*1 finding statutory court’s of a aggravating OMNICARE, INC.,
factor.46 Plaintiff Below, Appellant, At hearing, the court instruct jury ed the they required were v. find the existence of the first factor as a matter HEALTHCARE, INC., H. Jon Out of law felony because of the murder conv calt, Shaw, Sells, Kevin B. Boake A. instructed, jury, iction.47 Thus the Osborne, Richard L. Genesis Health found the proved by State the first factor Ventures, Inc., Sub, Inc., and Geneva judge vote of 12-0. The was also bound Below, Appellee. Defendants finding.48 ruling today Our the court in convicting erred Williams Miles, Marti, Robert M. An Guillerma felony murder necessitates the conclusion thony Noble, Jeffrey Treadway, Tillie mandatory that the finding of this fact Saltzman, Dolphin Limited Partner jury was invalid as a matter of statuto I, ship L.P., Mehan, Ramesh Renee result, ry law. As a in order for the Mehan, Ira, Saroj Renee Mehan Me stand, penalty of death to another statuto han, Mehan, Mehan, Maneesh Rahul ry aggravating factor has to exist. Mehan, Lajia Mehan, Joel Darshan (Rollover Ira, statutory second Mehan aggravating factor Danshal Mehan jury Ira), found was that Williams Mehan, killed Arsh N. Arsh N. Mehan (Roth Mason in retaliation for calling Ira), her Mehan, Ashok K. and Ash police after argument. their The trial Ira, Below, ok K. Mehan Plaintiffs however, judge, ruled that the State did Appellants, not meet its burden of proof respect v. Thus, to this factor.49 this factor not Outcalt, Shaw, H. Jon Kevin E. Boake properly proven by required the State as Sells, Osborne, A. Richard L. by the statute. Ventures, Inc., Sub, Health
Conclusion Inc., Healthcare, and NCS Defen prove any State failed to Below, Appellees. dants statutory aggravating According- factors. 605, 2002, 649, Nos. 2002. ly, imposition of the death sentence Supreme Court of Delaware. was invalid as a matter of law.50 We re- verse the sentence of the trial court and Submitted: Dec. 2002. remand with direction that the court im- April Decided: pose upon Williams sentence of natural possibility life without the of parole on the
other homicide conviction for intentional
murder. Williams, § 4209(g)(2)(b). 46. 11 Del. C. 49.State ID No. at 3 (Del.Super.Ct.2001). 4209(e)(2). § 47. 11 Del. C. 4209(e). § 50.11 Del. C. Id. *3 Michael A. Weid- McNally, M. Edward Morris, Brown, of A. inger, Elizabeth Williams, James, Wilmington, Hitchens & Warner, Bright, R. and James Timothy G. Co., Bell, McCurdy & Newell Spieth, defendant, OH, B. Cleveland, Kevin Shaw. McTear, of Abramczyk, Brian J. E.
Jon Tunnell, & Nichols, Morris, Wil- Arsht Goins, and Frances Floriano mington, & Kovach, Squire, Sanders Thomas G. *4 defendant, Cleveland, OH, for Dempsey, H. Jon Outcalt. Carmella (argued), A. Rosenthal
Joseph Gross & Rosenthal, Monhait, Keener, of P. P.A., Goddess, Wilmington, Daniel A. Os- LLP, Osborn, New of Beatie born Bemporad, Low- City and Richard B. York & Bemporad Selinger, ey, Dannenberg, NY, Plains, LLP, plaintiffs. for White Jr., Kriner, & of Chimicles Robert J. Wolfe, (argued), Kevin R. Donald J. Jr. Tikellis, LLP, counsel Wilmington, liaison Shannon, M. Pittenger, Michael A. John plaintiffs. for Seaman, Renck, Potter, Richard L. of Corroon, LLP, Wilmington, Anderson & Justice, VEASEY, Chief Before Farber, Myers, Robert C. Seth C. James WALSH, HOLLAND, BERGER and III, Owens, P. F. Melanie R. Smith David Justices, STEELE, constituting the Court Moss, Ballantine, LLP, Dewey of New Banc. en City, appellant. for York Justice, HOLLAND, majority: for (argued), Edward P. Edward B. Welch Micheletti, Neikirk, A. Katherine J. James (“NCS”), Healthcare, Inc. a Dela- Slate, Skadden, Whitney, Arps, Meagh- of object of com- corporation, ware Flom, Wilmington, Phillips, er & Mark A. bids, one Genesis peting acquisition Friedlander, Benesch, Coplan & Aro- (“Genesis”), Ventures, a Penn- Inc. Health noff, Cleveland, OH, appellees, for by Om- corporation, and the other sylvania Healthcare, Inc., A. and Rich- Boake Sells (“Omnicare”), nicare, a Delaware cor- Inc. ard L. Osborne. before proceedings poration. cir- exigent due to expedited were Court Bruce L. (argued),
David McBride C. cumstances, including pendency Silverstein, Wright, Douglas Christian consider meeting to stockholders’ Poff, Conaway, Star- Young, Adam W. The de- merger agreement. Paul gatt & Taylor, Wilmington, Vizear- NCS/Genesis set forth this Court were terminations of rondo, Jr., (argued), N. Minds Theodore argu- oral following manner summary in a Gordon, Lauryn P. Lynch, John F. Mark certainty to clarity and provide ment to Rosen & Wachtell, Gouldin, Lipton, Those determi- going forward. parties Katz, Health City, York for Genesis New in this Sub, explicated opinion. Ventures, nations are Inc. Inc. and Geneva Opinion Thus, Overview er. the combined terms of the vot- ing agreements NCS, The board of directors of an insol- initio, guaranteed, ab that the transaction publicly vent corporation, traded Delaware proposed by Genesis would obtain NCS agreed to of merger the terms approval. stockholder’s Genesis. Pursuant that agreement, all paid NCS creditors would be in full The Court of Chancery ruled that the and the corporation’s stockholders would voting agreements, coupled when with the exchange their shares the shares of provision in the merger agree- Genesis, publicly Pennsylvania traded requiring presented ment that it be corporation. approv- Several months after pursuant stockholders for a vote to 8 Del. ing merger agreement, but before the 251(c), §C. constituted defensive mea- scheduled, stockholder vote was the NCS within meaning Corp. sures of Unocal board of prior directors withdrew its rec- v. Mesa Petroleum After applying Co.2 ommendation favor of the merg- judicial Unocal standard of enhanced scru- er. tiny, of Chancery Court held that fact, the NCS board recommended those defensive measures were reasonable. reject stockholders the Genesis that, We have concluded in the absence of deciding transaction after competing clause, an effective out those de- *5 proposal from Omnicare superior was a preclusive fensive measures are both and transaction. competing The Omnicare bid coercive. we hold that those Therefore^ offered the NCS stockholders an amount defensive measures are invalid and unen- equal of cash to more than twice the then forceable. current market value to be shares received merger. Genesis The The Parties transaction by offered Omnicare also treat- defendant, NCS, The is a Delaware cor- ed the corporation’s NCS other stakehold- Beachwood, poration headquartered equal ers on agree- terms with the Genesis Ohio. a leading independent pro- NCS is ment. pharmacy vider of long-term services to merger agreement The between Genesis including nursing care institutions skilled provision and NCS contained a authorized facilities, living assisted and facilities other 251(c) corpora- Section of Delaware’s institutional healthcare facilities. NCS tion required law. It the Genesis common stock A consists of Class shares placed corpora- before the and B B Class shares. The Class shares vote, tion’s stockholders for a even if the per are entitled to ten votes and share longer NCS of directors no recom- A Class shares are entitled to one vote per Genesis, mended it.1 At the insistence of virtually share. shares are identical agreed NCS board also to omit in every respect. other fiduciary effective clause from the The defendant H. is Jon Outcalt Chair- agreement. In connection Gene- man of the board of directors. Out- merger agreement, sis two stockholders of 202,063 calt owns A NCS, shares of NCS Class a majority voting who held of the 3,476,086 power, agreed common stock and unconditionally to vote shares of all their merg- shares in favor of the B Genesis Class common stock. The defendant 8, 251(c). 1361, (Del. § Corp., 1. Del.Code Ann. tit. Am. Gen. 1386-89 1995). Co., Corp. 2. Unocal v. Mesa Petroleum Unitrin, A.2d 946 See also Inc. v. BACKGROUND President, PROCEDURAL and B. Shaw is CEO Kevin At the time the director of NCS. from or- appeal This is a consolidated dispute in this agreement at issue in two Chancery the Court of ders of Genesis, 28,905 executed with Shaw owned proceeding proceedings. One separate A common stock and shares of NCS Class invalidate seeking to brought by Omnicare 1,141,134 B shares of Class common stock. between NCS fiduciary duty grounds. members, has two other NCS board challenges also proceeding, Omnicare L. Boake A. and Richard defendants Sells Voting Agreements between Har- graduate is a Osborne. Sells Shaw, B. two H. and Kevin Jon Outcalt vard Business School. He was Chairman stockholders, collectively who major NCS in Cleve- Drugstores and CEO at Reveo power of NCS own over 65% of the land, from 1987 to when he was Ohio Agreements irrevoca- Voting stock. The currently replaced by new owners. Sells to vote for commit these stockholders bly public pri- of both sits on the boards action was merger. The Omnicare full-time companies. Osborne is a vate Chancery in the C.A. No. 19800 Court at the Weatherhead School of professor in this Court. and is No. Management at Case Reserve Western University. university He has been at the is a class action proceeding The other thirty years. currently for over Osborne That ac- stockholders. brought corporate on at least seven boards sits merger primar- seeks to invalidate the tion other than NCS. the directors ily ground on the duty of care their NCS violated Pennsylvania The defendant Genesis is process an effective failing to establish corporation principal place with its of busi- *6 achieve the transaction designed to Square, Pennsylvania. in Kennett It ness highest value for produce would leading provider is a of healthcare and action stockholders. The stockholder NCS elderly. The de- support services to the in the Court of Chan- was C.A. No. 19786 Sub, Inc., wholly fendant owned Geneva 649, in this Court. cery and is No. Genesis, subsidiary corpo- of is a Delaware by acquire ration formed to NCS. Standing Decision in action plaintiffs the class own (the 605, 2002 “Omnicare Appeal In No. of shares of NCS unspecified number Chancery entered of appeal”) the Court They represent A Class common stock. and order The first decision two orders. A consisting holders of Class class of all (the Decision”), dated October “Standing 28, 2002, July common stock. As of NCS 2002, 25, dismissed Omnicare’s 18,461,599 5,255,- A had Class shares and standing to it lacked duty claims because outstanding. B shares Class of claims. The Court Chan- assert those declar- corporation is a Delaware to dismiss Omnicare’s cery Omnicare refused claim, Coving- holding that Omni- place atory judgment in principal business notwithstanding the ton, standing, in institu- had Kentucky. Omnicare is care of NCS stock business, purchase of its timing with annual pharmacy tional claim, bidder for as a bona fide assert its during billion its last sales in excess of $2.1 control, should be the NCS charter year. purchased fiscal Omnicare conver- an automatic interpreted to cause A stock on of NCS Class common shares B stock and Shaw’s Class 30, sion Outcalt’s July (with share) per ten votes AClass stock FACTUAL BACKGROUND (with share). per one vote parties are in substantial agreement regarding operative They facts. dis- Voting Agreements Decision however, agree, legal implica- about the The second decision and order of the tions. This recitation facts is taken Chancery Court of is before this primarily by from the opinion the Court of in appeal Court the Omnicare is the Court Chancery. Chancery’s order of October (the Decision”) “Voting Agreements adju- Restructuring Seeks NCS Alternatives dicating Voting Agree- the merits of the in Beginning changes late in the issue, ments. regard With to that timing and level of reimbursements Chancery Court of held Omnicare had government and third-party providers ad- standing, in as set forth the preceding versely affected market conditions in the paragraph. Voting Agreements de- result, industry. health care aAs NCS summary judgment, cision on the Court of began experience greater in difficulty Chancery interpreted the applicable NCS collecting receivables, accounts led which charter provisions adversely to Omnicare’s precipitous to a decline in the market value contention that proxies irrevocable of its stock. common shares that granted in agreements by those Outcalt traded in January above 1999 were $20 and Shaw to vote for the worth as little as at the of that end $5 resulted in an automatic conversion of all year. By early NCS was default of Outcalt’s and B Shaw’s Class stock into debt, approximately in- million $350 A Class stock. Omnicare’s claim with re- cluding million senior bank debt $206 spect was, to the Voting Agreements million of its % $102 Convertible 5.% therefore, dismissed the Court of Chan- (the “Notes”). Subordinated Debentures cery. defaults,
