Law School Case Brief
Omnicare, Inc. v. NCS Healthcare, Inc. - 818 A.2d 914 (Del. 2003)
The prior decisions of the Delaware Supreme Court have identified the circumstances where board action must be subjected to enhanced judicial scrutiny before the presumptive protection of the business judgment rule can be invoked. One of those circumstances is described in Unocal when a board adopts defensive measures in response to a hostile takeover proposal that the board reasonably determines is a threat to corporate policy and effectiveness. A Unocal analysis also has been applied to the adoption of a stockholder's rights plan, even in the absence of an immediate threat. Other circumstances requiring enhanced judicial scrutiny give rise to what are known as Revlon duties, such as when the board enters into a merger transaction that will cause a change in corporate control, initiates an active bidding process seeking to sell the corporation, or makes a break up of the corporate entity inevitable.
NCS Healthcare, Inc. ("NCS"), a Delaware corporation, was the object of competing acquisition bids. One was by Genesis Health Ventures, Inc. ("Genesis"), a Pennsylvania corporation, and the other by Omnicare, Inc. ("Omnicare"), a Delaware corporation. NCS was financially recovering after it received the Omnicare's first offer. NCS accepted Genesis’ better offer but entered into two defensive measures NCS requested: (1) to include a voting trust in which the two major shareholders agreed to vote for the merger, and (2) to omit a "fiduciary out" clause: the board agreed not to consider other merger offers, to put the merger to a shareholder vote, and to allow minority shareholders to have appraisal rights. NCS then declined Omnicare’s second, better offer because of the defensive measures. Omnicare sued for a preliminary injunction to stop the merger between NCS and Genesis. The Court of Chancery, New Castle County, Delaware, denied the injunction.
Did the Court of Chancery err in denying the preliminary injunction?
The Court held that the case addressed tests of the extent to which the board was to exercise, not abrogate, its continuing fiduciary duties. The board combined two otherwise valid actions (stockholder voting agreements and the authority of directors to insert a Del. Code Ann. tit. 8, § 251(c) provision) in the merger agreement and caused them to operate in concert as an absolute lock up. The board should have contracted for an effective fiduciary out clause. The acquirer's contract expectations had to yield to the supervening responsibility of the directors to discharge their fiduciary duties on a continuing basis. The merger agreement and voting agreements, as they were combined to operate in concert in this case, were inconsistent with the NCS directors' fiduciary duties. To that extent, the Court hold that they were invalid and unenforceable. Thus, the Supreme Court (1) reversed the judgment denying the suitor's application for a temporary injunction and issued an immediate mandate for a temporary injunction to prevent the merger, (2) reversed a decision to the extent it permitted the implementation of a voting agreement contrary to the supreme court's ruling on fiduciary duty claims, and (3) declared moot a holding that the suitor lacked standing to assert certain fiduciary claims.
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