Ten Years after Omnicare: The Evolving Market for Deal Protection Devices

Article excerpt

I. "SHOULD OMNICARE BE OMNIPRESENT?" II. PROCEDURAL HISTORY III. CRITIQUE OF MAJORITY OPINION IV. THE FUTURE OF THE OMNICARE JURISPRUDENCE V. CONCLUSION 

I. "SHOULD OMNICARE BE OMNIPRESENT?"

The issue on which I would like to focus is whether the Delaware Supreme Court's majority opinion in Omnicare v. NCS Healthcare, Inc. (1) is properly sustainable in the milieu of modern-day dealmaking. The answer, with one exception, is "no." Before I address this question, it would be helpful to consider the procedural history behind the majority and dissenting opinions.

II. PROCEDURAL HISTORY

The Omnicare case (actually there were two cases) came before former Vice Chancellor Stephen P. Lamb of the Delaware Court of Chancery on an expedited basis. (2) We are concerned here with only the fiduciary duty decision, which arose on plaintiffs' (3) motion for a preliminary injunction, submitted to the Court of Chancery on November 14, 2002. On November 22, 2002, the Vice Chancellor rendered his decision on the merits, denying the motion for preliminary injunction. (4)

The plaintiffs promptly sought an interlocutory appeal. The Delaware supreme Court initially entered an order refusing the appeal, but on December 4, 2002, the court vacated that order and granted the interlocutory appeal. The court consolidated the cases, expedited the appeal process, and heard the case en banc on December 10, 2002. On the same day the court heard the case, the court, by an Order, decided to reverse the Court of Chancery's decision. (5) The Order, which Justice Walsh for the majority signed, noted that Justice Steele and I declined to join in the Order and would affirm. (6)

The Delaware Supreme Court then took until April 4, 2003, to issue its written, split opinion. (7) Justice Holland authored the majority opinion with Justice Walsh and Justice Berger concurring, and Justice Steele (now Chief Justice) and I filed dissenting opinions. (8)

III. CRITIQUE OF MAJORITY OPINION

I have great respect for all of my former colleagues who concurred in the Omnicare majority opinion, and with whom I seldom disagreed. (9) In my view, however, there are at least three questionable premises in the majority opinion. First, the misplaced dependence on the hostile takeover jurisprudence of Unitrin (10) even assuming that enhanced scrutiny under Unocal (11) is the appropriate standard of review. Second, the misplaced reliance on the Revlon (12) jurisprudence of Paramount v. QVC. (13) Third, the announcement of a sweeping, prescriptive, unnecessary, bright-line rule requiring a "fiduciary out."

With the utmost deference, I am constrained to say now, and consistently with what we said in dissent, that the majority's "train" first "went off the tracks" when they applied the hostile takeover gloss of Unitrin on the Unocal jurisprudence in the context of this case. The idea that Unocal controlled this case was debatable. In our view, the business judgment rule should have applied, but the application of the Unocal standard of review was arguably defensible, to a point.

Moreover, Unocal is the standard of review that courts modernly apply to deal protection measures in mergers not involving the sale of control. Vice Chancellor Lamb, Justice Steele, and I, while contending that Omnicare should be reviewed as a business judgment case, found that what the NCS board did was quite proper, even under Unocal. (14) As a result, our personal preference for business judgment review in this context, whether right or wrong, is moot.

In short, the tests under the watershed 1985 case of Unocal are, simply, whether: (a) the board reasonably perceived a threat to corporate policy and effectiveness and (b) the action taken by the board was reasonable in relation to the threat posed. (15) That standard was met in Omnicare. The Vice Chancellor painstakingly chronicled, page after page, (16) the details of the perilous financial condition in which NCS found itself and the steps the Independent Committee, the board, and advisors took to save the company, its stockholders, and creditors. In addition, he dealt painstakingly with the legal conclusions flowing from these facts. Here are just the headings: (17)

* NCS Begins Its Search for Restructuring Alternatives

* NCS Negotiates with Omnicare

* The NCS Board Creates an Independent Committee

* Genesis and NCS Sign an Exclusivity Agreement

* July 26: Omnicare Proposes to Negotiate

* July 28: The Independent Committee and NCS Board Approve the Genesis Merger Agreement and the Voting Agreements

* The NCS--Genesis Merger Agreement and the Voting Agreements

* Subsequent Events

* The NCS Directors Did Not Breach Their Duty of Care by Failing to Contact Omnicare After May 14

