Agreement, do not support the allegation that the board breached its fiduciary duties, such that this claim has a reasonable likelihood of success on its merit after a full hearing. As Schreiber makes clear, where a voting agreement in question is entered into to promote the interests of all shareholders, the
[C]ommunity of interests likely to be defrauded or disenfranchised by the separate private arrangement can be protected by full disclosure and an opportunity to vote on the proposed sale . . . under our present law, an agreement involving the transfer of stock voting rights without the transfer of ownership is not necessarily illegal and such arrangement must be examined in light of its objective or purpose.
Schreiber, infra at 25.
Here, the commitment to vote, disparaged as locked up or otherwise, has the objective of promoting the best interest of the community of shareholders by increasing the likelihood (though far short of a certainty) of approval of the merger of IXC into CBI. The merits of that proposal, as well as the details of the voting arrangement are in the proxy materials and before those eligible voting shareholders. So, in fact, is the plaintiffs' complaint expressing reasons to oppose the proposed merger. Just as in Schreiber, the shareholders will, with the benefit of all relevant, material information, be able to advance their own perceived economic interest by voting for or against the merger. The directors, having put the issue and all relevant information before the shareholders for their approval, can hardly be said to have "disenfranchised" those very same shareholders.
3. Termination Fee — Stock Option Provisions
Termination fees are permissible under Delaware law. It is very difficult to say that any termination fee is so excessive on its face that it is unenforceable. Termination fees are most properly evaluated in the context of the merger agreements under which they arise. It would be nearly impossible to evaluate them independently of the merger agreement since the fees are likely part of a careful balance of consideration from each side and the result of a give and take process. Thus, for this Court to interject itself into a battle over whether the termination fees are excessive would require a wholesale evaluation of the fairness of all of the terms of the Merger Agreement, as well as the process which brought them about, in order to decide whether the termination fee implicates a potential unconscionable expenditure based upon a percentage of the value of the deal. It would be even more difficult here since the parties so hotly contend exactly what percentage of the total merger deal that this termination fee comprises.
QVC Network, Inc.v. Paramount Communications, Inc., Del. Ch., 635 A.2d 1245 (1993), aff'd, Del. Supr., 637 A.2d 34, 50 (1994).
However, I do not find it necessary to reach the question of whether this fee is unfair and unenforceable, since enhanced judicial scrutiny does not apply and entire fairness is not the standard of review. Neither the termination fee, the stock option agreements nor the no-solicitation provisions are defensive mechanisms instituted to respond to a perceived threat to a potential acquiror In the absence of a showing of disloyalty or lack of care in agreeing to the termination fee, these provisions are reviewable as business judgments and are, thus, granted deference.
In re Santa Fe Pacific Shareholders Litigation, Del. Supr., 669 A.2d 59, 71 (1995). Nor is this a Revlon case where it is a stock for stock merger and control will remain in the market place.
Irreparable Harm
Certainty the irreversible nature of a shareholder vote on a merger supports the argument that any possible harm caused by a tainted voting process would be irreparable. In this very basic sense, the plaintiffs have established this clement of their request for a preliminary injunction. However, since I find no rational basis for concluding that either the voting agreement tainted the process or that the board failed to give the shareholders all information that a reasonably prudent shareholder would find material in the total mix required in order to cast an informed vote, the plaintiffs' argument underpinning the alleged irreparable harm falls under its own weight. The mere prospect of perceived inequities which may result after a fully informed shareholder vote may be the subject matter of ex-post claims for relief but will not support the extraordinary measure of preliminary injunctive relief. An untainted voting process result may be irreversible, but any harm that a dissatisfied plaintiff may perceive after that process is complete can be appropriately addressed.
Balancing of the Equities
The directors, as fiduciaries elected by the shareholders to act in their best interest, evaluated the merits of a merger with CBI and have outlined their efforts and recommendation as well the opposition to the merger's position straight forwardly in proxy materials submitted to all shareholders.
Over sixty percent (169) of the shareholders entitled to vote are institutional investors presumably keenly aware of information included in the proxy materials. Those materials include a copy of the plaintiffs' complaint in this action. Plaintiffs do not allege that all or even some of the shareholders eligible to vote did not receive those materials, including the details of the plaintiffs' position found in their complaint, well enough before the proposed vote, to be able to cast an informed vote.
The shareholders ultimately decide based on the information available, including, but not limited to the advice of the board, whether the merger should be approved on the basis that it either will enhance the value of the shareholder's investment or rejected because it will not. The entire community of interest in which each shareholder is a member benefits from each shareholders' determination, from its own unique economic situation, whether the merger does or does not promote its interest.
Here, before they are asked to vote, the shareholders, predominately institutions with some appreciable level of sophistication know, because the proxy materials tell them, that other shareholders of consequence have cast their lot in favor of the merger. Those shareholders who have yet to commit can evaluate the decisions of the others with the confidence that those who favor the merger have done so in their own economic interests. Swett and Irwin, co-founders of IXC favor the merger, believe in its long-term value to their specific and substantial interests and are locked in to vote yes. GEPT, at one time a 26% and the largest IXC shareholder, acted more conservatively by selling one-half its holding in IXC outstanding common to CBI at $50 per share and retained one-half its shares. GEPT chose to hedge its bet on the successful marriage of IXC and CBI, while taking a discount for cash (as the defendants see it) or while obtaining as much as an $8 premium per share (as the plaintiffs see it). CBI, the proposed merger partner, readily paid $50 per share for 13% of IXC's outstanding common, has entered into a merger agreement after a significant pre-merger cost, including a 50% announced cut in its dividend to its own shareholders in order to be able to do so, and appears committed to the long-term success of the merger. Neither the facts alleged nor arguments presented persuade me that the board of IXC, or the actions of other shareholders through private agreements, either grossly negligently or through breach of fiduciary duties so skewed the deliberative process that the shareholders can not by their approval or rejection of the IXC/CBI merger perform the appropriate balancing of the equities between these parties. The relative harm to IXC, should the merger not go forward, versus the harm to shareholders should the merger vote go forward will and should be determined by a fully informed shareholder vote on October 29, 1999.
Conclusion
I conclude that:
1. The disclosures in the proxy materials adequately inform the shareholders not only about the circumstances of the merger, but also specifically detail the concerns alleged by plaintiff Crawford in his motion to enjoin the vote; and,
2. A majority of the IXC shareholders consisting of 169 institutional investors, 60% of the IXC outstanding shares, have every opportunity as a "community of interest" to accept or reject the merger; and,
3. No facts support the notion that the IXC board failed its obligations to ensure the integrity of the vote or that the directors' self-interest tainted their judgment thus depriving them of the protection of the business judgment rule.
The request for a preliminary injunction is denied.
IT IS SO ORDERED.
_________________________ Vice Chancellor