After these common stock range per traded $0.09 $0.50 Fiduciary Duty Decision days share until before announcement A enjoin class action to of the transaction at issue in this ease. brought by certain stockholders of NCS *7 in chancery Court of C.A. No. began explore strategic NCS alterna- Chancery The Court of prelimi- might denied a problems tives address the it injunction in nary effort, a decision and confronting. part order was As of this 22, 2002, 2000, dated November and February revised No- retained NCS UBS War- (the 25, “Fiduciary Duty vember burg, potential De- L.L.C. to identify acquirers cision”). That is possible equity decision now before this and investors. UBS War- upon interlocutory Court in Appeal burg fifty review contacted over different entities 649, standing No. 2002. The variety these to solicit their interest a injunctive to seek stockholders relief based transactions Warburg with NCS. UBS had alleged violations by marginal By duties success in its efforts. Octo- 2000, approving the NCS directors in pro- ber NCS had received one non- posed merger apparently challenged binding not indication of interest valued million, by the defendants. Accordingly, substantially the fidu- less than the $190 claims, ciary duty including those claims face value of senior debt. This NCS’s sought Omnicare to assert are being proposal as- was reduced 20% after the serted the class action plaintiffs. diligence offeror conducted its due review. It outstanding debt. of NCS’s Financial Deterioration face value NCS recovery only a small provided have would 2000, In December NCS terminated no recov- Noteholders and for Omnicare’s Warburg and re- relationship with UBS 2001, In October its stockholders. ery for Brown, Gibbons, Company Lang tained & Brown Gibbons Pollack of sent Glen NCS During financial advisor. as its exclusive advisor, financial with Omnicare’s to meet con- financial condition period, NCS’s inter- Omnicare’s Lynch, Merrill to discuss 2001, April In NCS tinued to deteriorate. it responded est in NCS. Omnicare and a formal notice of default received other transaction was not interested the trustee for holders of acceleration from bankruptcy. than an asset sale As NCS’s financial condition the Notes. worsened, the Noteholders formed a com- contact between was no further There their financial interests represent mittee to November and NCS between Omnicare (the Committee”). “Ad Hoc At about Instead, Omni- January time, began discussions with various NCS Judy began discussions with care secret regarding restructuring- groups investor Mencher, of the Ad representative K. did “pre-packaged” bankruptcy. in a NCS discussions, In Hoc these Committee. any proposal not receive that it believed a transac- pursue continued to Omnicare adequate consideration for its provided in bank- as a sale of assets tion structured time, recovery stakeholders. At that full 2002, In the Ad Hoc ruptcy. February pros- for NCS’s creditors was a remote board that notified the NCS Committee pect, any recovery for NCS stockhold- sale in proposed had an asset Omnicare impossible. ers seemed $313,750,000. bankruptcy for Negotiations Omnicare’s Initial Independent Board Committee 2001, In the summer of NCS invited January In Genesis was contacted Omnicare, to begin Inc. discussions with Hoc by members of the Ad Committee regarding possible Brown Gibbons trans- possible transaction with concerning Gemunder, July action. On Joel Omni- executed NCS’s standard NCS. Genesis CEO, care’s President and sent Shaw a due confidentiality agreement began in a proposal acquire written recently had diligence review. Genesis under bankruptcy sale Section 363 because, like bankruptcy from emerged Bankruptcy proposal Code. This was for NCS, dwindling gov- suffering it was from subject satisfactory comple- million $225 ernment reimbursements. diligence. tion of due NCS asked Omni- a confidentiality agreement care to execute bidding lost a war previously so that more detailed discussions could transaction. This a different Omnicare place.3 take princi- feelings between the led to bitter important- More pals companies. of both August Omnicare increased its *8 led to experience for Genesis ly, this bitter million, proposed but still to bid to $270 exclusivity agreements its insistence the deal as an asset sale bank- structure transaction million, lock-ups potential and Omnicare’s ruptcy. Even $270 than the with NCS. proposal substantially lower was that, engaged in an has customers. Omnicare Discovery had revealed at the same time, times, attempting away recently was to lure most Omnicare “NCS Blitz” a number through what it character- NCS’s customers were in discussions NCS and Omnicare while Blitz.” The "NCS Blitz” ized as the "NCS August July and target NCS's effort Omnicare to was an Improvement Financial
NCS thereby creating and an environment where Omnicare to maintain felt its com- operating performance NCS’s im- petitive monopolistic positions, they proving by early perfor- 2002. As NCS’s had to match and exceed that level.” mance improved, began the NCS directors Thus, degree Genesis “wanted a of certain- to might believe that it for possible ty that to willing [it] the extent to w[as] NCS to enter into a transaction would pursue negotiated merger agreement provide recovery some for NCS stockhold- ..., In equity. ers’ March decided would be [it] able to consummate the to form an independent committee of negotiated transaction and executed.” [it] board members who were neither NCS proposed June Genesis a trans- employees major nor NCS stockholders action place that would take outside the (the Committee”). “Independent The bankruptcy Although context. it did not thought necessary NCS board this was provide recovery full for NCS’s Notehold- because, precarious due to NCS’s financial ers, it provided possibility that NCS condition, it felt that duties were stockholders would be able to recover enterprise owed as a whole rather something for their As dis- investment. solely than to NCS stockholders. continued, proposed by cussions the terms Sells and Osborne were selected as the improve. Genesis continued to On June committee, members of the au- given 25, the economic terms of the Genesis thority negotiate possible to consider and proposal repayment included of the NCS transactions NCS. entire four full, full assumption senior debt of trade board, however, member NCS retained au- obligations, credit exchange offer or thority approve any transaction. The purchase direct of the NCS Notes provid- Independent Committee retained the same ing with a NCS Noteholders combination legal and financial counsel as the NCS equal cash and Genesis common stock board. (not par value of in- the NCS Notes The Independent Committee met for the interest), cluding accrued million $20 May first time on 2002. At that meet- in value for the NCS common stock. ing suggested Pollack that NCS seek a Structurally, proposal the Genesis contin- “stalking-horse merger partner” to obtain ued to include a significant consents from highest possible in any value transac- majority of the Noteholders as well as tion. Independent agreed Committee agreements support from stockholders suggestion. with the owning majority pow- er. Proposal Initial
Genesis later, 16, 2002, days Two on May Scott Exclusivity Agreement Genesis Gibbons, Berlin of Brown Glen Pollack and financial legal NCS’s advisors and coun- George Hager, Boake Sells met with CFO again legal sel met Genesis Genesis, Walker, and Michael who was 26, 2002, counsel on June to discuss a meeting, Genesis’s CEO. At that number of transaction-related At issues. made it if going clear that it were meeting, Pollack asked Genesis to in- NCS, engage any negotiations with it crease its offer to NCS stockholders. “stalking would not do so as a horse.” As agreed request. to consider this testified, one of its advisors didn’t “We *9 Thereafter, and Hager Pollack had further want to be someone who set forth a valua- agreed tion which in conversations. Genesis to offer a for NCS would result disclosed, being publicly that ... of valuation total million in consideration for the $24 that Genesis felt stock, explained A. [Pollack] an common additional $4 NCS hands of suffered at the million, they that had in the form of common Genesis maybe guess I and others. Omnicare stock. know much I don’t just Omnicare. repre- meeting, At the Genesis’s June history. acquisition [sic] about Genesis that, fur- demanded before sentatives before they But had suffered to agree take NCS negotiations place, ther a to have they and that wanted 11:59:59 exclusivity agreement into an with it. enter they deal or bulletproof much pretty it: Hager explained “[I]f As from Genesis go forward. going wei'e not they try to continue to to move wished us Q. say they suffered at the you When agreement, to a definitive process Omnicare, you do mean? what hands an they need to do it on exclusive would Well, that that was my expression A. to, going with us. We were and basis was related to related to—a deal that expense, already significant had incurred they, explained me or to me Gene- expenses but would incur additional we sis, suppose, I acquire, had tried to ..., external, bring internal and both I don’t remem- pharmacy, institutional signing. to a definitive this transaction had a Thought they of it. ber the name them to work with us on an We wanted minute, at the last Omni- deal and then a time to period exclusive basis for short company them for the care outbid agreement.” see if we could reach On they 27, 2002, thing, like 11:59 kind of legal counsel de- June Genesis’s once unhappy about that. And exclusivity agree- livered a draft form of were burned, shy. ment for review and twice consideration legal NCS’s counsel. exclusivity After NCS executed with a agreement, provided met on Genesis NCS Independent Committee 3, 2002, July merger agreement, a draft Notehold- proposed to consider the ex- draft