Omnicare's Silver Lining
Laster, J. Travis, Journal of Corporation Law
I. THE LITIGATION PATH A. The Court of Chancery Decision B. The Delaware Supreme Court Majority Opinion C. The Dissents D. The Response II. GOOD DOCTRINE: ENHANCED SCRUTINY FOR DEAL PROTECTION III. GOOD DOCTRINE, BAD APPLICATION: COERCION AND PRECLUSION IV. GOOD THINKING, BAD DRAFTING: DIRECTORS AS SOOTHSAYERS V. GOOD POLICY: A PRE-COMMITMENT RULE FOR DIRECTORS VI. CONCLUSION
Fashion dictates that Omnicare (1) be criticized. The majority opinion provoked two vigorous dissents, and commentators echoed them in a chorus of denigration. (2) One of the dissenters famously predicted that Omnicare would have "the life expectancy of a fruit fly." (3) But 11 years later, a geriatric fruit fly flaps on.
Perhaps it is time to realize that like people, problems, and broken hearts, Omnicare isn't all bad. Although saying anything good about Omnicare smacks of heresy, four aspects of the decision deserve positive reinforcement. First, Omnicare made a helpful contribution to Delaware law by confirming that enhanced scrutiny applies to deal protection devices, regardless of the form of merger consideration. Second, the decision properly separated the elements of coercion and preclusion from the question of overarching reasonableness. Third, the timing of the majority's fiduciary analysis has been overly criticized. Finally, from a policy standpoint, the decision gave target directors greater bargaining leverage, particularly in distressed situations, by establishing a pre-commitment rule against majority voting lockups. There is still plenty to disagree with, but Omnicare does have a silver lining. (4)
I. The Litigation Path
Omnicare involved a bidding contest for NCS Healthcare, Inc. between two rival health care companies, Genesis Health Ventures, Inc. and Omnicare, Inc. The health care industry was rapidly consolidating because of changes in government and third party medical reimbursement policies, and the regulatory changes had hit NCS hard. Its stock had traded at $20 per share in January 1999, but by the end of the year, its stock hovered around $5. NCS also carried approximately $350 million in debt, comprising $206 million in senior bank debt and $102 million in convertible subordinated debentures. (5)
In early 2000, the NCS board of directors decided to explore strategic alternatives and tapped a financial advisor for assistance. (6) The board had four members: Boake Sells, Richard Osborne, Jon Outcalt, and Kevin Shaw. Osborne and Sells were outside directors. Outcalt and Shaw founded NCS and were its two senior officers. They also controlled a majority of NCS's stockholder voting power by virtue of owning the high-vote shares under NCS's dual class structure. To state the obvious, the board did not have a majority of independent, outside directors, and management's positional influence and informational advantages were backed up by hard voting control and founder status.
NCS's effort to develop strategic alternatives generated little interest. Despite contacting over 50 parties, NCS received only one indicative response, and that party proposed consideration below the face value of the company's senior bank debt. In December 2000, NCS terminated its process. (7)
By the beginning of 2001, NCS's financial condition had deteriorated further. In April, NCS received a formal notice of default on its debentures, and the holders of the debentures organized a Noteholders Committee to protect and enforce their rights. (8) With the threat of bankruptcy looming, the board began discussing a pre-packaged bankruptcy plan with various investors. The trading range for NCS's common stock fell to $0.09-$0.50 per share. (9) Under the scenarios being considered by the board, the common stockholders would have been wiped out and the creditors unlikely to be made whole.
In this environment, Omnicare expressed unsolicited interest in acquiring NCS. In summer 2001, one year after NCS's process of exploring strategic alternatives, Omnicare proposed to acquire the company in a bankruptcy sale for $225 million. …