* The NCS Directors Did Not Breach Their Duty of Care for Failing to Contact Omnicare After July 26

* The "Deal Protection" Devices in the Merger Agreement Satisfy the Unocal

Reasonableness Standard

The essence of the Vice Chancellor's fact finding is as follows:

   [T]he perceived threat NCS faced was the potential loss of the    Genesis deal followed by a downward spiral in the price offered for    NCS. The record shows that the directors questioned the need for    these provisions and agreed to them only because Genesis was    unwilling to commit itself to the transaction without them.    Moreover, the board was aware that [the controlling stockholders]    Outcalt and Shaw had expressed a willingness to enter into the    voting agreements only as a means of achieving the Genesis    transaction and without material conflicting interests. There is    also no suggestion in this record that the directors authorized    these terms or agreements in order to preclude what they knew or    should have known was a superior transaction. On the contrary, at    the time the directors acted to meet the Genesis deadline, the only    proposal reasonably available to them was the one they adopted.    Finally, Omnicare certainly is not precluded from making a bid for    the combined NCS/Genesis entity, as Gemunder [Omnicare's CEO]    admitted in his testimony. Indeed, Omnicare's financial advisors    have already begun to analyze such a transaction. (18) 

These are the factual findings the majority of the Supreme Court accepted, and this framework is of critical importance. This framework is dispositive, in my view, because it is focused, as it should, through the lens of the facts before the NCS board on July 28, 2002, not later.

I have now gone back and re-read the opinions of the Court of Chancery (including footnote references to deposition testimony and affidavits) and the Supreme Court, as well as the transcript of the oral argument before the Supreme Court. I have re-affirmed my view of ten years ago that the Vice Chancellor's factual findings "are sufficiently supported by the record and are the product of an orderly and logical deductive process," (19) that his conclusions from those facts were correct, and that the decision of the majority of the Supreme Court was erroneous.

In view of the fact that the Supreme Court majority accepted these findings as the factual framework of its opinion, an affirmance should have inexorably followed, in my opinion. Why? To do otherwise would be second-guessing the board's judgment when it acted on July 28, exercising proper due care and good faith. On that basis, the board concluded that it had the Genesis deal in hand, and it had used the latter-day, conditional Omnicare proposal to cause Genesis to sweeten its deal to the point that Genesis required a "take-it-or-leave-it" ultimatum. All along, both courts accepted that Genesis had made the credible threat that it would walk rather than get into a bidding contest. (20)

NCS needed the Genesis deal; without Genesis, there might well have been no deal. The NCS board acted quite reasonably, as the Court of Chancery found, in not taking the risk of losing the "bird-in-hand"--Genesis--to explore the possibility of whether it could get a better and unconditional deal from Omnicare. (21)

But, in misapplying the gloss on Unocal that is found in Unitrin to this merger agreement--namely that defensive action in a hostile takeover must not be "coercive" or "preclusive"--the majority tried to hammer a square peg into a round hole. Merger deal protections are unlike unilateral defensive measures of an entrenched target board designed to thwart a hostile takeover, such as the stock purchase programs at issue in both Unocal and Unitrin. Unocal involved a selective stock exchange plan to thwart Mesa's "inadequate and coercive two-tier tender offer." (22) The Supreme Court reversed the preliminary injunction on the ground that the board's action was not "[d]raconian" (23) and was reasonable in relation to the threat. (24) In Unitrin, the Supreme Court likewise reversed a preliminary injunction against a defense to a hostile takeover, finding that the particular stock repurchase plan, designed there to thwart the hostile tender offer, was reasonable in relation to the threat. (25) In that context, the court said, "if the board of directors' defensive response is not draconian (preclusive or coercive) and is within a 'range of reasonableness,' a court must not substitute its judgment for the board's. (26) This is where the Omnicare majority opinion went off the tracks. The second stage of the Unocal test requires the NCS directors to demonstrate that their defensive response was "reasonable in relation to the threat posed." This inquiry involves a two-step analysis. The NCS directors must first establish that the merger deal protection devices adopted in response to the threat were not "coercive" or "preclusive," and then demonstrate that their response was within a "range of reasonable responses" to the threat perceived. The court continued:

In Unitrin, we stated:

* A response is "coercive" if it is aimed at forcing upon stockholders a management-sponsored alternative to a hostile offer.

* A response is "preclusive" if it deprives stockholders of the right to receive all tender offers or precludes a bidder from seeking control by fundamentally restricting proxy contests or otherwise.