voting and draft clusivity agreement. presented support agreement, Pollack ers’ Shaw, for Outcalt and who summary possible agreements of the terms of a Gene- majority voting pow- im- of the merger, together sis which had continued to held a prove. proposal The then-current er of the NCS common stock. Genesis (1) of the negotiated of the senior the terms repayment included NCS (2) full, three weeks. over the next payment par debt value for (without interest) Indepen- negotiations, those During the Notes accrued the Ad Hoc Commit- dent form of a combination of cash and Genesis Committee (3) improve stock, persuaded to NCS stockholders tee payment stock, merger. terms of its the form of million Genesis $24 (4) the trans- plus assumption, because negotiating still parties were merger, structured as a action was exclusivity period was and the July to trade and other additional liabilities July 26. At that automatically extended to creditors. unsecured to exe- were close point, NCS and Genesis related agreement and testified, cuting merger Pollack told director Sells proposed agreements. Genesis July at a Committee Independent agree- exclusivity of the extension the Ex- short meeting that Genesis wanted finalized. On the could be step ment so a deal Agreement to be the first clusivity 26, 2002, Independent July morning up locked transaction completely towards a an extension authorized higher bid from Committee preclude that would July 31. through exclusivity period Omnicare: *10 Proposes Negotiations Omnicare 26, 2002, Late in the afternoon July representatives NCS received voicemail By late July Omnicare came to messages from asking Omnicare to discuss believe that NCS was a negotiating trans- exclusivity agreement pre- letter. The action, possibly with Genesis or another of returning vented NCS from those calls. competitors, Omnicare’s poten- would In part, relevant tially precluded present competitive threat to Om- believe, “engag[ing] nicare. Omnicare also particpat[ing] came to in NCS.from light run-up of a in the price of NCS negotiations discussions or with re- stock, common that whatever transaction spect to Competing Transaction or a NCS was negotiating probably included a proposal for July one.” The 26 letter from Thus, payment for its stock. the Omni- Omnicare met the “Compet- definition of a care board of directors met on the morn- ing Transaction.” and, ing July on the recommendation Despite the exclusivity agreement, management, of its proposal authorized a Independent Committee met to consider a acquire that did NCS not involve a sale response to Omnicare. It concluded that in bankruptcy. assets discussions with July Omnicare about its 26, 2002, July On the afternoon of Om- presented 26 letter an unacceptable risk nicare faxed to outlining letter Genesis would abandon dis- proposed acquisition. The letter suggest- Independent cussions. The Committee aed transaction in which Omnicare would that, given believed past Omnicare’s bank- retire NCS’s senior and subordinated debt ruptcy proposals and unwillingness to con- interest, par plus pay accrued merger, sider a as well as its decision to NCS stockholders cash for their $3 negotiate exclusively with the Ad Hoc however, shares. Omnicare’s proposal, Committee, losing the risk of the Genesis was expressly conditioned on negotiating a proposal was too substantial. Neverthe- merger agreement, obtaining certain third less, Independent Committee instruct- consents, party and completing its due dil- Pollack ed to use Omnieare’s letter to ne- igence. gotiate improved terms with Genesis. Mencher saw the July 26 let- Omnicare that, ter and realized while its economic Merger Agreement Genesis And attractive, terms were diligence” “due Voting Agreements condition substantially undercut responded request to the NCS strength. get an effort to a better improve its offer aas result of the proposal Omnicare, from Mencher tele- day. Omnicare fax the next July On phoned Gemunder and told him that Omni- proposed substantially improved unlikely care was to succeed in its bid First, terms. it proposed to retire the unless it dropped diligence the “due outs.”
925 in merger agreement fee from in superior tive or transaction $10 future.” added). million to million. return for these (emphasis $6 concessions, stipulated that summary After to a listening transaction had to be mid- approved terms, the board then resolved night day, July the next or else Genesis merger agreement that the and the trans- would terminate discussions and withdraw thereby actions were advisa- contemplated its offer. ble and fair and in the best interests of all Independent The Committee and the the NCS stakeholders. The NCS board NCS board both meetings scheduled for further resolved to recommend the trans- July 28. The committee met first. Al- ap- actions to the stockholders for their though meeting lasted than less proval adoption. A definitive merger hour, Chancery the Court of determined agreement between NCS and Genesis and the minutes reflect that the directors were the stockholder voting agreements were fully informed of all material relating facts day. executed later that Court to the proposed transaction. After con- Chancery per held that it was not a se cluding that Genesis in was sincere estab- fiduciary duty breach of the NCS deadline, lishing midnight the commit- board never read the NCS/Genesis unanimously tee voted to recommend the for word word.4 transaction to the full board. The full board met thereafter. After Merger Agreement NCS/Genesis receiving similar reports and advice from Among things, other the NCS/Genesis advisors, legal its and financial the board merger agreement provided following: concluded that “balancing potential (cid:127) NCS stockholders would receive loss of the against Genesis deal the uncer- share of in Genesis common stock ex- tainty letter, of Omnicare’s in results change every conclusion that for com- reasonable shares of NCS alter- held; native for the Board of Directors is to mon stock approve the Genesis transaction.” The (cid:127) ap- NCS stockholders could exercise board first voted to voting authorize the 262; § praisal rights under 8 Del. C. agreements Shaw, with Outcalt and (cid:127) would redeem NCS NCS’s Notes purposes of Section 203 of the Delaware terms; accordance with their (“DGCL”). Corporation General Law (cid:127) merger agree- would submit the NCS legal was advised its counsel regardless ment to NCS stockholders “under the terms of the NCS board continued to whether and because NCS represent- shareholders merger; recommend the ing excess of 50% of the outstanding (cid:127) NCS would not enter into discussions voting power would required, by Gene- parties concerning with third an alterna- sis to enter into stockholder agree- NCS, acquisition provide tive or non- ments contemporaneously signing with the public parties, information to such un- merger agreement, of the agree and would (1) party provided less the third an un- vote their shares favor of the solicited, proposal bona written doc- agreement, approval shareholder fide umenting acquisition; the terms of the merger would be if the assured even (2) good faith the NCS board believed Board were to or change withdraw proposal likely that the was or was pre- recommendation. These would facts engaging superi- vent in an on terms acquisition altema- result from See, Gorkom, e.g., Smith Van 883 n. Superior Proposal Omnicare’s by the contemplated to those merger agreement; NCS/Genesis 29, 2002, after July hours On *12 (3) informa- non-public providing before executed, transaction was NCS/Genesis party third party, third tion to that restating a letter to NCS faxed Omnieare confidentiality agree- a would execute a attaching proposal and its conditional in the one as restrictive as Later that agreement. ment at least merger draft Genesis; and release press and issued a place morning, between NCS Omnieare disclosing proposal. publicly (cid:127) were to be If the terminated, 1, 2002, under certain circumstances filed August Omnieare On enjoin pay attempting Genesis lawsuit required would be NCS NCS/Gen- it intend- merger, and announced esis fee Gene- million termination $6 and/or a tender offer for NCS’s ed to launch mil- expenses, up to sis’s documented $5 per share. On price at a shares $3.50 lion. 8, 2002, began its tender Omnieare August day, dated that same Om- By offer. letter Voting Agreements to discuss the expressed nicare a desire Shaw, capacity as in their Outcalt and of the offer NCS. Omnicare’s terms with stockholders, entered into NCS proposal to condition its letter continued also NCS was agreements with Genesis. of a due dili- satisfactory completion on voting agree- party to be required of NCS. gence investigation agreements pro- Those by ments Genesis. 8, 2002, August again and August On vided, things, that: among other Comiqittee 19, 2002, Independent the NCS (cid:127) acting in their and were Outcalt Shaw separately met full board of directors and in execut- capacity as NCS stockholders tender offer to consider the Omnieare capacity not in their ing agreements, merger agreement. of the Genesis light officers; as NCS directors or counsel and NCS’s legal outside NCS’s (cid:127) would trans- Neither Outcalt nor Shaw meetings. financial attended both advisor to the stockholder to determine .that prior fer their shares was unable The board interest were expressions of agreement; Omnicare’s merger vote on the “Superior Proposal,” to a likely to lead (cid:127) all of agreed and to vote Outcalt Shaw defined the term was NCS/Genesis merger of the their shares favor 10, September agreement. On merger and agreement; a waiv- 2002, requested and received (cid:127) granted Genesis Outcalt Shaw allowing to enter from er Genesis to vote their shares proxy an irrevocable without Omnieare into discussions with agreement. merger in favor of the to determine that Omnicare’s having first (cid:127) specifically was voting agreement Proposal.” “Superior was a proposal enforceable Genesis. 2002, irrevoca- Omnieare October On provided agreement further itself to transaction bly committed if or Shaw breached either Outcalt propos- terms of its Pursuant to the NCS. Genesis voting agreements, of the terms all the out- al, agreed acquire Omnieare terminate be entitled to would B A shares Class and Class standing NCS receive a potentially $6 in cash. As share price per at a of $3.50 offer, million Such a fee from NCS. on October termination of this irrevocable result pro- its rec- since Section board withdrew impossible the NCS breach vote the stockholders were voting agreements ommendation vided that agree- favor enforceable Genesis. NCS/Genesis specifically whereby Messrs. Outcalt Shaw ment. financial advisor withdrew NCS’s agreed to vote their shares of NCS Class opinion its fairness of the NCS/Genesis B com- merger agreement as well. A common stock and NCS Class merger, mon stock favor of Genesis Rejection Impossible approval stockholder ensure NCS litigation was com- merger.” This merger agreement permits The Genesis the consummation of non-public prevent menced to the NCS directors to furnish to, transaction. information or enter into discussions the inferior Genesis with, “any Person in connection with an *13 ANALYSIS LEGAL Acquisition bona fide written
unsolicited
person” that the
Proposal
such
board
Judgment or Enhanced
Business
likely
“Superior
deems
a
Pro-
constitute
Scrutiny
posal.”
