One of the circumstances for enhanced judicial scrutiny of a board decision 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. This 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.
Beginning in late 1999, changes in the timing and level of reimbursements by government and third-party providers adversely affected market conditions in the health care industry. As a result, NCS began to experience greater difficulty in collecting accounts receivables, which led to a precipitous decline in the market value of its stock. On July 20, 2001, Joel Gemunder, Omnicare's President and CEO, sent a written proposal to acquire NCS in a bankruptcy sale under Section 363 of the Bankruptcy Code. The proposal was for $ 225 million subject to satisfactory completion of due diligence. In August 2001, Omnicare increased its bid to $ 270 million, but still proposed to structure the deal as an asset sale in bankruptcy. Even at $ 270 million, Omnicare's proposal was substantially lower than the face value of NCS's outstanding debt. There was no further contact between Omnicare and NCS between November 2001 and January 2002. Instead, Omnicare began secret discussions with Judy K. Mencher, a representative of the Ad Hoc Committee. In these discussions, Omnicare continued to pursue a transaction structured as a sale of assets in bankruptcy. In February 2002, the Ad Hoc Committee notified the NCS board that Omnicare had proposed an asset sale in bankruptcy for $ 313,750,000. In January 2002, Genesis, Omnicare’s competitor, was contacted by members of the Ad Hoc Committee concerning a possible transaction with NCS. In June 2002, Genesis proposed a transaction that would take place outside the bankruptcy context. NCS accepted the Genesis’ better offer but entered into two defensive measures the acquirer 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. On July 29, 2002, hours after the NCS/Genesis transaction was executed, Omnicare submitted a proposal that was superior to that of Genesis’. As a result of this superior proposal, on October 21, 2002, the NCS board withdrew its recommendation that the stockholders vote in favor of the NCS/Genesis merger agreement. However, because of the major shareholders’ voting agreement and the omission of a “fiduciary out” clause entered into by NCS and Genesis, even if the NCS board "changes, withdraws or modifies" its recommendation, as it did, it must still submit the merger to a stockholder vote. Thereafter, On August 1, 2002, Omnicare filed a lawsuit attempting to enjoin the NCS/Genesis merger. The Court of Chancery, New Castle County, Delaware, denied the injunction.
Under the circumstances, was it correct to deny Omnicare’s application for a temporary injunction?
The Supreme Court 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. The Court held that the voting agreement and omission of a “fiduciary out” clause entered into by NCS and Genesis caused them to operate in concert as an absolute lock up. According to the Court, in the context of the preclusive and coercive lock up case, the protection of Genesis' contractual expectations must 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, are inconsistent with the NCS directors' fiduciary duties; as such, the Court held that they are invalid and unenforceable.