The Omnipresent Specter of Omnicare
Griffith, Sean J., Journal of Corporation Law
I. INTRODUCTION II. TWO READINGS OF OMNICARE III. OMNICARE IS DEAD IV. OMNICARE LIVES A. The Standstill Cases B. Ancestral Spirits V. PUTTING THE SPIRITS TO REST A. The Doctrinal Dilemma B. Enhancing Enhanced Scrutiny 1. All Deal Protections Should Receive Enhanced Scrutiny 2. Enhanced Scrutiny Is Not Confined to Unocal 3. Enhanced Scrutiny Applied to Deal Protections VI. CONCLUSION
The Delaware Supreme Court's opinion in Omnicare, Inc. v. NCS Healthcare, Inc. (1) is widely regarded as the most controversial opinion of that court in a quarter century. (2) It had immediate and wide-ranging implications both for transactional practice, effectively requiring a fiduciary out in every merger agreement, (3) and for the doctrinal underpinnings of Delaware corporate law, drawing into question the traditional change-of-control paradigm and elevating the duty to be "fully informed" to an absolute. (4) It attracted controversy immediately, starting with the strongly worded dissents of the immediate former and current Chief Justices and soon followed by a raft of commentary from practitioners and academics alike. (5)
Yet, it is also commonplace to hear that Omnicare is dead. Not long after the decision, Chief Justice Steele confidently predicted that the opinion would have "the life expectancy of a fruit fly." (6) Other voices from the bench have suggested that the opinion is "of questionable continued vitality" (7) and an "aberrational departure." (8) Practitioners, meanwhile, counsel their clients on how to avoid the implications of the holding.(9) Academics, accordingly, have begun to eulogize the decision. (10)
However, to paraphrase Mark Twain, the reports of Omnicare's demise have been greatly exaggerated. My descriptive thesis in this Article is that far from having been buried and forgotten, the underlying principles of the Omnicare decision continue to animate Delaware corporate law jurisprudence and continue to channel the actions of transaction planners. I will demonstrate the continued vitality of Omnicare by separating two readings of the decision: a weak reading, focusing narrowly on the facts of the case, and a strong one, based upon the broad language of the opinion. (11) Those who claim Omnicare is dead can support their view by pointing to a line of cases that indeed challenges the weak reading of the opinion. (12) However, I shall show that neither the factual context nor the doctrinal underpinnings of these cases challenges the strong reading of Omnicare. (13) Rather, the core reasoning underlying the strong reading recently arose as the basis for the holding in a number of important Court of Chancery decisions. (14) This, I argue, is the omnipresent specter of Omnicare.
What ought we to make of this? In the wake of Omnicare, I argued in the pages of the Journal of Corporation Law that the decision was a mistake. (15) Ten years later, it still is. In my earlier analysis of the opinion, I focused on its economic consequences, building a simple game theoretic model to illustrate the intuitive proposition that the ability to trade certainty has value and that taking this ability away may prove detrimental to the merger marketplace. (16) Several of my co-panelists have arrived at a contrary view of the economics, pointing out that mergers have not dried up (17) and that making targets say "no" or "not-for-sure" to an initial bidder may in some cases lead to higher transaction prices. (18) Fair points, but as to the first, much of what influences the merger market is exogenous to Delaware law, making it difficult or impossible to gauge the good or ill effects of the decision from transaction statistics. As to the second, while standard auction theory recognizes that the seller will always be tempted to renege, it also recognizes that the ability to do so will change bidders' strategies and destroy the ability of sellers to control the sale process, making the ability to renege undesirable overall. …