Revisiting Omnicare: what does its status 10 years later tell us?

• Author: Shaner, Megan W.

1. INTRODUCTION II. THE REACTION TO OMNICARE: CRITICISMS AND CONCERNS III. POST-OMNICARE DECISIONS : "THE LONG SLOW DEATH OF OMNICARE"? A. ORMAN V. CULLMAN B. OPTIMA INTERNATIONAL OF MIAMI, INC. V. WCI STEEL, INC. C. IN RE OPENLANE, INC. SHAREHOLDERS LITIGATION D. NON-DELAWARE CASES IV. POST OMNICARE TRANSACTIONS: WERE THE CRITICS RIGHT TO BE CONCERNED? V. WHAT DOES THIS TELL US ABOUT OMNICARE? A. THE COURT OF CHANCERY ACTING TO LIMIT THE SUPREME COURT'S DECISION B. OMNICARE DID NOT IMPACT THE M&A MARKET C. OMNICARE'S QUESTIONABLE DOCTRINAL FOOTING AND EFFICACY VI. CONCLUSION I. Introduction

   In the late 1970s and early 1980s, corporate law entered a period that was dominated by hostile takeover activity. In connection with (and most likely in response to) the prevalence of this hostile activity, there was also an increase in the use of deal protection devices in mergers and acquisitions. (1) These deal protection devices involved "any measure or combination of measures that [were] intended to protect the consummation of a merger transaction." (2) They were economic in form, structural in form, or both. In a series of decisions, the Delaware courts began to express skepticism with respect to the increased use of deal protection devices in mergers and acquisitions (M&A). In the context of hostile takeover transactions, the Delaware Supreme Court in Unocal Corp. v. Mesa Petroleum co. held that enhanced judicial review, and not the deferential business judgment rule, should apply to defensive measures, which could include deal protection devices. (3) Similarly, in the change-in-control context, the Delaware Supreme Court in Revlon inc. v. MacAndrews & Forbes Holdings, inc. held that enhanced judicial review should apply to a board's actions, which could include approval of deal protection devices where a corporation had effectively put itself up for sale. (4)

   In 2003, the Delaware Supreme Court was asked to address the proper use of, and standard of review for, deal protection devices in the context of a friendly, non-change-in-control transaction. Omnicare, Inc. v. NCS Healthcare, Inc. (5) involved a challenge to the proposed merger of NCS Healthcare, Inc. and Genesis Health Ventures, Inc. (6) The challenge specifically focused on three elements of the proposed merger that were intended to protect the transaction: (i) a force-the-vote provision that required the transaction be put to a vote of the NCS stockholders; (ii) the absence of a fiduciary out provision allowing the NCS board to terminate the merger in the event of a superior proposal; and (iii) a voting agreement that obligated two of NCS's stockholders, who collectively held over a majority of the corporation's voting power, to vote in favor of the Genesis merger and against any competing transaction. (7) The Court of Chancery rejected claims by NCS stockholders and competing bidder Omnicare, Inc. that approval of the merger's deal protection devices violated the NCS board's fiduciary duties, but the Delaware Supreme Court reversed.

   In a rare split decision, the Delaware Supreme Court invalidated the NCS-Genesis merger agreement. (8) In so doing, the court set forth three highly criticized holdings. First, the majority of the court held that enhanced judicial scrutiny per Unocal applies to a board's approval of deal protection devices. 9 Second, applying that enhanced scrutiny, the majority held that the specific combination of deal protection devices in the NCS Genesis merger failed to satisfy this heightened review and were invalid under Unocal. (10) Finally, the majority invalidated the NCS-Genesis merger agreement on alternative grounds, holding that completely locked-up transactions violate a board's fiduciary duties and thus are per se invalid. (11)

   Beginning with the two separate dissenting opinions, the majority's opinion in Omnicare garnered an immediate and widespread negative reaction from the legal community. The decision has been labeled by many as a troubling one--contrary to both precedent and common sense--and one that would "[f]undamentally [a]lter the [m]erger [i]ndustry."12 The criticism and concerns surrounding the Omnicare decision fall into two broad categories: (i) doctrinal faults in the majority's holdings and rationale and its poor normative implications; and (ii) pragmatic concerns regarding the impact the majority's decision would have on M&A activity.

