Mergers and Acquisitions: Omnicare versus NCS Healthcare Case - Research Paper Example

Mergers and Acquisitions Omnicare, Inc. v. NCS Healthcare, Inc.818 A.2d 914 (Del. 2003). Facts: In 1999 NCS hadsome economic struggles which culminated in early 2001 with NCS unable to discharge around US$350 million in accumulated debt. Individuals holding subordinated NCS notes created a committee designed to protect their holdings. Investment bankers were unable to devise suitable options for NCS’s financial recovery and finally later in 2001, NCS invited Omnicare to negotiate a deal. Over the ensuing months, Omnicare proposed a number of transactions involving the sale of NCS’s assets under bankruptcy that would not include paying off a majority of NCS’s debt. Moreover, Omnicare’s proposal did not include relief for NCS’s stockholders. Genesis was approached by the committee formed by the subordinated note holders in early 2002 and Genesis offered a deal aside from the bankruptcy that included a discharge of NCS’s senior debts and a payment to NCS’s stockholders of approximately US$24 million. Genesis’s offer had a number of exclusive arrangements and all indications were that any deal would have to be “locked up” so that a higher bid would not prevail (Omnicare, Inc. v. NCS Healthcare, Inc.818 A.2d 914 (Del. 2003)). When Omnicare became aware of Genesis’s offer, Omnicare improved its offer and withdrew the initial requirement for bankruptcy and also offered to discharge NCS’s debts and shareholder payments. NCS responded by using Omnicare’s offer to get Genesis to improve its offer. This tactic worked as Genesis improved its offer, but demanded that the offer be approved within 24 hours otherwise it would be withdrawn. NCS’s board of directors recommended accepting Genesis’s offer and just before a shareholders’ meeting to accept the offer by Genesis, Omnicare improved its bid so that its offer exceeded the offer made by Genesis. The merger arrangement however did not make provision for an out, the NCS/Genesis merger was locked in. As a result, Omnicare the minority shareholders of NCS took the matter to court with a view to enjoining the NCS/Genesis merger. Legal Issues: The primary legal issue was the validity and enforceability of a lock-in or no shop clause in a merger and acquisition agreement. The question for the court was whether or not a no shop agreement could be enforced so that NCS could not consider the offers and bids for merger by Omnicare. It has been previously held in some jurisdictions in the US that a no shop clause was valid when it allowed a board to legally bind the organization to a merger arrangement so that it may not negotiate or accept an offer from another organization until such time as the shareholders considered the original offer (Jewel Cos., Inc. v. Pay Less Drug Stores Northwest, Inc.; 741 F.2d 1555 (9th Cir. 1994)). The Delaware Supreme court however, considered the no shop clause in light of the fiduciary duty of the board of directors to obtain the best deal possible and to re-evaluate its decisions. In this regard, the main legal issue for the Delaware Supreme court was not so much a no shop clause, but the significance of a fiduciary out clause in negotiating mergers and acquisitions. Court Holding; Consequence; Damages; Who Won and Who Lost: The Chancery Court of Delaware declined the application by NCS’s minority shareholders and Omnicare to enjoin the merger by NCS and Genesis. The Chancery Court held that the business judgment rule functioned to prevent indiscriminate challenging of board of directors’ decisions. There is a general presumption that directors act in good faith and are well-informed when making a decision and do so in the best interest of the company. Any party who alleges otherwise must prove that the presumption cannot be made. The Chancery Court of Delaware also ruled that the no shop clause was consistent with the law of Delaware although it could be scrutinized by the judiciary. Such scrutiny will usually only occur when the board has taken defensive action in response to a hostile takeover bid. In this case, the Delaware Court of Chancery ruled that the NCS board of directors acted reasonably in locking down the Genesis offer as it was reasonable for the board to perceive that a satisfactory alternative would not be available. Therefore the merger would not be enjoined. By a three to two vote, the Supreme Court of Delaware rejected the decision of the Chancery Court. Although the majority agreed that the merger was good, they did not agree that the defensive response locking up a merger was reasonable. The Supreme Court of Delaware ruled that first, directors must have “reasonable grounds for believing that a danger to corporate police and effectiveness existed” (Omnicare, Inc. v. NCS Healthcare, Inc.818 A.2d 914 (Del. 2003)). This standard will only be satisfied when directors can demonstrate that they acted in good faith on the basis of information. The defensive measures must also be proportionate to the threat. In this regard, the response must be shown to be non-coercive and non-preclusive and the response was reasonable. To this end, a coercive response is a response that intends to force stockholders to accept a “management sponsored alternative to a hostile offer” (Omnicare, Inc. v. NCS Healthcare, Inc.818 A.2d 914 (Del. 2003)). A preclusive response is a response that “deprives stockholders of the right to receive all tender offers or precludes a higher bidder from seeking control” (Omnicare, Inc. v. NCS Healthcare, Inc.818 A.2d 914 (Del. 2003)). The Supreme Court of Delaware ruled that the NCS’s directors’ decision had not met the reasonableness standard. The defensive response was not only coercive but also preclusive. It was coercive because the