For Whom Should the Corporation Be Sold? Diversified Investors and Efficient Breach in Omnicare V. NCS
Foulds, Christopher M., Journal of Corporation Law
I. Introduction II. Factual and Procedural Background A. Genesis Offers a "Blowout" Price B. The Anatomy of a Lock-Up C. The Termination Provision and Termination Fees D. Omnicare's "Predatory and Highly Conditional" Bids E. Genesis Didn't Like Omnicare Either F. NCS Picks Genesis's "Sure-Thing" Bid G. Omnicare and NCS Shareholders Start the Litigation H. The Court Revives the Shareholders' Appeal I. The Supreme Court Majority Opinion J. The Dissents III. Omnicare's Duty and Interest Analysis IV. Omnicare and Efficient Non-Breach V. Conclusion
For a decade, the Delaware Supreme Court's split decision in Omnicare v. NCS Healthcare1 has generated controversy, criticism and predictions of imminent demise. (2) What often gets lost in this criticism is the extremely difficult practical decision that the Delaware Supreme Court faced. Putting aside the numerous doctrinal issues flowing from the ultimate decision, consider the Supreme Court's unenviable position: if the court allowed the merger of NCS Healthcare, Inc. ("NCS") and Genesis Health Ventures, Inc. ("Genesis") to go through, NCS's stockholders would have received approximately $1.60 per share, as valued on the date of the merger agreement. By contrast, if the Supreme Court enjoined that merger, it was a virtual certainty that NCS's stockholders wo uld have received at least $3.50 per share from the interloping bidder, Omnicare Inc. ("Omnicare"). That decision put the Delaware courts in an awkward position.
Indeed, one can imagine that no one understood just how awkward this position was better than NCS and its board. If NCS and its board prevailed in the litigation, the directors would not have been found to have violated their fiduciary duties, which is an outcome any director ordinarily would welcome. (3) On the other hand, if the directors were found to have breached their duties and the Genesis merger was enjoined as a result, NCS's stockholders would receive more than double the money. (4) It also bears noting that two members of NCS's board were very large stockholders who stood to reap a "windfall" if the court found that they breached their fiduciary duties. (5)
In the trial court's opinion dismissing the breach of fiduciary duty claims, Vice Chancellor Lamb framed this exact issue: "If an injunction issues, it is obvious that the stockholders will wind up with a better deal than the one they will get under the existing merger agreement. The question before this court is not, however, whether one deal is better than the other." (6) "Instead," the Vice Chancellor wrote, "the question is whether there is a reasonable likelihood that, at trial, those directors will be shown to have breached the fiduciary duties they owe to all of the corporation's stakeholders when they approved the merger transaction and the attendant voting agreements." (7) This Article submits that one way (and perhaps the only way) to understand the Delaware Supreme Court's majority opinion is to view it from the perspective that the trial court rejected--i.e., "whether one deal is better than the other."
From this perspective, the majority's fiduciary duty analysis could be seen to have been designed to address the immediate practical problem, which it did. By reversing the Court of Chancery's dismissal of the breach of fiduciary duty claims, NCS was effectively released from its commitment to close, which opened the door to an outcome that mimicked the results of an efficient breach. Despite the criticism of the majority opinion's reasoning, along with its effects on the broader mergers and acquisitions (M&A) market, it nevertheless is undeniable that the Delaware Supreme Court has since avoided facing this particular situation for another decade. Although this perspective has some allure, especially in terms of its parsimony, it also shortchanges the majority opinion's treatment of certain fundamental issues of Delaware corporate law, such as for whom the corporation should be sold and the possibility of efficiently breaching a merger agreement. …