provision
absolutely
That
has
no
in
“defining
corporate gov-
tension”
merger agreement.
effect on the Genesis
characterized as
today
ernance
has been
“changes,
Even if the NCS board
with-
“the tension between deference to di-
recommendation,
or modifies” its
draws
as
judicial
scope
decisions and the
of
rectors’
did,
it
it must still submit the
to a
ju-
of
appropriate
review.”5 The
standard
stockholder vote.
party
of which
dispositive
dicial review is
A
subsequent filing
the Securities
any
proof
litigation
has the burden of
as
(“SEC”)
Exchange
Commission
states:
stage until there is
proceeds
stage
from
independent
“the NCS
committee and the
on the merits.6
a substantive determination
NCS board of directors have determined
of the correct
Accordingly, identification
to withdraw their recommendations of the
prop-
to a
analytical framework is essential
and recom-
judicial
challenges
er
to the deci-
review
that
mend
the NCS stockholders vote
corporation’s
of a
sion-making process
against
approval
of the
adoption
board
directors.7
merger.”
In that same
fil-
SEC
rule,
judgment
as
“The business
however,
ing,
explained
NCS board
review,
judicial
a standard of
is a common-
why the
success of the Genesis
had
statutory authority
recognition
law
already
predetermined.
been
“Notwith-
in
manage
corporation
a
that is vested
standing the foregoing,
indepen-
the NCS
business
the board of directors.”8 The
dent committee and the NCS board of
in
(1)
a
judgment
“presumption
rule is
recognize
directors
existing
making a
decision the directors of
business
obligations
contractual
to Genesis current-
basis,
ly
corporation
a
acted on an informed
prevent
from
accepting
Omni-
(2)
in the honest belief that
good
care irrevocable
faith and
merger proposal; and
interests
the existence of the
the action taken was
the best
agreements en-
Shaw,
application
tered into
“An
of the
company.”9
Messrs. Outcalt and
Unitrin,
Corp.,
Veasey,
Defining
5. E.
7.
v. Am. Gen.
651 A.2d at
Norman
Inc.
Tension
America,
Corporate Governance in
52 Bus.
1374.
393,
(1997).
Law.
403
Audio, Inc.,
Liquid
Companies
813
8. MM
v.
Unitrin,
Corp.,
Inc. v. Am. Gen.
651 A.2d
1127
See,
(Del. 1995).
e.g., Malpiede
1371
v.
Townson,
(Del.2001);
27. See Unocal Petroleum 31. Id. at 1.148. Communications,
28.
Inc. v. Time
Paramount
n. 15.
Id.
Inc.,
34.
Id. Corp.
Unocal
v. Mesa Pe
Unitrin,
41.
A.2d at
651
Corp.,
Inc. v.
Am. Gen.
(Del. 1985);
Co.,
946
troleum
see In
1388.
Litiga
Corp.
re Santa Fe
Shareholder
Pacific
(Del. 1995).
tion,
38. Id. Co., 493 A.2d at Corp. v. Mesa Petroleum 954-57. Id. Therefore, protect merger agreement applying judicial a that will not enhanced in change scrutiny designed result a of control. to defensive devices protect merger agreement, a a court must A protect board’s decision to its decision first determine that those measures are to enter a with defen- preclusive not or coercive its focus before against competing sive devices uninvited “range shifts to the of reasonableness” may emerge analogous transactions that is a making proportionality determination.50 to a board’s protect against decision to If the trial court determines that the de- dangers corporate policy and effective- merger a are protecting fensive devices adopts ness when it defensive measures coercive, preclusive not the proportion- a hostile takeover contest. In applying ality paradigm applicable. of Unocal is judicial Unocal’s scrutiny enhanced as- The board that it must demonstrate has sessing challenge a to defensive actions grounds reasonable that a believing by target taken corporation’s board danger corporation to the and its stock- context, in a directors takeover this Court merger holders exists if the transaction is held that the board not “does have unbri- not consummated.51 That burden is satis- dled perceived discretion to defeat threats “by showing good fied faith and reasonable by any Draconian means available”.46 investigation.”52 proof materially Such is Similarly, just statutory power as a board’s approved by enhanced if it is regard to a is not decision comprised majority of a di- of outside absolute, a board does not have unbridled independent rectors or an committee.53 any discretion to defeat perceived threat to merger by protecting any it with draco- judicial scrutiny When focus shifts nian means available. reasonableness, range to the Unocal Unocal,
Since requires “this Court has consis- defensive devices must tently recognized that defensive proportionate perceived measures to the threat to which preclusive corporation are either or coercive are and its stockholders if the law included within the common definition transaction is not consummated. ju- of draconian.”47 In applying protect merg- enhanced Defensive devices taken to scrutiny dicial to defensive actions under er executed a board of di- Unocal, a court give agree- must “evaluate the board’s rectors are intended to response, including justification any subsequent overall ment an over advantage measure, for each contested defensive and transactions that materialize before the thereby.”48 approved by results achieved If a the stockholders inextricably analogous “board’s defensive actions are and consummated. This is related, that a di- principles require of Unocal the favored treatment board of collectively may properly give encourage that such actions be scrutinized rectors initial unitary response perceived discharges bidder when it its fiducia- ry threat.”49 duties under Revlon. Co.,
46. Unocal Id. at 1367. Corp. v. Mesa Petroleum A.2d at 955. *18 Co., 51. Unocal Corp. v. Mesa Petroleum Unitrin, 47. Corp., Inc. v. Am. Gen. A.2d at 955. 1387. omitted). (citation 52. Id. 48. Id. (citation (citations omitted). omitted).