This aspect of the Unocal standard provides for a disjunctive analysis. If defensive measures are either preclusive or coercive they are draconian and impermissible. In this case, the deal protection devices of the NCS board were both preclusive and coercive. (27)

But, by equating unilateral defensive measures that an entrenched target board designed to thwart a hostile tender offer of the Unitrin genre with the deal protection measures in the NCS-Genesis merger, the Omnicare majority put the "rabbit in the hat."

With deference to my former colleagues, I sincerely believe that the majority's conclusion in Omnicare--that the minority stockholder vote was "coerced"--makes no sense. The majority votes of the stockholders, through the voting agreements of the controlling stockholders, were settled and irreversible. To be sure, the board later changed its recommendation after the emergence of Omnicare's latter-day superior offer. But, that was not a completely futile act because it facilitated the ability of the minority stockholders to perfect their appraisal rights by voting against the merger.

The majority's conclusion that the deal was "preclusive," as well as coercive, likewise does not make it actionable. (28) The deal protections in Omnicare, combined with the majority stockholders' voting agreements, predetermined the outcome, to be sure. That was precisely the point. The majority's reasoning, however--that a predetermined outcome is ipso facto actionably "preclusive"--is circular. The test should not be whether the deal protections were outcome determinative of stockholder approval but whether the NCS board properly exercised its fiduciary duties of care and loyalty on July 28, 2002, and preceding that date.

Look at the facts of Omnicare. It is undisputed that: (a) NCS was financially "between a rock and a hard place"; (b) the board of that insolvent enterprise had previously canvassed the market for a merger partner; (29) (c) the process included Omnicare itself, which at the operative time proposed only a conditional deal; (d) the NCS directors thus found Genesis to be the "only game in town"; (e) to make a deal with Genesis, they had to "exchange certainties"; (30) (f) NCS succeeded in sweetening the Genesis deal; and (g) Genesis required the lockup to do the deal or it would walk, and there would be nothing but bankruptcy for NCS. (31) This was the snapshot of the state of play ex ante when the board made its judgment.

Since this was not a unilateral defensive measure by an entrenched target board in response to a hostile tender offer, the Unitrin gloss on Unocal is inapplicable. The board's actions, by any reasonable yardstick, were clearly reasonable in relation to the threat. In a very persuasive article, Sean Griffith notes:

   In sum, the application of Unocal to the deal protection devices in    Omnicare, and to deal protection devices generally, is deeply    unsatisfactory. Unocal involved a specific context--hostile    takeovers--and a specific risk--entrenchment. While the specter of    self-interest may be omnipresent, the risk of entrenchment is not.    There is much less entrenchment risk in friendly mergers. In such    cases, there should at least be some basis for suspecting    self-interest on the part of the target board before applying    enhanced scrutiny. In Omnicare, there is simply no reason to    believe that the board behaved in any way other than perfectly    selflessly. The "omnipresent specter" thus seems to have been    conspicuously absent, along with any basis for applying Unocal    scrutiny. (32) 

Similarly, the jurisprudence of Paramount v. QVC does not apply. QVC was a Revlon case in which control of Paramount was being sold to Viacom. When control is sold, directors are required to obtain for the stockholders the best transaction reasonably available. (33) Just as Omnicare was not a hostile takeover case, it was not a Revlon case. (34) Omnicare was a stock-for-stock merger case, not a sale of control. The fact pattern and the analysis in QVC, therefore, were entirely different from a proper analysis of the deal protections in the NCS-Genesis merger agreement. (35) Nevertheless, the Omnicare majority conflated these irrelevant doctrines with the facts presented to the NCS board. (36)

Finally, by injecting a prescriptive, quasi-regulatory, bright-line rule that not only prevents lockups but also requires a "fiduciary out" in a merger, the majority ventured into unnecessary territory and thus turned Delaware's case-by-case, fact-intensive, deal protection jurisprudence on its head. The majority did not view this case, as they were required to do, as a "snapshot" through the lens of the situation as seen and experienced ex ante by the NCS directors on July 28, 2002. That day, circumstances propelled them into the arms of Genesis, eschewing the risk of driving Genesis away while chasing Omnicare's conditional offer and perhaps having any transaction "spiral down" or disappear.

