Thursday, August 15, 2002

Hostile Takeovers ... Part III

You may be wondering why I have hostile takeovers on the brain today. Well, it's grading time at the law school, and I asked my students a question about the most recent decision of the Delaware Supreme Court in Omnicare v. NCS Healthcare, where the Court held that deal protections devices were subject to "intermediate scrutiny" under the Unocal standard.

More specifically, the Court examined the combined effect of (1) stockholder voting agreements, pursuant to which two individuals holding 65% of the voting power of NCS stock irrevocably agreed to vote in favor of a proposed merger between NCS and Genesis Health Ventures, Inc.; (2) a provision of the merger agreement, expressly authorized under Delaware General Corporation Law § 251(c)), requiring the board of directors of NCS to submit the proposed merger for a stockholder vote, regardless of whether the board of directors continued to recommend the merger; and (3) the omission of a so-called “fiduciary out” clause, which would allow NCS to withdraw from the merger agreement if the board of directors of NCS concluded that its fiduciary duties required such action.

The majority opinion by Justice Holland focused on the fact that the proposed merger was completely locked up prior to the actual shareholder vote. Applying Unocal as modified by Unitrin (another horrible Holland opinion), Justice Holland concluded that the deal protection devices were both coercive and preclusive. He also wrote, in reference to the failure of the merger agreement to provide a fiduciary out, “We hold that the NCS board did not have authority to accede to the Genesis demand for an absolute ‘lock-up.’”

This is the latest in a series of absolutely awful opinions by Justice Holland, who seems to have no appreciation at all for the proper role of the Court in hostile takeover litigation. This follows MM Companies, Inc. v. Liquid Audio, Inc., where Justice Holland added another level to the "proportionality" prong of the Unocal analysis, making that standard even more incoherent than it already was. The only good thing that can be said about these opinions is that the Delaware Supreme Court is finally deciding that a board of directors might, in some hostile takeover contexts, breach their fiduciary duties.