49. 53. Id. Id. 251(c) clause, Therefore, mandating its submission in the context of a vote even if the board’s rec- change a stockholder merger that does not involve control, ommendation was withdrawn. Genesis in the when defensive devices exe merger agree- further insisted that merger agreement challenged cuted are fiduciary out any ment omit effective subsequent their effect on a com vis-a-vis clause. transaction, merger peting alternative analysis in Court’s Macmillan is didactic.54 two stockholder gave also Genesis
In the context of a of defensive mea case board, of the Shaw and members bidder, existing taken we against sures Outcalt, time table to the same accelerated stated in Macmillan: voting agree- personally sign proposed treatment,
In disparate the face of voting agreements commit- ments. These trial court must first examine whether irrevocably majority ted them to vote their properly perceived the directors merger and further power favor shareholder interests were enhanced. 6 that provided Section any event the board’s action must be be agreements specifically enforceable. advantage reasonable relation to the required that Genesis also NCS execute it sought [by merger to be achieved the voting agreements. conversely, or approved], to the threat twenty-four hour ultimatum Genesis’ [competing poses
which a to transaction] that, merger agree- unless both the stockholder interests. If on the basis of voting agreements ment and the were scrutiny this enhanced Unocal the trial signed requested, with the terms it court is satisfied that the test has been going offer was to be withdrawn. Accord- met, then the directors’ actions neces- ing attorneys, “were un- Genesis’ these sarily are protections entitled to the willingness alterable conditions to Genesis’ judgment the business rule.55 proceed.” insisted on the exe- Genesis interlocking voting rights cution of the The latitude board will in either have merger agreements because it feared maintaining using or the defensive devices superior merger Omnicare would make a adopted protect it has it merger proposal. signed The NCS board the vot- approved vary will according degree ing rights merger agreements, without of benefit detriment or to the stockholders’ clause, any fiduciary out to ex- effective presented by interests that is or value pressly guarantee that the Genesis terms of subsequent competing trans- approved, superior even if a would action.56 presented transaction was from Day Genesis’ One Ultimatum any entity. other Omnicare The record reflects two of the four Deal Protection Devices members, Outcalt, NCS board Shaw and devices, were also the same two NCS stockholders Defensive as that term is used majority combined to who control opinion, synonym in this is a for what are voting power. gave stockholder protection to as “deal frequently referred person the four NCS board less than twen- Both are used inter- devices.” terms pro- in favor of its measure or ty-four changeably hours vote to describe agreement. insist- of measures that are intended posed merger combination of a protect ed the include a Section to the consummation (citation omitted). Acquisition Id. 54. Mills Co. v. Macmillan (Del. 1988). Id. *19 locked-up
transaction. devices can eco- that the acts Defensive which Genesis 251(c) nomic, structural, or provi- both. transaction were the Section voting sion and “the execution of the protection Deal devices need not all be agreement by Outcalt and Shaw.” In merger agreement itself. this 251(c) case, example, provi- the Section that With the assurance Outcalt and sion in the was com- irrevocably agree to Shaw would exercise voting bined with separate agreements majority voting power their in favor of its to provide a structural defense for the transaction, Genesis insisted merger agreement against any Genesis merger agreement reflect the other two subsequent superior transaction. Genesis defense, i.e., aspects of its concerted made NCS board’s defense of its 251(c) provision inclusion of a Section by insisting transaction absolute on the any fiduciary the omission of effective out omission of effective out aspects merger clause. Those dual merger agreement. clause the NCS agreement provided would not have Gene- complete sis with a defense in the absence argues voting Genesis that stockholder voting agreements Shaw and agreements cannot be construed as deal Outcalt. protection devices taken a board of directors because stockholders are entitled These Deal Protection Devices
to vote
then own interest. Genesis cites
Unenforceable
v.
v.
Williams Geier57
Stroud Grace58
voting
case,
for the proposition
agreements
In this
the Court of Chan
subject
cery correctly
are not
to the Unocal standard of
held that the NCS directors’
cases, however,
review. Neither of those
adopt
decision to
defensive devices to com
operative
voting
holds that the
effect of a
pletely
up”
merger
“lock
man
Genesis
disregarded per
must be
se
“special scrutiny”
dated
under the two-
Unocal,59
analysis
applied
when
Unocal
test
forth in
That con
part
set
comprehensive
and combined
de-
holding
clusion is consistent with our
plan.
fense
“safety
Paramount v. Time that
devices”
that did
adopted
protect
transaction
case,
In
voting
the stockholder
in a change
not result
of control are sub
agreements
inextricably
were
intertwined
ject
judicial
scrutiny
to enhanced
under
aspects
with the defensive
of the Genesis
not,
analysis.60
Unocal
The record does
fact,
In
merger agreement.
however,
Chancery’s
support the Court of
agreements with Shaw and Outcalt were
conclusion
the defensive devices
linchpin
proposed tripartite
of Genesis’
adopted by
protect
the NCS board to
Therefore,
defense.
made the ex-
pro
were
reasonable
voting agreements
ecution of
a non-
those
portionate
per
to the threat
that NCS
negotiable
precedent
condition
to its exe-
potential
ceived from the
loss of the Gene
merger agreement.
cution of the
In the
us,
Chancery
case before
the Court of
held
sis transaction.
(Del.
Communications,
Geier,
A.2d 1368
v.
60.See
Paramount
Inc. v.
Williams
1996).
(Del.1989)
Inc.,
Time
(holding
safety
that "structural
devices” in
(Del. 1992).
Grace,
58. Stroud v.
935 pro- the Unocal standard judicial aspect This scrutiny Pursuant disjunctive If de- analysis. for a two-stage analy under Unocal’s vides required or sis, preclusive measures are either directors must first demon fensive imper- and they are draconian they grounds strate “that had reasonable coercive case, protec- In this the deal believing danger corporate for that a missible. both ....”61 tion of the NCS board were policy and existed To devices effectiveness burden, preclusive and coercive. satisfy that the NCS directors are they good acted in required to show faith This enunciated the standard Court conducting investigat a reasonable after in the determining stockholder coercion by ion.62 The threat identified the NCS A stockholder case of v. Geier67 Williams possibility losing board was may by wrongful nullified coercion vote being left with no com Genesis offer party or some other “where parable alternative transaction. have the effect of caus takes actions which ing the stockholders to vote favor of the stage The second of the Unocal proposed transaction for some reason oth requires the directors to demon test er than the merits of that transaction.”68 response strate that their defensive was Corporation, In v. Bell Atlantic we Brazen in relation to the threat “reasonable coercion applied that test for stockholder posed.”63 inquiry two-step This involves although the termination and held “that analysis. NCS directors must first may fee have influenced provision protection establish that the deal vote, ‘no structur stockholder there were adopted response devices to the threat factors’ that ally situationally coercive “preclusive,” were not “coercive” or im- provision made an otherwise valid fee response then demonstrate that their pres the facts permissibly coercive” under “range responses” within a of reasonable ented.69 Unitrin, perceived.64 threat In we stated: Brazen, concluded “the we (cid:127) A if response is “coercive” it is aimed particular determination of whether a forcing upon manage-
at
stockholders a
of its
stockholder vote has been robbed
ment-sponsored
to a
alternative
hostile
coercion
impermissible
effectiveness
offer.65
the case.”70 In
depends on the facts of
(cid:127)
case,
Chancery
A
if
did not
response
“preclusive”
it de-
the Court of
prives
right
stockholders of the
to re-
address the issue of “coercion”
expressly
It did find as a
precludes
analysis.
ceive all tender offers or
in its Unocal
fact, however,
public
from
stock
seeking
bidder
control
funda-
that NCS’s
(who
mentally restricting proxy
or holders
owned 80% of NCS
contests
supported Omnicare’s of-
overwhelmingly
otherwise.66
Co.,
Corp.
66.
61. Unocal
v. Mesa Petroleum
493
Id.
(Del. 1985) (citation omitted).
A.2d
955
(Del.
Geier,
A.2d 1368
67. Williams v.
1996).
62.
Id.
omitted).
(citations
68.
Id. at 1382-83
63.
Id.
Unitrin,
Corp.,
Bell Atl.
695 A.2d
Corp.,
Gen.
69.
v.
64.
Inc. v. Am.
Brazen
1997).
(Del.
1387-88
Communications,
1387;
Corp.,
view because are not within the range of reasonableness. Fiduciary Required Effective Out
Although
minority
were
stockholders
pro
The defensive measures that
not forced
merger,
to vote for the Genesis
tected the
transaction are unen
were
it
they
required
accept
it because
not
they
preclu-
forceable
because
are
accompli
but,
a
record reflects
alternatively,
they
sive and coercive
fait
employed by
that the defensive devices
they
are
because
are invalid
unenforceable
preclusive
board are
they operate
coercive
this case. Given the
they accomplished
specifically
the sense that
a
irrevocable
enforceable
fait
case,
accompli.
despite
agreements,
provision
In this
the fact
in the
agreement requiring
the NCS board has withdrawn its
the board to submit
a
recommendation for the Genesis transac-
the transaction for
stockholder vote
rejection by
fiduciary
tion and
its
of a
out clause in
recommended
the omission
stockholders,
completely prevent
the deal
protection
devices
fiduciary
approved by
operated
discharging
ed the board from
its
minority
a preclusive
responsibilities
concert to have
and coercive
stockhold
presented
superior
ers
tripartite
effect. Those
defensive mea-
when Omnicare
251(c)
[merg
“To the extent that a
provision,
sures —the Section
transaction.
contract,
thereof,
,
voting agreements,
provision
pur
and the absence of an
or a
er]
fiduciary
ports
require
it
a board to act or not act
effective
out clause—made
“mathematically
and “realis-
such a fashion as to limit the exercise of
impossible”
duties,
fiduciary
it is invalid and unen
tically unattainable”
the Omnicare
74
to suc-
forceable.”
proposal
transaction or
other
explicitly provides
"prom-
§
a
A.2d at
193
71. See
695
Corp.,
tracts
v. Bell Atl.
Brazen
duty
by fiduciary
fiduciary
ise
a
to violate his
promise
a
that tends to induce such a viola-
or
Unitrin,
651
Corp.,
Inc.
Gen.
See
v. Am.
grounds
public
tion is unenforceable
1388-89;
A.2d at
Carmody
see also
v. Toll
section indi-
The comments to that
policy.”
(Del.Ch.
Bros., Inc.,
723 A.2d
cate that
and other officials of
"[d]irectors
(citations
1998)
omitted).
corporation
capacity
act
subject to the rule stated in this Section.”
are
Unitrin,
Corp., 73. See
Inc. v. Am. Gen.