The majority opinion notes that after the Genesis merger was signed, Omnicare reversed its earlier frosty treatment of NCS, its creditors, and stockholders to propose an extraordinarily superior offer. Judicial review of a business decision must eschew hindsight bias and not conflate the ex post outcome with ex ante circumstances. Before Omnicare was even decided, Chancellor Leo J. Strine of the Delaware Court of Chancery (then Vice Chancellor) wrote an article making the following point, which was then presciently relevant to what should have been the Omnicare decision, and is an enduring principle of Delaware jurisprudence:

   [A] point often raised by those who fear heightened judicial    scrutiny of board decisions ... [is the] concern ... that courts    (perhaps subconsciously) do not assess a board decision to agree to    deal protection measures based on the information the board    possessed at that time, but in view of later developments--such as    a topping bid. Because it is always easier to make a correct    decision with the benefit of hindsight, there is a danger that    judges will substitute their judgment for that of directors too    easily. If this is done on a persistent basis and the decisions of    well-motivated directors to grant deal protections cannot be relied    upon by merger partners, there may be a diminution in    value-maximizing transactions, to the overall detriment of    stockholders. This is a legitimate concern, and one that builds on    the corporation law's recognition that the judiciary is ill-suited    to determine whether a proper judgment call was made by a board    about a business matter. (37) 

In Delaware jurisprudence, viewing and judging a transaction at the time the board approves it is axiomatic. For example, Vice Chancellor Laster, in an important and pertinent recent decision involving deal protections, said:

   Delaware law does not judge fiduciary decisions by hindsight or    evaluate the merits of the decisions by what later transpired. Deal    protections provide a degree of transaction certainty for merging    parties by setting up impediments to the making and accepting of a    topping bid. Relaxing deal protections facilitates a topping bid.    (38) 

In sum, the Omnicare majority (unnecessarily) imposed a new bright-line, fiduciary out doctrine based on the fact that fiduciary duties are "unremitting" seemingly even in an ex post context. (39)

The majority did not have to establish a bright-line rule requiring "fiduciary out" in merger agreements, which was purportedly based on a board's "continuing fiduciary responsibilities to the minority stockholders." (40) Such an inflexible, prescriptive rule is unprecedented and unworkable. To say that a board always has "continuing fiduciary responsibilities" is a noble abstraction, but here it does not credit the ex ante due-care, good-faith diligence of the NCS directors in the proper exercise of their fiduciary duties ex ante. The fact that the Genesis merger required a lockup under those unusual facts should not have resulted in its invalidation because the directors had already exhaustively and diligently exercised their fiduciary duties on July 28, 2002. They had then "crossed the Rubicon."

IV. THE FUTURE OF THE OMNICARE JURISPRUDENCE

In my view, with one exception, Omnicare as a precedent is suspect. It should not be exalted as an over-arching precedent (41) for defensive measures in mergers where the focus must be on what directors face ex ante. It is an aberration in two important respects.

First, its unique facts are not likely to be repeated. That is, the "perfect storm" that made up those facts (two controlling stockholders voting in advance of a stockholders' meeting, a force-the-vote feature, and no fiduciary out) are sui generis and not likely to come around again in that form. The Delaware Supreme Court, if confronted again by such facts, could well overrule the majority opinion in Omnicare. Dealmakers are not likely to take that risk, however. There is no need for dealmakers to replicate this "perfect storm" because there are workable alternatives, and the court is unlikely to expand the Omnicare doctrine, in my view. As we noted in the conclusion to our joint dissent:

   It is regrettable that the Court is split in this important case.    One hopes that the Majority rule announced here--though clearly    erroneous in our view--will be interpreted narrowly and will be    seen as sui generis. By deterring bidders from engaging in    negotiations like those present here and requiring that there must    always be a fiduciary out, the universe of potential bidders who    could reasonably be expected to benefit stockholders could shrink    or disappear. Nevertheless, if the holding is confined to these    unique facts, negotiators may be able to navigate around this new    hazard. (42) 

Second, the art of dealmaking has indeed moved on, and negotiators have been "able to navigate around this new hazard." Dealmakers have continued to develop new structures for protecting deals while not implicating the exact concerns the Omnicare majority opinion identified. The exception to Omnicare's sustainability as a precedent, in my view, is that Unocal is now the normal lens through which defensive measures in stock-for-stock mergers are viewed. One could debate the efficacy of that issue, but such debate is moot, for now. While Unocal is established as the standard of review, the Unitrin gloss should not apply in circumstances such as that presented in this case, in my view. It is clear that every case is unique and many deals are passing muster. See, for example, Orman v. Cullman (43) Optima v. WCI (44) and OPENLANE (45)

