The omnipresent specter of Omnicare.

• Author: Griffith, Sean J.
• Position: Delaware

1. 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 I. Introduction

   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. (19) In other words, a rule that takes away the commitment power of merger agreements likely has deleterious consequences for shareholder welfare, all of which is to say that the economic implications of the opinion are still bad.

   My focus in this Article, however, is the doctrinal consequences of the Omnicare opinion. My normative thesis is that elevating the "unremitting duty" to remain "fully informed" to an absolute principle or a per se rule, as the strong reading of Omnicare does and the cases that follow it also do, wreaks doctrinal havoc on Delaware corporate law. I demonstrate this by reference to the statute and case law, (20) and conclude by suggesting a way for Delaware judges to escape these doctrinal consequences through a slightly modified conception of enhanced scrutiny that enables the judiciary, at last, to exorcise the omnipresent specter of Omnicare. (21)

   The remainder of this Article proceeds as follows: Part I discusses Omnicare, separating out the weak and strong readings of the majority opinion. Part II describes the line of cases that has led some to conclude that Omnicare is dead, showing that in fact these cases are limited to a unique factual context (concentrated ownership) and a distinctive doctrinal rationale (majority-minority shareholder rights), which challenges the weak reading but leaves the strong reading undisturbed. Part III presents recent evidence that Omnicare is, in fact, alive and well, demonstrating how the strong reading animates an important line of Court of Chancery decisions and further showing the family resemblance between these decisions and the Court of Chancery's early deal protection cases that culminated ultimately in Omnicare. Part IV shows how the doctrinal consequences of the strong reading of Omnicare are inconsistent with the underlying structure of Delaware corporate law. It then articulates a way out of the doctrinal bind through a reinterpretation of enhanced scrutiny that affirms the core principles underlying the standard of review, while rejecting the ossified rubrics under which it has often been applied. The Article then closes with a brief summary and conclusion.

2. Two Readings of Omnicare

   Because this is an Article focusing more on the aftermath of Omnicare than on the decision itself, I will not rehearse the facts of the case here except to emphasize that the NCS-Genesis transaction took place after a two-year canvassing of the market, during which NCS had moved closer to and ultimately over the brink of insolvency. (22) If not for the Genesis offer, NCS would likely have been forced to sell itself in a pre-packaged bankruptcy to Omnicare, resulting in no recovery to its shareholders. (23) Omnicare only made an offer outside of the bankruptcy context once negotiations with Genesis were well underway. (24) Once both Genesis and Omnicare were involved in bidding, NCS sought further concessions from each. Winning them from Genesis, but not Omnicare, (25) NCS took the best offer then available, which was from Genesis, (26) fearing that a failure to do so would cause Genesis to make good on its threat to withdraw from the process. (27) Genesis's withdrawal would have left NCS with only one negotiating partner, Omnicare, which in the absence of competition, may have reverted to its previous position in favor of a pre-packaged bankruptcy sale.

   The transaction agreements between NCS and Genesis were designed to provide Genesis with transactional certainty. (28) The merger agreement contained a no-shop clause with a standard fiduciary out and benign termination fees. (29) The principal protective effect came instead from the clause in the merger agreement, requiring the NCS board to submit the agreement to its shareholders for a vote (the so-called "must submit" covenant). (30) Once combined with the voting agreements of two shareholders together controlling a majority of the company's voting power (the "majority voting agreements"), (31) this clause assured approval of the NCS-Genesis merger agreement. As a result, when Omnicare subsequently submitted a superior proposal, the NCS board could withdraw its recommendation to shareholders that they vote in favor of the NCs-Genesis transaction, but it was powerless to stop it. (32) Therefore, Omnicare sued to enjoin the transaction.

   On appeal from a set of Court of Chancery rulings denying injunctive relief, (33) the supreme Court reversed, holding first that a form of enhanced scrutiny applies to deal protection provisions. (34) The Court identified enhanced scrutiny in the deal protection context with the kind of enhanced scrutiny applied under Unocal and its progeny, (35) further specifying that "in applying enhanced judicial scrutiny to defensive devices designed to protect a merger agreement, a court must first determine that those measures are not preclusive or coercive before its focus shifts to the 'range of reasonableness' in making a proportionality determination." (36) With this analytic rubric in place, it remained unclear how to treat this particular package of deal protection provisions. For the purposes of this test, should the majority voting agreements, acts of shareholders in their capacity as such, be treated together with the must-submit clause, an act of the corporation? (37) Or should the deal protection provisions of the merger agreement, which treated alone were unremarkable, and the shareholder voting agreements, be treated separately as acts of independent agents? (38) Ultimately, the majority had little difficulty concluding that the must-submit covenant should be treated together with the voting agreements, since "Genesis made the execution of those voting agreements a nonnegotiable condition precedent to its execution of the merger agreement." (39) Having thus combined the must-submit covenant with the majority voting agreements, the necessary outcome of Unocal scrutiny seems obvious: because the provisions, in combination, made the deal a fait...