   This Article reviews corporate law decisions and transactions from the past ten years to determine whether this controversial decision has had the detrimental impact that jurists predicted. In reviewing merger activity over the past decade, it appears that the concerns about Omnicare's impact on the M&A market did not come to fruition. This finding should not be surprising in light of subsequent cases in the Delaware Court of Chancery and other jurisdictions expressing hostility to the Omnicare majority's opinion and its holdings. Indeed, while the decision has not been overruled, decisions of the Court of Chancery addressing Omnicare-based challenges have sought to avoid its application by distinguishing the facts before it. (13) These decisions indicate the willingness of Delaware's lower court to limit the reach of Omnicare. As a result, the number of scenarios where the decision may still have a direct impact is small. Finally, in reevaluating the decision ten years later, this Article asks, and seeks to answer the following question: In reflecting on Omnicare, what does its status today tell us about the decision?

2. THE REACTION TO OMNICARE: CRITICISMS AND CONCERNS (14)

   The Omnicare decision has been described as one of the most controversial decisions to come out of the Delaware Supreme Court. (15) Joining the ranks of Smith v. Van Gorkom, (16) Williams v. Geier, (17) and Brehm v. Eisner, (18) Omnicare is also one of the rare non-unanimous decisions issued by the court. The dissenting justices in Omnicare were the first to criticize the decision, expressing (i) disagreement with the doctrinal foundation for the majority's holdings and rationale and (ii) concerns regarding the practical negative impact the decision would have on M&A activity. (19) Many corporate scholars, practitioners, and jurists have followed suit, building upon the dissenting justices' critique of Omnicare.

   First, a considerable amount of scholarship has been written about the Omnicare majority's misplaced reliance on, improper application of, or lack of support in Delaware jurisprudence to support its holdings and rationale. Critics of Omnicare disagree with the majority's first holding--that Unocal-enhanced judicial scrutiny applies to a board's decision to adopt defensive devices (20)--contending that the more deferential business judgment rule is the correct standard of review. This is because, as Chief Justice Veasey explained in his dissent, the merger before the court was a friendly merger, so there was no threat to which the board was acting in a defensive, self-interested manner, as was the case in Unocal. (21) Corporate scholars have further faulted the majority's application of enhanced judicial scrutiny in that the majority classified all merger deal protection devices as defensive and thus always triggering enhanced scrutiny. (22) This is improper because the policy rationale for applying Unocal's enhanced scrutiny--the inherent conflicts and entrenchment motives of a board in hostile takeover situations--is not present in friendly negotiated mergers like the one in Omnicare. (23)

   In addition, even assuming, arguendo, that Unocal enhanced review was the proper standard to apply to a board's approval of deal protection devices, the dissenting justices and corporate commentators object to the manner in which the majority applied that standard. In particular, the majority has been criticized for (i) its incorrect application of the concepts of "coercive" and "preclusive" under Unocal as preempting any proportionate balancing inquiry, (24) and (ii) finding that the combination of deal protection devices in the NCS-Genesis merger was preclusive and coercive and thus failed to pass muster under Unocal. (25) Rather, critics assert, not only were the defensive devices at issue in Omnicare neither preclusive nor coercive, they were also a reasonable, proportionate response to the threat posed. (26) Accordingly, the challenged deal protection devices satisfied scrutiny under Unocal and should have been upheld.

   The holding that has garnered the harshest criticism, however, is the per se rule announced by the majority invalidating completely locked-up transactions and requiring a fiduciary-out provision in merger agreements. (27) This bright-line rule established by the majority has been attacked as unsupported by Delaware case law: as summarized by dissenting Chief Justice Veasey, "We know of no authority in our jurisprudence supporting this new rule, and we believe it unwise and unwarranted." (28) Moreover, critics point out that the majority's per se rule is overly rigid because it eliminates the factual, case-by-case analysis of deal protection devices for which the Delaware courts are known, (29) as well as the potential for the rule to be applied broadly to precommitment devices outside of the merger context. (30)

   Further, separate and apart from specific holdings of the Omnicare majority, the decision has been criticized as an example of improper judicial second-guessing of a board's business decision. Such second-guessing is in clear contravention of Delaware law, which provides that it is not the role of the courts to evaluate a board's decision with the benefit of hindsight. (31) The Omnicare majority did just that though, evaluating the NCS board's approval of the deal protection devices in light of later events--the later omnicare bid--and not based on the information that was reasonably available at the time the board made its decision. Applying hindsight in this manner to...