Ten years after Omnicare: the evolving market for deal protection devices.

• Author: Veasey, E. Norman
• Position: Delaware

1. "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.

2. 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)

3. 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. In addition, he dealt painstakingly with the legal conclusions flowing from these facts. Here are just the headings: (17)

   * NCS Begins Its Search for Restructuring Alternatives

   * NCS Negotiates with Omnicare

   * The NCS Board Creates an Independent Committee

   * Genesis and NCS Sign an Exclusivity Agreement

   * July 26: Omnicare Proposes to Negotiate

   * July 28: The Independent Committee and NCS Board Approve the Genesis Merger Agreement and the Voting Agreements

   * The NCS--Genesis Merger Agreement and the Voting Agreements

   * Subsequent Events

   * The NCS Directors Did Not Breach Their Duty of Care by Failing to Contact Omnicare After May 14

   * The NCS Directors Did Not Breach Their Duty of Care for Failing to Contact Omnicare After July 26

   * The "Deal Protection" Devices in the Merger Agreement Satisfy the Unocal

   Reasonableness Standard

   The essence of the Vice Chancellor's fact finding is as follows:

   [T]he perceived threat NCS faced was the potential loss of the Genesis deal followed by a downward spiral in the price offered for NCS. The record shows that the directors questioned the need for these provisions and agreed to them only because Genesis was unwilling to commit itself to the transaction without them. Moreover, the board was aware that [the controlling stockholders] Outcalt and Shaw had expressed a willingness to enter into the voting agreements only as a means of achieving the Genesis transaction and without material conflicting interests. There is also no suggestion in this record that the directors authorized these terms or agreements in order to preclude what they knew or should have known was a superior transaction. On the contrary, at the time the directors acted to meet the Genesis deadline, the only proposal reasonably available to them was the one they adopted. Finally, Omnicare certainly is not precluded from making a bid for the combined NCS/Genesis entity, as Gemunder [Omnicare's CEO] admitted in his testimony. Indeed, Omnicare's financial advisors have already begun to analyze such a transaction. (18) These are the factual findings the majority of the Supreme Court accepted, and this framework is of critical importance. This framework is dispositive, in my view, because it is focused, as it should, through the lens of the facts before the NCS board on July 28, 2002, not later.

   I have now gone back and re-read the opinions of the Court of Chancery (including footnote references to deposition testimony and affidavits) and the Supreme Court, as well as the transcript of the oral argument before the Supreme Court. I have re-affirmed my view of ten years ago that the Vice Chancellor's factual findings "are sufficiently supported by the record and are the product of an orderly and logical deductive process," (19) that his conclusions from those facts were correct, and that the decision of the majority of the Supreme Court was erroneous.

   In view of the fact that the Supreme Court majority accepted these findings as the factual framework of its opinion, an affirmance should have inexorably followed, in my opinion. Why? To do otherwise would be second-guessing the board's judgment when it acted on July 28, exercising proper due care and good faith. On that basis, the board concluded that it had the Genesis deal in hand, and it had used the latter-day, conditional Omnicare proposal to cause Genesis to sweeten its deal to the point that Genesis required a "take-it-or-leave-it" ultimatum. All along, both courts accepted that Genesis had made the credible threat that it would walk rather than get into a bidding contest. (20)

   NCS needed the Genesis deal; without Genesis, there might well have been no deal. The NCS board acted quite reasonably, as the Court of Chancery found, in not taking the risk of losing the "bird-in-hand"--Genesis--to explore the possibility of whether it could get a better and unconditional deal from Omnicare. (21)

   But, in misapplying the gloss on Unocal that is found in Unitrin to this merger agreement--namely that defensive action in a hostile takeover must not be "coercive" or "preclusive"--the majority tried to hammer a square peg into a round hole. Merger deal protections are unlike unilateral defensive measures of an entrenched target board designed to thwart a hostile takeover, such as the stock purchase programs at issue in both Unocal and Unitrin. Unocal involved a selective stock exchange plan to thwart Mesa's "inadequate and coercive two-tier tender offer." (22) The Supreme Court reversed the preliminary...