Delaware Courts Continue to Provide Guidance on the Parameters of Acceptable Termination Fees

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On October 5, 2010, the Delaware Chancery Court decided In re Cogent, Inc. S’holder Litig., handing Cogent’s Board of Directors a clear and decisive victory with respect to its actions in connection with the sale of Cogent to 3M Company.1 Among other claims, the plaintiff shareholders argued that the deal protection measures Cogent granted to 3M, including a $28.3 million termination fee, breached the Board’s fiduciary duties. The court rejected this claim, and in so doing gave further guidance on how termination fees should be viewed under Delaware law.

Importantly, although the termination fee in Cogent amounted to only 3 percent of Cogent’s $943 million equity value, it was 6.6 percent of the company’s $430 million enterprise value.2 The reason for this large disparity is that Cogent’s balance sheet included $513 million in cash and no debt. The Cogent court rejected the plaintiff’s position that enterprise value is the proper measure against which to assess the termination fee, holding instead that Cogent’s cash should be included for purposes of evaluating the reasonableness of the fee.

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