Ten Years after Omnicare: The Evolving Market for Deal Protection Devices
Veasey, E. Norman, Journal of Corporation Law
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. …