(Second)
§
of Contracts
Restatement
A.2d at 1389.
added).
(1981) (emphasis
74. Paramount Communications
v. QVC
Inc.
(Del.1993) (cita-
Network
omitted).
(Second)
tion
Restatement
Con-
the stock-
the outcome of
that made
QVC',75
recognized
power
this Court
foregone conclusion.
majority
corporation’s
of a
vot- holder vote a
“[w]hen
by single person
ing
acquired
shares are
Chancery noted that Sec-
The Court
growp acting
entity,
or
a cohesive
251(c)
Corpo-
of the Delaware General
tion
case],
signifi-
in this
there is a
together [as
agree
permits
ration Law now
boards
voting power
in the
cant diminution
for a stock-
submit
*22
thereby
minority
become
stock-
those who
vote,
later with-
if the Board
holder
even
Therefore,
acknowledged
holders.”76
we
agreement
for that
support
its
draws
protect-
the absence of devices
“[i]n
reject
recommends that
the stockholders
stockholders,
minority
stockholder
ing the
also noted
Chancery
of
it.80 The Court
formali-
likely
votes are
to become mere
are
voting agreements
that stockholder
ties,”
group acting
to-
where
cohesive
refusing
Delaware law.
permitted by
majority voting powers
to
gether
exercise
certify
interlocutory appeal,
the
to
this
already
have
decided the outcome.77 Con-
Chancery
simply
stated “it is
Court
mi-
we concluded that since the
sequently,
say
a board of directors
nonsensical to
power
stockholders lost the
to in-
nority
manage the ‘busi-
abdicates its duties to
corporate
through
direction
the
fluence
under
corporation
ness and affairs’ of a
ballot, “minority
rely
stockholders must
141(a)
by agreeing to
Section
of the DGCL
solely
fiduciary
protection
agreement
of a
merger
the inclusion
owed
them
duties
directors.”78
251(c)
§by
of the same
term authorized
presented
Under the circumstances
statute.”
case,
a cohesive
of stock-
group
where
le
Taking action that is otherwise
majority voting
holders
power
was
however,
gally possible,
ipso
does not
facto
irrevocably
merger
committed to the
fiduciary
comport
responsibilities
with the
“[ejffective
transaction,
representation
in all circumstances.81 The
of directors
the financial
minority
interests
that resulted
synopsis to the amendments
imposed upon
shareholders
the [NCS
251(c) in the
in the enactment of Section
responsibility
an affirmative
pro-
board]
corporation
specifi
law statute
Delaware
minority
tect
shareholders’
those
inter-
79
cally provides: “the amendments are not
ests.”
board could not abdi-
of wheth
question
intended to address the
fiduciary
minority
cate
duties to the
requirement
appro
er such a submission
leaving
ap-
it to the stockholders alone to
cir
priate
any particular set of factual
prove
disapprove
merger agreement
provisions,
251
like
cumstances.” Section
already
because two stockholders had
com-
QVC,
examined in
majority
no-shop provision
to establish a
bined
QVC
not their
v.
to a vote of stockholders whether or
Paramount Communications Inc.
Inc.,
(Del. 1993).
Network
the last before execution of the This Court to Invalidate the Joint agreement.99 recog- The Court Action of the Board and the Control- lock-up agreement nized that “fore- ling Stockholders bidding,” further noted that elose[d] but market, had canvassed found Majority The invalidates the NCS Western, only party willing acquire one by announcing action a new rule board’s and made a decision calculated to maxim- represents juris- an extension of our ize pursuing stockholder value “the can prudence. narrowly That new rule prospect that remained.”100 viable A merger agreement stated as follows: that, Court also noted in return for the search, market entered into after a before limit lock-up, acquirer agreed to emerged, any prospect topping of a bid has prevent own “outs” that would consumma- up approval which locks stockholder merger. merging parties, tion of the “fiduciary out” provi- does not contain then, “exchanged by locking certainties” sion, per signifi- invalid a later se when deal, up approved by which was emerges. As have topping cant bid we Chancery Court of and affirmed this noted, bright-line, per se rule would Court.101 (1) the circumstances apply regardless *27 (2) the leading up to the and present
While the
case does not involve
control
attempt
to hold on to
one interest-
fact that stockholders who
Lines,
at
97. See Rand v.
Air
judgment
apply102
should
—we
deposi-
deposed, and each
directors were
nevertheless,
arguendo
assume
—as
attention
makes manifest the care and
tion
applies.
did—that Unocal
Vice Chancellor
every member
given
project by
to this
Therefore,
di-
under Unocal
the NCS
fully with
agree
We
board.”103
forward
going
rectors had
burden of
conclusions,
and
findings
Chancellor’s
Vice
with the evidence to show that there was
judgment
have
and we would
affirmed
corporate policy
threat to
and effectiveness
on that basis.
Chancery
of the Court of
that their
actions were reasonable
view,
.
Majority misapplies
our
to that
Chan-
response
threat.
Vice
preclu-
concept of “coercive and
Unitrin
reasonably
correctly
they
cellor
found that
pro-
preempt
proper
measures to
sive”
threat
not
perceived the
that NCS did
Thus, Majority
balancing.
portionality
have a viable offer from Omnicare—or
judicial
applying
that “in
enhanced
asserts
creditors,
anyone
pay
else—to
cure
off its
designed to
to
devices
scrutiny
insolvency
provide
payment
some
defensive
agreement,
... a court
protect
to stockholders.
ac-
The NCS board’s
measures
... determine that those
must
correctly
the Vice
tions—as
Chancellor
preclusive
not
or coercive....”104
are
held—were
in relation to the
reasonable
Here,
were
protection
the deal
measures
threat
deal was the
because
town,”
unilaterally by the board
adopted
not
“only game
the NCS directors
existing
deal
off an
hostile offer
got
they
the best
could from Genesis
fend
merger,
original
Time-Warner
basis for the
doctrine is
stock-for-stock
102.The
Unocal
"omnipresent specter”
Court held was entitled
the board's self-in-
which this
rule,
judgment
presumption of the
entrench
Unocal
business
terest
itself in office.
Co.,
jettisoned
parties
in the face
was
Corp. v. Mesa
Petroleum
1985).
topping
at 1152. The
(Del.
bid.
Id.
Paramount’s
plagued
was not
replaced
with a new transaction
was
specter of
Unlike the Unocal
self-interest.
Time
situation,
was an all cash tender offer
which
here
a hostile offer did not arise
It was the
acquire
of the Warner stock.
51%
the market search and the locked-
until after
agreement,
original
not the
revised
up
with Genesis.
deal
"defense-
agreement,
that was found to be
unilateral
applies
doctrine
The Unocal
subject
Id.
to Unocal.
motivated”
defensive and reactive
board actions
are
Thus,
analysis
Healthcare,
nec-
in nature.
