Academic journal article
By Shaner, Megan W.
Journal of Corporation Law , Vol. 38, No. 4
I. INTRODUCTION II. THE REACTION TO OMNICARE: CRITICISMS AND CONCERNS III. POST-OMNICARE DECISIONS : "THE LONG SLOW DEATH OF OMNICARE"? A. ORMAN V. CULLMAN B. OPTIMA INTERNATIONAL OF MIAMI, INC. V. WCI STEEL, INC. C. IN RE OPENLANE, INC. SHAREHOLDERS LITIGATION D. NON-DELAWARE CASES IV. POST OMNICARE TRANSACTIONS: WERE THE CRITICS RIGHT TO BE CONCERNED? V. WHAT DOES THIS TELL US ABOUT OMNICARE? A. THE COURT OF CHANCERY ACTING TO LIMIT THE SUPREME COURT'S DECISION B. OMNICARE DID NOT IMPACT THE M&A MARKET C. OMNICARE'S QUESTIONABLE DOCTRINAL FOOTING AND EFFICACY VI. CONCLUSION
In the late 1970s and early 1980s, corporate law entered a period that was dominated by hostile takeover activity. In connection with (and most likely in response to) the prevalence of this hostile activity, there was also an increase in the use of deal protection devices in mergers and acquisitions. (1) These deal protection devices involved "any measure or combination of measures that [were] intended to protect the consummation of a merger transaction." (2) They were economic in form, structural in form, or both. In a series of decisions, the Delaware courts began to express skepticism with respect to the increased use of deal protection devices in mergers and acquisitions (M&A). In the context of hostile takeover transactions, the Delaware Supreme Court in Unocal Corp. v. Mesa Petroleum co. held that enhanced judicial review, and not the deferential business judgment rule, should apply to defensive measures, which could include deal protection devices. (3) Similarly, in the change-in-control context, the Delaware Supreme Court in Revlon inc. v. MacAndrews & Forbes Holdings, inc. held that enhanced judicial review should apply to a board's actions, which could include approval of deal protection devices where a corporation had effectively put itself up for sale. (4)
In 2003, the Delaware Supreme Court was asked to address the proper use of, and standard of review for, deal protection devices in the context of a friendly, non-change-in-control transaction. Omnicare, Inc. v. NCS Healthcare, Inc. (5) involved a challenge to the proposed merger of NCS Healthcare, Inc. and Genesis Health Ventures, Inc. (6) The challenge specifically focused on three elements of the proposed merger that were intended to protect the transaction: (i) a force-the-vote provision that required the transaction be put to a vote of the NCS stockholders; (ii) the absence of a fiduciary out provision allowing the NCS board to terminate the merger in the event of a superior proposal; and (iii) a voting agreement that obligated two of NCS's stockholders, who collectively held over a majority of the corporation's voting power, to vote in favor of the Genesis merger and against any competing transaction. (7) The Court of Chancery rejected claims by NCS stockholders and competing bidder Omnicare, Inc. that approval of the merger's deal protection devices violated the NCS board's fiduciary duties, but the Delaware Supreme Court reversed.
In a rare split decision, the Delaware Supreme Court invalidated the NCS-Genesis merger agreement. (8) In so doing, the court set forth three highly criticized holdings. First, the majority of the court held that enhanced judicial scrutiny per Unocal applies to a board's approval of deal protection devices. 9 Second, applying that enhanced scrutiny, the majority held that the specific combination of deal protection devices in the NCS Genesis merger failed to satisfy this heightened review and were invalid under Unocal. (10) Finally, the majority invalidated the NCS-Genesis merger agreement on alternative grounds, holding that completely locked-up transactions violate a board's fiduciary duties and thus are per se invalid. (11)
Beginning with the two separate dissenting opinions, the majority's opinion in Omnicare garnered an immediate and widespread negative reaction from the legal community. …