Omnicare, Inc. v. NCS Healthcare, Inc.--Part Two
May 7, 2003
A great deal of attention has been focused on the principal holding of the Delaware Supreme Court in its recently issued opinion in Omnicare v. NCS, that an agreement which fully locks up a proposed merger vote and contains no fiduciary out will not be enforceable under Delaware law. A closer reading of the opinion, however, reveals a number of ancillary issues that merit further discussion.
As a brief reminder, the pertinent facts are as follows:
Jon Outcalt, the chairman, and Kevin Shaw, the CEO, owned shares comprising a majority of the voting power of NCS, a company that was experiencing financial difficulties and exploring strategic alternatives. NCS engaged in discussions with Omnicare whereby Omnicare made a series of proposals, each of which was conditioned upon completion of due diligence and was not for a merger, but rather, for the purchase of assets out of bankruptcy, under which the NCS creditors would be partially paid and NCS stockholders would receive nothing. NCS later engaged in negotiations with Genesis, a second bidder, in which Genesis proposed a merger that provided for full recovery by NCS’s debt holders and unsecured creditors and the payment of Genesis stock equal to $1 in value for each share of NCS stock. Omnicare learned of these negotiations and proposed a merger whereby the debt holders and creditors of NCS would be fully paid, and the stockholders would receive $3 per share. Omnicare continued to insist, however, on completion of confirmatory due diligence. Genesis improved the terms of its proposal in exchange for a merger agreement that did not contain a "fiduciary out" and voting agreements with Outcalt and Shaw pursuant to which they agreed irrevocably to vote all of their shares in favor of the merger. The merger agreement also contained a "force the vote" provision requiring NCS to submit the merger agreement to its stockholders for a vote whether or not the NCS board continued to recommend the merger. The NCS board approved the merger agreement and the voting agreements, and NCS and Genesis signed the merger agreement and Outcalt and Shaw signed the voting agreements. Omnicare subsequently committed itself to a transaction with NCS whereby it agreed to tender for all outstanding shares of NCS for $3.50 per share, with no due diligence condition. The NCS board withdrew its recommendation of the NCS/Genesis merger agreement, and NCS’s financial adviser withdrew its fairness opinion. Omnicare and certain NCS stockholders then sought an injunction to invalidate the Genesis merger agreement and related voting agreements.
The Court of Chancery held that the plaintiffs failed to establish a reasonable probability of success on the merits of their claims for the reasons described in our memorandum dated April 9, 2003. The Delaware Supreme Court (in a rare three-to-two decision) reversed the Court of Chancery and principally held that the absence of a "fiduciary out" provision in the merger agreement made the deal protection measures (i.e., the Section 251(c) "force the vote" provision coupled with the stockholder voting agreements that represented a majority of the votes on the merger) both preclusive and coercive.
Aside from the court’s principal holding, we have extracted the following additional points:
The majority opinion implies that the appropriate standard of review for any deal protection device under any circumstance may be the enhanced scrutiny standard of Unocal Corp. v. Mesa Petroleum Co., rather than the business judgment rule. In addition, the court suggests that the appropriate time to test the reasonableness of the adoption of the defensive measure in relation to the threat posed is the time the defensive measure is challenged, not at the time it is adopted.
In its Legal Analysis section of the opinion, at the end of the subsection entitled Merger Decision Review Standard, the court notes that the NCS board of directors approved a merger agreement that was summarized for, but never read in its entirety by, the members of the board. Although the court cites to Smith v. Van Gorkom for the proposition that the exercise of due care does not necessarily require board members to read the entire merger agreement, it does so with some skepticism. While this might call into question the court’s commitment to allow for directors’ due care to be properly exercised in such a way, it is not advised at this time that a full reading of the merger agreement is required, so long as counsel adequately summarizes all salient points of the agreement and is available to answer the directors’ questions.
Although the court clearly holds that majority voting agreements coupled with defensive measures that entirely lock up a transaction are prohibited, by negative implication, agreements that lock up less than a majority of the voting power should still be valid.
The court cites Paramount v. QVC and states, "To the extent that a [merger] contract, or a provision thereof, purports to require a board to act or not to act in such a fashion as to limit the exercise of fiduciary duties, it is invalid and unenforceable." The court’s insertion of the word "merger" may at least partially resolve any lingering concerns that the statement in Paramount would apply to ordinary course, long-term contracts and other commercial arrangements rather than to mergers and other fundamental matters.
The court did not comment on the Court of Chancery’s statement, albeit in a footnote, that the debt portion of the transaction value should be taken into account when evaluating the reasonableness of the termination fee in situations where the board owes fiduciary duties to both stockholders and creditors.
The dissenting justices noted that an acquirer may pay a higher price for a target if the acquirer is assured consummation of the transaction, and that a target also benefits from the certainty of completing the transaction with the bidder because losing an acquirer may create the perception that the target is "damaged goods," thereby reducing its value. The majority opinion, however, does not expressly acknowledge that certainty in and of itself has value.