Unocal
Li
Inc. S'holders
In re NCS
(Del.Ch.) ("Chancery,
Time
essary in Paramount
Communications
tig.,
threatened the and The measures the cites as by approved “coercive” were Shaw and They adopted tiveness of NCS.105 were through the of their indepen- Outcalt lens game because in “only Genesis—the merits of dent assessment of the the trans- NCS, town”—would not save its creditors in action. The case is proper inquiry and its provi- stockholders without these had taken actions whether NCS board sions. ¡ofcausing that “have the effect the stock- Majority incorrectly, The view— our — to of the proposed holders vote favor on Unitrin analysis. relies to advance its transaction for some reason other than the discussion “draconian” measures of that merits transaction.”109 Like the action, Unitrin dealt with unilateral board fee a valid upheld liquidated termination repurchase designed fend off program, to a claim damages against clause of coercion an existing by hostile offer American Gen- Corp., Brazen Bell Atlantic the deal Unitrin recognized eral.106 In we protection measures at here issue were “an need police preclusive to and coercive ac- integral part of the of 'the transac- merits board to delay tions initiated struggled tion” as the board to se- existing retard so cure—and did deal avail- an hostile bid as to secure—the able.110 ensure that the stockholders can benefit negotiations from the the bid- board’s fully Outcalt and Shaw were informed der or and to effectively others exercise stockholders. As the NCS controlling as the check on franchise ultimate stockholders, they made informed board action.107 Unitrin the effect polices voting power to choice commit their of board on existing action tender offers merger. minority stockholders were and proxy contests ensure when controlling deemed know that permanently cannot its will impose they stockholders have 65% of vote can stockholders, on the leaving the stockhold- approve merger without the need for the Moreover, minority voting rights.108 ers no recourse to their votes. to the extent a Geier, 1368, Majority mocracy.” 105.The states that our decisions Williams v. (Del. 1996). Williams v. and Stroud v. do not Geier Grace operative hold that "the effect of Unitrin, 106. Corp., Inc. v. American General disregarded per be se when a must 1995). (Del. 651 A.2d applied analysis comprehensive Unocal to a Majori plan." and combined defense 107. ("We begin at 1379 our Id. examination Grace, ty Opinion howev at 934. Stroud v. Program Repurchase of Unitrin’s mindful of er, clearly we noted that record indi "The special import protecting the share- cates, concedes, [plaintiff] ... that over require- Unocal’s holder's franchise within outstanding [the of the shares of ... 50% be ment that defensive measure reasonable corporation] under control of are the direct (citation omitted). proportionate.”) defendants]_ con [the These directors corporation trolled the in fact and law. This (upholding at 1383 the Unitrin board’s Id. contemplated obviates Uno threat defensive measures because board actions (Del.1992) (empha cal. ...” 606 A.2d preclusive appear not "would have effect Stroud, then, supplied). According sis ability upon successfully American General's enter Shaw’s and Outcalt's decision to into enough votes to win a to marshal shareholder subject voting agreements should not contest.”). proxy analysis they to a because controlled Unocal corporation "in Far fact and Id. law.” Geier, (citations 671 A.2d 1382-83 duty, joint from a breach of action omitted). represents stockholders and directors here 1997). (Del. 110. highest corporate "the best form of de- *29 case, abundantly it made felt In this minority may stockholder have willing negoti- to merger, early “coerced” vote for the which on that it was to clear it was a the already accompli, only was a on a deal with NCS but ate fait meaningless “stalking coercion—or no coercion not be a that it would condition votes, controlling all—because the those Thus, to be certain it wanted horse.” Shaw, already were “cast.” Outcalt use its with party could not deal a third Although controlling that the votes the fact a begin a floor which to against merger “precluded” were committed to the negotiat- of this bidding war. As a result overriding against merger an vote the ac- “fiduciary a out” not was ing position, stockholders, A pejorative the Class the Opin- Majority to The ceptable Genesis. applicable in a Unitrin “preclusive” label negotiating position, holds that a ion such no here. application fact situation has agreement, in the is invalid implemented if Therefore, no minor- meaningful there was lock-up. an absolute se where there is per ity stockholder to coerce. decision in authority jurispru- our know no We rule, applying scrutiny, In we believe new and we supporting Unocal this dence Majority incorrectly preempted the the unwarranted. it is unwise and believe view, inquiry. the proportionality our our Majority The relies on decision proportionality inquiry account must fiduciary QVC to assert that the board’s reality the that the contractual measures negotiat- from prevent the directors duties agreement protecting this were providing without ing agreement a necessary to obtain the deal. The QVC for Rebanee escape provision. on Majority has not demonstrated that however, our proposition, confuses director re- disproportionate action was responsibilities of a board’s statement Indeed, it is sponse posed. the threat superior confront a when the directors negoti- clear to us that the board action to away from it to lock and turn transaction reasonably ate the best deal available with dif- very with the up a less valuable deal (Genesis) merger partner viable here, where the board ferent situation could satisfy who the creditors and benefit only value-enhanc- itself to the committed stockholders, in rela- reasonable The transaction available. decision ing threat, by any yard- tion to the practical QVC prior is an extension of decisions stick. prevent and Mills that board Revlon willing who ignoring a bidder is from Lock-up An Absolute is a Per Se Not of- the favored bidder’s match exceed Duty Fiduciary Violation of “con- application of Majority’s fer.111 respectfully disagree the Ma- We here a further fiduciary duties” tinuing jority’s conclusion that board the NCS permits, and thus concept of this extension A breached its duties to the Class view, a court to second- wrongly our failing to a “fidu- negotiate stockholders analysis the risk and return guess ciary merger agree- out” in the Genesis weigh must make to value practical import ment. What is against pros- only viable transaction “fiduciary provi- out?” It is contractual not an offer that has materiahzed. pect sion, negoti- in a manner to articulated mistakenly relies Majority also ated, permit that would the board QVC notion support decision our acquired exit without corporation being should have retained the NCS board in the breaching minority stock- fiduciary out to save of a superior event offer. work, QVC Net- 49-50 111. Paramount Communications v. *30 Nevertheless, appear.
holder from Shaw’s and Outcalt’s if voting holding the is QVC, agreements. reasoning facts, Our in which unique negotiators confined to these recognizes minority stockholders must may navigate be to able around this new rely protection fiduciary the duties hazard. directors,112 owed to them does not we dissent. Accordingly, respectfully
create a special duty protect to the minori- ty from consequences stockholders the of a STEELE, Justice, dissenting. controlling stockholder’s ultimate decision I respectfully dissent the majority from unless the controlling stockholder stands opinion, join the Chief Justice’s dissent in transaction,113 on both sides of the which is respects all dissent separately order Indeed, certainly not the case here. the crystallize my objec- the central focus of a minority discussion stockholders’ lack majority tion to the view. QVC voting power impor- notes the I would affirm the Chancellor’s Vice scrutiny tance of enhanced in change of injunctive holding denying relief. control precisely transactions because the minority stockholders’ interest in the new- Here the board directors acted self- ly entity merged hinge thereafter will on lessly pursuant careful, to a fair process controlling course set stockhold- in good and determined faith that the ben- QVC, er.114 In Redstone Sumner owned efits to corporation the stockholders and Viacom, voting 85% of the stock flowing merger agreement from contain- corporation.115 surviving Unlike stock- ing protection provisions reasonable deal holders who are with a confronted transac- outweigh speculative benefits that tion relegate that will to a minority them might entertaining from a putative result in the corporation, status A Class higher A court offer. asked examine purchased stockholders stock decisionmaking process of the board knowing provided Charter Class should decline interfere with the con- B stockholders control. summation and execution otherwise of an valid contract. Conclusion view, unim- my Vice Chancellor’s It regrettable split is that the Court is peachable findings preclude factual further this important hopes case. One that the judicial scrutiny of the NCS board’s busi- rule Majority though announced here — judgment negotiated ness the hotly clearly erroneous in in- our view—will be terms of were nec- terpreted narrowly be and will seen as sui essary company order to save the from generis.116 By from deterring bidders en- financial collapse, repay pro- creditors gaging negotiations like those present vide some benefits NCS stockholders. requiring always here and that there must out, concurring A dissent not a useful be a potential the universe of reasonably restating bidders who could mechanism for the facts Vice expected significant, particularly to benefit shrink stockholders could or dis- Chancellor found QVC, at 47. A.2d at 47-48. 112. 114. Curtiss-Wright Corp., 113. See Bershad v. Id. at 38. 115. (Del. 1987) (noting that absent arising standing fiduciary duties on both from Importantly, we decide case be- transaction,'"stockholders sides of a in Dela QVC, fore 637 A.2d at us. corporations right to ware have a control and interest."). vote their shares in their own in- concludes that Unocal’s majority majority accepts those facts when ju- compels dissent, of review termediate standard compelling highly persuasive, *31 to whether determine squarely per- in the correct dicial interference them places to terms, refers majority to that the far less clear me is spective. What is contract de- protection and majority adopt the those facts times “deal how can at various devices,” vices,” board “defensive conclude that the NCS breach- then “defensive devices,” fiduciary minority any duty safety to NCS’ ed or “structural measures” endorsing voting majori- a simply by The stockholders and coercive. preclusive are majority the stock- from substantially departs between ty’s conclusion carefully up negotiat- holders that locked the con- appraisal of a common sense both merger agreement with ed and essential Dela- of this and landscape case textual Genesis. stan- applying the Unocal ware case law dard. law my opinion,
In
Delaware
mandates
judgment
under
the business
deference
case, the
context
factual
of
the
of
decision that is
rule to a board
directors’
the
canvassed
thoroughly
had
NCS board
interest, made with
care
free from self
due
acquirer,
attempt to find an
market in an
faith.
good
and
and
repay creditors
company,
save the
law,
judg-
the business
Under Delaware
stock-
financial benefit to
provide some
of the
offspring
ment rule is
funda-
the
silence,
so in
face of
They
holders.
did
the
141(a),
§
principle, codified
mental
hostility from
outright
to
tepid interest
of
that the
and affairs
a Dela-
business
only
credible
fide,
The
bona
Omnieare.
corporation
managed by
are
ware
during
NCS could find
partner
directors....
under its board of
Genesis,
compa-
process
exhaustive
judgment rule exists
protect
business
desir-
that
less than
ny
experienced
had
full and free exercise of
promote
the
past.
in the
with Omnieare
able relations
managerial
granted
Dela-
power
the
viable
only
Small wonder NCS’
ware directors.117
demands and concessions
partner made
as-
Gorkom,
enhanced
acquire contract terms that
cor-
Importantly, Smith
Van
merger would close.
the
court
surance that the
rectly casts
focus on
review
up
to lock
alleged
agreed
for
NCS board
challenged
of
action
board
protection provisions
duty
“only
of
with contractual
fiduciary
of the
care
breach
prospect
of Genesis
information
order to avoid
the basis
then
upon
of
leaving
NCS
walking away from
deal
reasonably available to the directors
ne-
position of
woefully
in the
undesirable
Though
their
relevant to
decision....”118
company
had worked
imposition
gotiating
of
particularly
criticized
for
ne-
NCS’ interests
against
for months
liability
for
personal
on directors
breach
ne-
Those
NCS’ creditors.
care,
gotiating with
duty of
Gorkom still
Van
no
for NCS’
suggested
regard
gotiations
recognizing
importance
stands for
interests,
only
out
and held
for
inter-
stockholders’
limited circumstances
court
structuring a
hope
purchase
focusing
on the
importance
and the
vention
environment.
bankruptcy
in a
attacked.
timing
decision
Recommendation, 96
Gorkom,
Merger
and the
872 Measures
v. Van
117. Smith
(2002) (an
presaging
article
Nw.