In Orman v. Cullman, a case decided shortly after Omnicare and thoroughly distinguishing it, former Chancellor Chandler said:

   Surely it cannot be the case that whenever a controlling    stockholder can vote against a sale the out voted minority can    assert a coercion claim.... The relevant question "is not whether a    [proposal] is coercive, but whether it is actionably coercive." ...    The line between "coercion" and "actionable coercion" is whether    the vote to approve turned on factors extrinsic to the merits of    the transaction.... unless being in a voting minority automatically    means that the shareholder is coerced (because the minority    shareholder' s investment views or hopes have been precluded by a    majority), plaintiff' s concept of coercion is far more expansive    than Omnicare or any other decisional authority brought to my    attention. (46) 

Optima v. WCI was a highly unusual case, with a union's contract status being central to the decision. It is notable here that Vice Chancellor Lamb denied a motion for preliminary injunction involving a merger where stockholder consents were sought and provided in a 24-hour period. The following passage from the Vice Chancellor's ruling is pertinent:

   [T]he plaintiffs also contend that the board's decision, first on    May 14th and again on May 16th, to agree to Severstal's 24-hour or,    indeed, shorter stockholder consent period provision improperly    contracted away their fiduciary out in violation of Omnicare's    alleged supposed teaching to the contrary. But a stockholder vote    is not like the lockup in Omnicare. First, it's really not my place    to note this, but Omnicare is of questionable continued    vitality.... Therefore, the stockholder vote, although quickly    taken, was simply the next step in the transaction as contemplated    by the statute. Nothing in the DGCL requires any particular period    of time between a board's authorization of a merger agreement and    the necessary stockholder vote. And I don't see how the board's    agreement to proceed as it did could result in a finding of a    breach of duty. (47) 

In OPENLANE, the dealmakers employed the device of controlling stockholder consents executed twenty-four hours after the directors approved the merger, thus obviating topping bids and the fiduciary out requirement of Omnicare. In distinguishing Omnicare, Vice Chancellor Noble said in a footnote:

Omnicare may be read to say that there must be a fiduciary out in every merger agreement. "[T]he ... board was required to negotiate a fiduciary out clause to protect the ... stockholders if the [original] transaction became an inferior offer. The ... board was required to contract for an effective fiduciary out clause to exercise its continuing fiduciary responsibilities to the minority stockholders. Nevertheless, when a board enters into a merger agreement that fails to contain a fiduciary out it is not at all clear that the Court should automatically enjoin the merger when no superior offer has emerged. In Omnicare itself, the Supreme Court held unenforceable a merger agreement without a fiduciary out, thereby allowing the board to consider what the Supreme Court viewed as a hostile bidder's superior offer. Thus, hostile bidders are on notice that Delaware courts may not enforce a merger agreement that lacks a fiduciary out if they present a board with a superior offer. If, however, a merger agreement lacks a fiduciary out, and no better offer has emerged why should the Court enjoin the merger? To require that a fiduciary out clause be put in the merger agreement when sophisticated hostile bidders are on notice that the merger agreement may be found unenforceable if they submit a superior offer? Enjoining a merger when no superior offer has emerged is a perilous endeavor because there is always the possibility that the existing deal will vanish, denying shareholders the opportunity to accept any transaction. There is no alternative or competing offer--importantly, none that is arguably superior--and that suggests that caution should be exercised before enjoining a transaction with no viable alternative and no ready cure. On the other hand, there was little or no publicity about the OPENLANE-KAR transaction before it was announced and almost immediately thereafter irrevocable consents from holders of a sufficient number of OPENLANE shares to approve the Merger were obtained, leaving the impression (or reflecting the reality) of a "done deal." under such circumstances, it is not surprising that another suitor has not emerged. (48)

As OPENLANE notes, abstractions such as whether the need for a "fiduciary out" is omnipresent are unhelpful because outcomes depend on all the facts, particularly whether there is a topping bid. (49) Each case must be carefully examined to evaluate the real-world impact of merger-protection measures, particularly in combination and in context.

V. CONCLUSION

In short, there are reasons to question the enduring jurisprudence of Omnicare. But of greater importance is the fact that there are many variations of deal protections and ways to obviate Omnicare. Dealmakers are fashioning these measures every day. In practice, therefore, Omnicare may have set forth some doctrinal landmarks, but it should not present too many obstacles for dealmakers.

(1.) Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003).

