Business Combinations After Omnicare: It Ain't Over 'Til It's Over
By: BARBRA MÜLLER & JOHN F. WURM
September 2003
In many merger and other acquisition transactions, the acquirer insists on various so-called "deal protection" provisions to prevent a third party from stepping in with a superior offer after the deal is signed but before it is closed. These may include shareholder voting agreements (lock-ups) and a requirement that the target company's board of directors put the transaction to a shareholder vote even if it no longer supports the transaction ("force the vote" provision).
In Omnicare, Inc. v. NCS Healthcare, Inc., et. al., the Delaware Supreme Court held such provisions unenforceable because they were not coupled with a fiduciary out - a provision allowing the target to accept a superior offer after the original deal is signed but before it is closed.
The decision of the Delaware Supreme Court was based on the following facts:
In 2002, NCS Healthcare, Inc. (NCS) was suffering severe financial difficulties. To avoid bankruptcy, its board considered possible business combinations. An initial offer received from Omnicare, Inc. (Omnicare) was structured as an asset sale in bankruptcy. The offer failed to cover NCS' outstanding debt, would not have paid out anything to NCS shareholders, and was subject to various conditions. Genesis Health Ventures, Inc. (Genesis) then made an offer that provided for the payment of all of NCS' outstanding debt, as well as $24 million to NCS shareholders. To avoid being outbid (Genesis had lost a previous bidding contest to Omnicare), Genesis made its offer contingent upon acceptance by NCS within 24 hours.
The board discussed Genesis' offer in depth, considering the offer it had received from Omnicare. The board decided to agree to the transaction. Two board members who held shares representing about 65% of NCS' voting power entered into voting agreements in favor of Genesis. The agreement signed by NCS and Genesis included a force-the-vote provision, but no fiduciary out.
Following the execution of this agreement, but before the NCS shareholder meeting, Omnicare submitted a superior offer and the board withdrew its support for the Genesis transaction. Due to the lack of a fiduciary-out and the existing voting agreements, however, shareholder approval of the Genesis transaction was a foregone conclusion. Omnicare and a class of NCS stockholders instituted a lawsuit and managed to enjoin the consummation of NCS' merger with Genesis.
In a highly unusual 3-2 decision, the Delaware Supreme Court held that the "deal protection" measures utilized by NCS and Genesis were invalid and unenforceable. The majority of the court applied the two-prong test established in Unocal Corp. v. Mesa Petroleum Co., deciding that while the NCS board had complied with the first part of the Unocal text (they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed), they failed the second prong because "[t]he deal protection devices adopted by the NCS board were designed to coerce the consummation of the Genesis merger and preclude the consideration of any superior transactions." The majority also decided that the "deal protection" devices were invalid and unenforceable because they prevented the board from continuing to faithfully discharge its fiduciary duties towards the company's shareholders.
It is not clear to what extent the Omnicare rationale will apply to other types of protective devices, such as break-up fees, or whether voting agreements that "lock up" only a minority of shares will be enforceable in Delaware in the future in combination with a force-the-vote provision and lack of a fiduciary-out provision. Also unclear is to what extent Delaware courts will attempt to limit Omnicare to the specific facts of the case or will apply its rationale to other cases as well. Courts in other states usually pay great deference to Delaware decisions, but this one carried only a 3-2 majority.
The only firm conclusion a potential acquirer of a Delaware company can draw from Omnicare at this time is that a deal cannot be protected by a combination of lock-up agreements involving a majority of the target's stockholders and a force-the-vote provision; these provisions will be enforceable only if they are combined with a fiduciary out. Or, to quote Yogi Berra: "It ain't over 'til it's over."