U.L.Rev.
discharge of
appropriate
between
the conflict
sanctity of contract
874;
duty and the
also R. Franklin Balotti
118. Id.
see
III,
negotiated).
fairly
provisions
Sparks,
Deal-Protection
and A. Gilchrist
The contract
terms that NCS’
board
their clients’ decision—sound at the
agreed
insidious,
to included no
camou-
economically
time but later less
beneficial
flaged
deals for
side
the directors or the
post-decision,
because of
unforesee-
majority
transparent
stockholders nor
pro-
respected by
able events—will be
visions for
control premi-
entrenchment or
courts,
law,
Delaware
courts that
ums. At the time the
and the
it,
expound
may
questioned.
well be
I
majority
agreed
stockholders
board,
would not shame the NCS
which
lockup, the terms were the best reasonably
every
acted in accordance with
fine instinct
stockholders,
available
all the
balanced
to encourage,
invalidating
we wish
*32
against
genuine
a
risk of no deal at all.
approving
their action
Genesis merger
the
The cost
analysis
by
benefit
entered into
they
upon
because
failed to insist
a fiducia-
an independent
board,
of
committee
the
ry out.
I use “shame” here because the
approved
the full
by
indepen-
board and
majority finds no
loyalty
breach of
or care
dently agreed
majority
to
stock-
but
these
nonetheless sanctions
directors
holders cannot be
guessed by
second
for
upon
fiduciary
their failure to insist
a
no
expertise
courts with
business
that
out as if
regard
those directors had no
for
qualify
would
them to substitute their
disinterested,
the effect
their
of
otherwise
careful,
judgment
that
for
of a
selfless
careful decision on
The majority
others.119
board or
majority
stockholders who
seeks to deter future boards from similar
significant
had the most
economic stake in
by declaring
agreements
conduct
ne-
the outcome.
gotiated under similar circumstances will
We
encourage proscriptive
should not
be unenforceable.
rules that invalidate or render unenforcea-
corporate
Delaware
citizens now face
precommitment
ble
strategies negotiated
in
every
prospect
circumstance,
between
parties
two
to a
who
contract
will
price,
boards
obtain the highest
must
even
presumably,
the absence of conflicted
if
requires
a
breaching
contract en-
interest, bargain intensely over every
tered
a time
no
into at
when
one could
meaningful provision of a contract after a
reasonably
have
truly “Superior
foreseen a
careful cost
analysis.
benefit
Where could
Proposal.” The majority’s proscriptive
plain
approach
common sense
be more
rule
a
scope
limits
of
board’s cost
board,
wisely
than
invoked
where a
free of
benefit
analysis
taking
bargaining
conflict,
informed,
fully
supported by the
chip
foregoing
of
out “off equally
largest
conflict-free
holders
table” in all
For that
circumstances.
new
transaction,
economic
interest
reach-
principle to arise from the context of this
es the
voting lockup
conclusion that a
case,
Omnicare,
striving
buy
when
after
to
strategy is the best course to obtain the
cheap by
NCS on the
off
buying
its credi-
most
for all
benefit
stockholders?
tors,
fray,
slinked back into the
reversed
principle
This fundamental
Delaware
antagonistic
strategy
historic
and of-
law so
eloquently put
the Chief Justice’s
fered a
“Superior Proposal”
conditional
dissent,
particularly applicable
here
entirely
seems
counterintuitive.
where the NCS board had no alternative if
majority
fairly nego-
declares that
If
company were to be saved.
attor-
motivated,
neys counseling
careful,
exchange
tiated
is invalid
well
consideration
theory
and well-advised boards cannot be assured
and unenforceable on the
that its
Jr.,
expansive
thoughtful
Symposium
Corporate
119. For a more
ex-
Norms
Law:
&
Law,
planation
concept
“shaming”
Shaming Corporate
U.
in the
Pa. L.Rev.
law,
Skeel,
(2001).
corporate
context of
see David A.
Here, one
may be called.
from matter what it
preclude minority stockholders
terms
scrutiny
it
deferring
applying
or that
Unocal
accepting
superior
alternative
one
into
an inferior
When
accepting
coerces them
reach the same conclusion.
would
faith,
objection-
that the
presupposing
good
deal while
agrees rationally,
Gene-
able terms of NCS’
reasonable care
conflict and with
without
The ma-
sis are
measures.”120
“defensive
pre-
in a contract to
provisions
include
jority equates
provisions
those contract
one,
a better
in the absence of
a deal
serve
affirmatively
adopted
with measures
not be sec-
judgment should
their business
party
third
from
prevent a
bidder
frustrat-
de-
invalidate or
ond-guessed in order to
with which
ing
acquirer
deal with
valid
an otherwise
clare unenforceable
management may
to deal without
choose
majority
fact that
merger agreement. The
being
informed or for their own self
fully
have a
of conflicts
choice
free
stockholders
effect,
majority
In
has
interest.
avail-
every
get
the best
incentive
in-
adopted
theory
“duck”
of contract
judg-
a rational
deal and then make
able
view,
my
just
all ducks
terpretation.
unfairly
so as well neither
ment
do
wary
have
season and the
hunter
their
minority shareholder choice
impinges upon
*33
carefully
the air to determine which
scans
of a shareholder “democra-
concept
or the
a
may
may
duck
and which
not be shot at
significance
any independent
nor has it
cy”
day,
a
given time on
the same
certain
of the
bearing on the reasonableness
holds
for
con-
distinguishing
true
between
separate and
exercise of
board’s
distinct
in
provisions
tract
that could
another con-
judgment.
text be
measures
truly
deemed
defensive
majority’s
I
reliance on
cannot follow
scrutiny
a court.
demanding
enhanced
QVC.122and Paramount
Paramount
v.
certain,
When
or when
doubt that
QVC,
v. Time.123
is con-
Communications
season, courts,
pru-
like
“duck” is not
underlying
facts
waterfowlers,
trolled
of
dent
should defer.
not
The Paramount
did
transaction.
I
sugges-
believe that
absence of a
market,
exclusively
negotiated
canvass the
of
compels
tion
self-interest or lack of care
QVC’s
in-
announced
despite
with Viacom
a court to defer to what
is a business
QVC an
give
oppor-
to
terest
refused
a
to
judgment
qualified
court is not
Arguably,
tunity
top
the Viacom offer.
However, I
guess.
recognize
second
QVC’shigh-
board shunned
the Paramount
judge might prefer
another
view the
up
to lock
a deal
er offer and then turned
of
reasonableness
the board’s
action
to stockholders
less valuable
Viacom
through
prism
the Unocal
before defer-
a
grant of
flexible,
along with an unreasonable
ring.121
readily
Some
discernable
option
review
no
a stock
unlimit-
applied
right
standard of
must be
exercise
em-
majority
analytical tool which should be
refers to "defensive mea-
sures,”
devices,”
recognize
protection
ployed.
I do
that critics view
“deal
"structural
safety
judgment
as
rule as no framework
devices” and "defensive devices”
business
demanding heightened
analysis
presupposes
That
interchangeable,
at all.
view
each
course,
equal
greater
judges
regulators
have an
or
scrutiny.
the mere fact that the
"Of
judgments
exercising
as
expertise
mean
business
court
a 'duck' a ‘duck’ does not
calls
provisions
up-
imposing
policy.
social
that such defense
will not
long
they
not
held
are
draconian.”
so
Communications,
QVC
n.
Inc. v.
Intercargo,
Paramount
McMillan
1993).
Network, Inc.,
(Del.
(Del.Ch.2000).
Paramount v. Time “orig- majority’s discussed the general, genuine concern to do inal” and the “revised” so, Time-Warner I equity, trust not. If our courts and agreements. reviewing Both courts structure our law that we have “original” concluded that it from resulted develop strived so hard to and perfect will appraisal an “exhaustive of Time’s future board, prevent responsible Dela- under corporation” as a and that the “Time precisely ware law to make kind original board’s decision” to enter into the here, faith, good decision made free of agreement (containing preservation deal interest, self after exercising scrupulous provisions) with Warner “was entitled to honoring due care from its contract obli- protection judgment of the business gations. view, In my rule.”124 strategic policy Therefore, I respectfully dissent. protected original decision in the Time- cannot, Warner like the NCS- here, necessity be con- a responsive
sidered “defensive measure” analysis.
compelling By Unocal con-
trast, both courts concluded that the “re-
vised” was “defense-motivated” and as applies result “Unocal alone WRIGHT, Bruce Isaiah Defendant determine whether the judgment business Below, Appellant, rule attaches.”125 Lockup provisions attempt to assure parties that opportuni- have lost business Delaware, STATE of Plaintiff
ties and incurred substantial costs that Below, Appellee. their I deal will close. am concerned 233,2002. No. majority decision will cer- remove the tainty that adds value to rational Supreme Court of Delaware. plan. Perhaps business transactions that voting agree- include “force-the-vote” and Submitted: Dee. 2002. provisions ment approval make Decided: March 2003. foregone conclusion will be the deals so, invalidated Even there- prospectively. the problem. thought- lies Instead of
ful, retrospective, flexibility restrained fo-
cused on the existing circumstances at the decision,
time of have we now moved bright
to a line regulatory alternative? majority adopt
For the to articulate and
an inflexible rule where a board has dis- Id. 1152. Id. at 1151. Notes accordance with the terms of the explained She this was the way a bid indenture, eliminating thus the need for at the last minute would be able to suc- Noteholders to consent to the transaction. ceed. Gemunder considered Mencher’s change This all paying involved accrued real,” warning “very up followed with plus redemption premium. interest small however, They, his advisors. insisted that Second, exchange Genesis increased the diligence he retain the due condition “to ratio for NCS common stock to one-tenth protect from doing something [him] fool- heart, of a Genesis common share for each Taking ish.” this advice to Gemun- share, Third, der decided not common an 80% increase. drop diligence the due it condition. agreed proposed to lower the termination