Omnicare, Inc. v. NCS Healthcare, Inc.

Supreme Court of Delaware
818 A.2d 914 (2003)

ELI5:

Rule of Law:

Deal protection devices in a merger agreement, such as a force-the-vote provision and shareholder voting agreements, are invalid and unenforceable when, operating in combination without an effective fiduciary out clause, they are preclusive and coercive, thereby preventing the board of directors from discharging its continuing fiduciary duties to protect shareholder interests.

Facts:

NCS Healthcare, Inc. (NCS), a financially distressed company, began exploring strategic alternatives after defaulting on approximately $350 million in debt.
After a lengthy search for a buyer, Genesis Health Ventures, Inc. (Genesis) expressed interest in a merger that would pay creditors in full and provide some recovery for NCS stockholders.
Omnicare, Inc. (Omnicare), a competitor, had previously only proposed to purchase NCS's assets in a bankruptcy proceeding, which would have provided nothing for stockholders.
Genesis, having lost a previous bidding war to Omnicare, demanded absolute certainty and insisted on a 'bulletproof' deal, refusing to be a 'stalking horse' for other bidders.
The NCS board agreed to a merger with Genesis that included three key provisions required by Genesis: (1) a clause under DGCL § 251(c) requiring the merger to be submitted for a shareholder vote even if the board withdrew its recommendation; (2) irrevocable voting agreements from two NCS directors, Jon H. Outcalt and Kevin B. Shaw, who together controlled a majority of the voting power, committing them to vote for the merger; and (3) the absence of an effective fiduciary out clause that would permit the board to terminate the agreement in favor of a superior proposal.
The combination of the force-the-vote provision and the voting agreements from Outcalt and Shaw made shareholder approval of the Genesis merger a foregone conclusion.
Shortly after the merger agreement was signed, Omnicare submitted an unsolicited, all-cash proposal to acquire NCS at a price more than double the value of the Genesis stock-for-stock deal.
The NCS board determined Omnicare's offer was superior and withdrew its recommendation for the Genesis merger, but it remained contractually obligated to submit the Genesis deal to a vote it was guaranteed to win.

Procedural Posture:

Omnicare, Inc. filed suit against NCS Healthcare, Inc. in the Delaware Court of Chancery seeking to invalidate the NCS/Genesis merger agreement and related voting agreements.
Separately, NCS stockholders brought a class action in the Court of Chancery to enjoin the merger, alleging the NCS directors breached their fiduciary duties.
The Court of Chancery dismissed Omnicare's fiduciary duty claims for lack of standing.
In a subsequent ruling, the Court of Chancery granted summary judgment against Omnicare on its challenge to the voting agreements.
In the stockholder class action, the Court of Chancery denied a motion for a preliminary injunction, holding that the board's actions were permissible under the business judgment rule.
The plaintiffs in both actions appealed to the Delaware Supreme Court, which consolidated the appeals.

Premium Content

Subscribe to Lexplug to view the complete brief

You're viewing a preview with Rule of Law, Facts, and Procedural Posture

Issue:

Do deal protection measures in a merger agreement violate a board of directors' fiduciary duties when they combine a force-the-vote provision with irrevocable voting agreements from majority shareholders, and omit a fiduciary out clause, thereby making approval of the merger a mathematical certainty and precluding any superior competing offer?

Opinions:

Majority - Holland, Justice

Yes, such deal protection measures are invalid and unenforceable because they are impermissibly preclusive and coercive. A board's decision to implement defensive devices to protect a merger agreement is subject to enhanced judicial scrutiny under Unocal, even when the merger does not involve a change of control. The Unocal standard first requires a court to determine if the defensive measures are draconian—that is, preclusive or coercive. Here, the combination of the Section 251(c) provision, the majority shareholder voting agreements, and the lack of a fiduciary out was both preclusive and coercive. It was preclusive because it made it 'mathematically impossible' for any superior offer to succeed. It was coercive because it forced minority stockholders to accept an inferior transaction that was a 'fait accompli,' rendering their vote meaningless. Alternatively, these measures are unenforceable because they represent an abdication of the board's unremitting fiduciary duties; a board cannot contractually disable itself from exercising its duty to protect shareholders when a superior offer emerges, and thus was required to negotiate for an effective fiduciary out clause.

Dissenting - Veasey, Chief Justice

No, the deal protection measures should be upheld as a valid exercise of the board's business judgment under the unique, exigent circumstances. The majority's holding creates an unwise, bright-line rule that ignores the reality the NCS board faced: the company was on the brink of bankruptcy, and the Genesis deal was the only value-enhancing transaction available. Genesis's insistence on the lock-up provisions was a non-negotiable condition—a sine qua non—for the deal. Without these provisions, the only viable deal would have disappeared, leaving stockholders with nothing. Even under Unocal, the board's response was reasonable in relation to the threat of losing the only available deal. The measures were not draconian in this context because they were not a unilateral defensive action against a hostile bid but rather a negotiated exchange for a value-creating transaction.

Analysis:

This decision significantly curtailed the extent to which a board can 'lock up' a merger agreement. It established that even individually lawful provisions (like Section 251(c) clauses or voting agreements) can become impermissible when their combined effect makes a deal's approval a certainty and forecloses all competition. The case strongly emphasizes that a board's fiduciary duties are ongoing and cannot be contracted away, highlighting the critical importance of an effective 'fiduciary out' clause to allow a board to respond to superior proposals. This ruling forces deal planners to ensure that merger agreements, while providing deal certainty, do not completely eliminate the board's ability to act in the shareholders' best interests, especially those of the minority.

Gunnerbot

AI-powered case assistant

Loaded: Omnicare, Inc. v. NCS Healthcare, Inc. (2003)

Try: "What was the holding?" or "Explain the dissent"