(2.) Vice Chancellor Lamb decided several issues raised in the matter including, for example, whether Omnicare had standing to sue for breach of a fiduciary duty. See Omnicare, Inc. v. NCS Healthcare, Inc., 809 A.2d 1163, 1169-73 (Del. Ch. 2002) (discussing the standing issue). The principal decision at issue on appeal, which the majority of the Supreme Court reversed, and which I and Justice (now Chief Justice) Steele would have affirmed is In re NCS Healthcare, Inc. S'holders Litig., 825 A.2d 240 (Del. Ch. 2002), rev'd sub nom. Omni Care, Inc. v. NCS Healthcare, Inc., Nos. 605, 2002, 649, 2002, 2002 WL 31767892 (Del. Dec. 10, 2002).

(3.) The plaintiffs include a stockholder class in one action and Omnicare itself, the unsuccessful bidder, in the other.

(4.) In re NCS Healthcare, Inc., S'holders Litig., 825 A.2d 240, 262 (Del. Ch. 2002), rev'd sub nom. Omni Care, Inc. v. NCS Healthcare, Inc., Nos. 605, 2002, 649, 2002, 2002 WL 31767892 (Del. Dec. 10, 2002).

(5.) Omni Care, Inc. v. NCS Healthcare, Inc., Nos. 605, 2002, 649, 2002, 2002 WL 31767892, at *1-3 (Del. Dec. 10, 2002).

(6.) Id. at *3.

(7.) Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003).

(8.) Frankly, it is regrettable that the majority of the court felt that exigent circumstances forced it into an immediate decision before the justices could internally and deliberately vet a comprehensive opinion. Who knows whether that normal process might have affected the outcome?

(9.) I participated in about 3,500 decisions (not all full opinions) during my 12-year term and I dissented only twice--in Omnicare and in a search and seizure case. Our court almost always acts unanimously. See E. Norman Veasey & Christine T. Di Guglielmo, What Happened in Delaware Corporate Law and Governance from 1992-2004? A Retrospective on Some Key Developments, 153 U. Pa. L. Rev. 1399, 1407 n.18 (2005) (discussing former Chief Justice Veasey's decision history).

(10.) See generally Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del. 1995) (discussing enhanced judicial scrutiny of defensive measures in certain merger deals).

(11.) See generally Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (discussing the correct standard of review for certain merger cases).

(12.) See generally Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (discussing the legality of certain defensive measures).

(13.) See generally Paramount Commc'ns v. QVC Network Inc., 637 A.2d 34 (Del. 1993) (discussing whether a board of directors violated their fiduciary duties during a merger).

(14.) In fact, while the Vice Chancellor properly analyzed why Revlon and QVC were inapplicable in this non-sale-of-control case, he added: "Indeed, even if the court were applying the Revlon standard of enhanced scrutiny, the directors' actions and decisions would pass muster." In re NCS Healthcare, Inc. S'holders Litig., 825 A.2d 240, 259 (Del. Ch. 2002), rev'd sub nom. Omni Care, Inc. v. NCS Healthcare, Inc., Nos. 605, 2002, 649, 2002, 2002 WL 31767892 (Del. Dec. 10, 2002).

(15.) Unocal, 493 A.2d at 955.

(16.) In re NCS Healthcare, Inc., 825 A.2d at 244-63.

(17.) Id. at 245-62.

(18.) Id. at 262-63 (emphasis added).

(19.) In establishing the Supreme Court's standard of review, see Levitt v. Bouvier, 287 A.2d 671, 673 (Del. 1972) ("In exercising our power of review, we have the duty to review the sufficiency of the evidence and to test the propriety of the findings below. We do not, however, ignore the findings made by the trial judge. If they are sufficiently supported by the record and are the product of an orderly and logical deductive process, in the exercise of judicial restraint we accept them, even though independently we might have reached opposite conclusions."). The factual record before the Vice Chancellor was adduced as the record on preliminary injunction, including documents, affidavits, depositions, briefs, and oral arguments. This was not a trial record with live witnesses. Thus, on review the Supreme Court was not obliged to give it the strongest deference of a trial record that might have been based on the credibility of witnesses, but was obliged to determine if it was the product of an orderly and deductive process, which it did in accepting these findings. The fact that the majority opinion adopted these findings established the framework for the appellate analysis. As a consequence, the majority's conclusions drawn from that framework became a non-sequitur, in my view.

