On December 5, shareholders of The Seagram Company Inc. passed judgement on the proposed union of the company with Vivendi. Rejection of the deal would not have triggered the payment of the U.S.$800 million break fee, an amount that represented 2.33% of the total value of the deal. The Seagram board distinguished itself by indicating that its members were not terribly happy about the break fee. Among the reasons the Seagram board gave for its endorsement of the deal was: ‘the fact that the U.S.$800 million termination fee, which was insisted upon by Vivendi, is payable by Vivendi or Seagram in similar circumstances.

There are, I think, people who count among their particular skills the ability to make pretty much anything more complicated, and thus the appearance of variable break fees. Siebel Systems Inc. bought Janna Systems Inc., announcing the completion of the transaction on November 15th. To make a very long set of provisions shorter by picking out the highlights, the break fee was set at US$10,050,000, US$20,100,000 or $30,150,000 depending upon the particular deal breaking transgression of Janna. The lowest fee would have been payable had the company’s securityholders not given the required voting approval. The break fee would have doubled had Janna entered into or completed a merger with another entity within a year of deciding to terminate its agreement with Siebel. Finally, a fee of US$30,150,000 would have been the penalty to Janna and its shareholders if Siebel terminated the transaction because Janna’s board failed to unanimously recommend the deal to its securityholders or took ‘any other action that a reasonable person would believe indicate[d] that the board d[id] not support the Arrangement’. In sum, the penalty for walking away from this deal would have amounted to between about 1% and 3.2% of its total cost.

The most expensive escape hatch we have seen in recent months was written into the agreement between Maverick Tube Corporation and Prudential Steel Ltd., and was also graduated, totaling between 1.3% and 6%. In this

case, the fee would have been payable by either party, and again, the largest fee was payable if either company’s board had failed to play its part in so far as its fiduciary responsibility to its shareholders would allow.

Just in case the enormous cost of backing out is not sufficient to keep the parties to the script, many transactions feature other impediments to escape. Option Agreements are a particularly popular example. The typical option agreement will provide that one company, generally the acknowledged acquiree, grant the acquiror an option to purchase between 10% and 20% of the number of acquiree shares issued and outstanding at the then current market price. The existence of such an agreement will clearly work to dampen the enthusiasm of the acquiree’s various personnel about rival bids because it may not be easy to get rid of the former suitor. In an interesting extension of this deterrent to deal breaking, the option granted to Psion PLC by Teklogix International Inc. provided that Psion could vote, based on the number of shares underlying the option (just under 20% of diluted outstanding common shares), against a superior proposal.

Option agreements are put in place in the hopes that the option will not be exercised, but will expire upon the completion of the arrangement. In contrast, many companies see fit to bestow voting rights upon their optionholders. There would not appear to be any logical reason to allow optionees to vote on an arrangement. Rather the only rationale would appear to be the opportunity to ensure a bunch of extra votes in favour. Votes based on option holdings are simply adverse to the interests of minority shareholders who have their decision making power reduced by those with ‘securities’ that do not evidence any investment in the company. The practice simply doesn’t make any sense and should not be permitted.