(20.) The Vice Chancellor was emphatic on this point: This increased offer from Genesis, however, did not come without a cost. Genesis made clear that its new offer was a "take it or leave it" proposition. If the revised proposal was not accepted and the requisite agreements executed by the end of the day on July 28, Genesis would withdraw its offer and terminate negotiations. It is true that in some cases courts have expressed skepticism over threats of this nature. But, the record here is convincing that Genesis would have withdrawn its offer and walked away from the deal if NCS violated the exclusivity agreement or allowed Genesis's deadline to pass. In re NCS Healthcare, Inc., S'holders Litig., 825 A.2d 240, 260 (Del. Ch. 2002), rev'd sub nom. Omni Care, Inc. v. NCS Healthcare, Inc., Nos. 605, 2002, 649, 2002, 2002 WL 31767892 (Del. Dec. 10, 2002).

(21.) Interestingly and ironically, the majority, while accepting the Vice Chancellor's findings, seemed to back track a bit and may have used some hindsight to question the board's judgment. In a footnote, the majority said: "The marked improvements in NCS's financial situation during the negotiations with Genesis strongly suggests that the NCS board should have been alert to the prospect of competing offers or, as eventually occurred, a bidding contest." Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 938 n.84 (Del. 2003).

(22.) Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 958 (Del. 1985).

(23.) Id. at 955 (noting that the board has a duty of care to protect the corporation from both third-party and shareholder threats, but that such power is not absolute and does not provide "unbridled discretion to defeat any perceived threat by any Draconian means available").

(24.) Id. at 958-59.

(25.) Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1384 (Del. 1995).

(26.) Id. at 1388. Although I concurred at the time in Justice Holland's opinion for the court in Unitrin, on reflection I think now that the "coercive" and "preclusive " gloss on Unocal, where we attempted to define what the term "draconian" was intended to mean, was not necessary to the Unitrin holding. Therefore, one could reasonably argue that it was dictum. Unfortunately, while all of the court's opinion in Unitrin seemed right to me at the time (1995), this dictum later became mischievous. Witness the mischief that happened in Omnicare.

(27.) Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 935 (Del. 2003) (emphasis in original).

(28.) Neither Williams v. Geier, 671 A.2d 1368, 1382-84 (Del. 1996) (holding that a stockholder vote on a charter amendment was not coerced by proxy statement when approval by family stockholders' "virtually assured" approval) nor Brazen v. Bell Atl. Corp., 695 A.2d 43, 45 (Del. 1997) (holding that a termination fee called liquidated damages is not coercive of a stockholder vote), which the majority cited in support of its coercion argument (Omnicare, 818 A.2d at 935) has any application here. For former Chancellor Chandler's distinction between coercion and actionable coercion, see also infra note 46 and accompanying text.

(29.) To be sure, the 2000 market check was old by July 2002, but it was in the mix of the board's data and no other bidders had emerged despite the fact that the plight of NCS seemingly was well known.

(30.) Omnicare, 818 A.2d at 942 (Veasey, C.J., and Steele, J., dissenting) (citing Rand v. W. Air Lines, No. 8623, 1994 WL 89006, at *6 (Del. Ch. Feb. 25, 1994), affd, 659 A.2d 228 (Del. 1995)).

(31.) In re NCS Healthcare, Inc., S'holders Litig., 825 A.2d 240, 262-63 (Del. Ch. 2002), rev'd sub nom. Omni Care, Inc. v. NCS Healthcare, Inc., Nos. 605, 2002, 649, 2002, 2002 WL 31767892 (Del. Dec. 10, 2002).

(32.) Sean J. Griffith, The Costs and Benefits of Precommitment: An Appraisal of Omnicare v. NCS Healthcare, 29 J. Corp. L. 569, 591 (2004).

(33.) In QVC the Paramount board had decided to sell control to Viacom, of which Sumner Redstone had the majority voting power. Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 38 (Del. 1994). It was not like Paramount v. Time, where there would be continuing public stockholders, as in the stock-for-stock merger in Omnicare. After the Paramount and Viacom boards entered into a merger agreement, QVC came along with a topping bid. Id. at 39. The Paramount directors, in effect, "stiff-armed" QVC and stayed with the Viacom merger because it was consistent with the business "vision" of the Paramount directors. Id. at 43. The Supreme Court held that was improper, though, because of the sale of control vesting power in Sumner Redstone, not the Paramount directors where their "vision" was irrelevant. Id. at 49-50. The court said that the Paramount board had a duty to continue to evaluate critically both the QVC tender offers and the ParamountViacom merger, applying specific criteria designed to obtain the best transaction reasonably available to the stockholders in this sale of control. Id at 49.

(34.) The Court of Chancery held this in In re NCS Healthcare, Inc., 825 A.2d at 254-56, and the Supreme Court majority did not disagree.

(35.) E. Norman Veasey and Christine T. Di Guglielmo, What Happened in Delaware Corporate Law and Governance from 1992--2004? A Retrospective on Some Key Developments, 153 U. Pa. L. Rev. 1399, 1456-60 (2005) (analyzing the differences between QVC and Omnicare).

(36.) See, e.g., Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 937 (Del. 2003) (comparing the facts in Omnicare to the QVC doctrine).

(37.) Vice Chancellor Leo E. Strine, Jr., Categorical Confusion: Deal Protection Measures in Stock-forStock Merger Agreements, 56 Bus. Law 919, 938-39 (2001). Note that in his separate dissent in Omnicare, Justice Steele makes the point, as does Chancellor Strine in this article, that judges are ill-equipped to make business decisions and must not second-guess directors. Omnicare, 818 A.2d at 948.

(38.) In re Compellent Techs., Inc. S'holder Litig., No. 6084-VCL, 2011 WL 6382523, at *1 (Del. Ch. Dec. 9, 2011).

(39.) Frankly, the "optics" of the situation in Omnicare were so striking and unusual that they may have weighed heavily on the majority. That is, having a non-determinative minority stockholder vote and a farsuperior offer emerge after the "die was cast" may have made it difficult for the majority to look only at the state of play ex ante, as found by the Vice Chancellor's findings, which the majority adopted as the framework for its opinion.

(40.) Omnicare, 818 A.2d at 939.

(41.) Interestingly, according to Shepard's Summary in early February 2013, Omnicare has been cited in 364 authorities, including 40 judicial opinions.

(42.) Omnicare, 818 A.2d at 946 (emphasis added).

(43.) Orman v. Cullman, No. 18039, 2004 Del. Ch. LEXIS 150, at *27-32 (Del. Ch. Oct. 20, 2004) (stating that controlling stockholders voting as stockholders to approve merger agreed not to sell shares or vote against any future alternative for 18 months, but public stockholders, who had the right to vote as a majority of the minority, were not coerced.).

(44.) Transcript of Oral Argument on Plaintiffs' Motion for Preliminary Injunction and Ruling of the Court at 126-28, Optima Int'l of Miami, Inc. v. WCI Steel, Inc., No. 3833-VCL, (Del. Ch. June 27, 2008), available at http://lawprofessors.typepad.com/mergers/files/_0702120713_001.pdf (stockholders given less than 24 hours to vote to approve the merger agreement).

(45.) In re OPENLANE, Inc. S'holders Litig., No. 6849-VCN, 2011 Del. Ch. LEXIS 156, at *26-34 (Del. Ch. Sept. 30, 2011) (holding that where a merger agreement contained "no solicitation clause," but not a shareholders' voting agreement, and although officers and directors all approved the merger, the majority of shareholders were not coerced into approving the merger).

(46.) Orman, 2004 Del. Ch. LEXIS 150, at *33 nn. 92, 94, *36-37 (emphasis added).

(47.) Transcript at 126-28, Optima Int'l of Miami, Inc. v. WCI Steel, Inc., No. 3833-VCL, (Del. Ch. June 27, 2008) (emphasis added), available at http://lawprofessors.typepad.com/mergers/files/_0702120713_001.pdf.

(48.) In re OPENLANE, Inc. S'holders Litig., No. 6849-VCN, 2011 Del. Ch. LEXIS 156, at *34-36, n.53) (alterations in original) (emphasis added) (citations omitted).

(49.) Similarly, abstractions and generalizations involving the "taxonomy" of defensive measures, such as no-shop clauses and termination fees, are likewise unhelpful, but it is helpful to analyze those provisions and their applications. In re Compellent Techs., Inc. S'holder Litig., No. 6084-VCL, 2011 Del. Ch. LEXIS 190, at *14-15 (Del. Ch. Dec. 9, 2011). In Compellent, Vice Chancellor Laster, in a scholarly ("must read") opinion with dealmaking implications, evaluated (for purposes of measuring an award of attorneys' fees) the benefit provided in a settlement in which certain defensive measures were modified for the purpose of encouraging the emergence of a topping bid. See generally id. (evaluating various lock-up provisions).

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.