minority stockholders had no choice but to vote in favor of the merger because it was locked in. The defensive response was preclusive because it did not permit a fiduciary out clause and as such made it impossible for the Omnicare offer or any other offer regardless of how lucrative to be considered. More importantly, the lack of a fiduciary out clause “completely prevented the board from discharging its fiduciary responsibilities to the minority stockholders” (Omnicare, Inc. v. NCS Healthcare, Inc.818 A.2d 914 (Del. 2003)). Rationale: Minority stockholders do not have sufficient authority for influencing the business decisions of the board of directors and therefore they have to rely on the directors to look after their welfare. Therefore, the board’s decision to constrain the exercise of their respective fiduciary duties was not valid and could not therefore be enforceable. The board was required to negotiate with Genesis for the retention of a fiduciary out clause. In other words, the Supreme Court of Delaware relied upon the fiduciary duty of NCS’s board of directors as a means of enjoining the merger of NCS with Genesis. The rationale was that the board could not squander its fiduciary duty relative to the interest of shareholders in the negotiation of a merger and acquisition. Any defensive responses taken in the face of a threat to the company under the auspices of a hostile takeover bid would be scrutinized in this vein leaving a no shop clause subject to the on-going fiduciary duty of all directors. Consolidated Edison, Inc. v Northeast Utilities 240 F. Supp. 2d 387 (S.D.N.Y. 2003). Facts: This case involved a proposed merger between Consolidated Edison, Inc. and Northeast Utilities both of which were major utility companies. The merger proposal however fell apart when Consolidated Edison, Inc. backed out of the merger and filed an action for declaratory relief. Specifically, Consolidated Edison, Inc. claimed that it was entitled to a declaration that its decision was not improper having regard to the fact that Northeast Utilities’ officers made misleading statements relative to Northeast Utilities’ risk management practices during the due diligence phase of negotiations. The risk management practices and policies related to the arrangements for power purchases. Legal Issues: The general rule of law relative to misleading statements during mergers and acquisitions’ transactions and negotiations was enunciated by the US Supreme Court. The rule of law is whether or not the misstatement is such that it would change the perspective of the information in its totality. The test is applied by looking at the perspective of the reasonable business investor (Basic Inc. v Levinson 475 U.S. 224 (1988 US)). In Consolidated Edison, Inc. v Northeast Utilities the legal issue was a bit more involved and queried whether or not the misstatement was reasonably relied on. Therefore the legal issue was not only whether or not the misleading statement changed the view of the plaintiff relative to the merger, but also whether or not the misleading information was such that it induced the plaintiff to agree to the merger. Northeast Utilities argued in return that Consolidated Edison was simply suffering from buyers’ remorse. Court Holding; Consequence; Damages; Who Won and Who Lost: The court ruled that under the law of New York, Consolidated Edison, Inc. could not demonstrate to the satisfaction of the court that it reasonably relied on the misleading statements. The court referred to the standardized “non-reliance” clauses contained in the Confidentiality Agreement applicable to Consolidated Edison and Northeast Utilities which specifically provided that there were no representations or warranties relative to any information provided in the course of the due diligence process between the parties (Consolidated Edison, Inc. v Northeast Utilities 240 F. Supp. 2d 387 (S.D.N.Y. 2003)). The court also ruled that when this provisions contained in the Confidentiality Agreement are read together with the integrated clause contained in the merger agreement, there could not be a claim of reasonable reliance on an oral statement claiming specific risk management practices. The court specifically stated that if Consolidated Edison, Inc.: Did believe that any such statements or documents were significant, it could have made them a basis for a specific representation and warranty in the merger agreement but it failed to do so (Consolidated Edison, Inc. v Northeast Utilities 240 F. Supp. 2d 387 (S.D.N.Y. 2003)). Regardless of the court’s ruling, Consolidated Edison, Inc. refused to complete the merger at the negotiated price with the result that the Northeast Utilities lost a significant amount of money. Northeast had spent millions of dollars for the acquisition of the necessary licences contemplated for the merger (Thomas and Stair 2009). Complicating matters for Northeast shareholders, in Consolidated Edison, Inc. v. Northeast Utilities 426 F.3d 524 (2d. Cir. 2005) the Second Circuit court ruled that the neither Northeast Utilities nor its shareholders were entitled to be compensated for the US$1.2 billion merger costs in terms of damages following Consolidated Edison’s refusal to execute the merger and acquisition at the price negotiated. The court further found that the merger agreement clearly denied Northeast Utilities and its shareholders’ the right to recover the premium or damages if Consolidated Edison committed a breach before the date of the merger (Consolidated Edison, Inc. v. Northeast Utilities 426 F.3d 524 (2d. Cir. 2005)). It would therefore appear that Consolidated Edison, Inc. v. Northeast Utilities (2003) demonstrates that in the event a party opts out of a merger and acquisition, the other party is left with no effective remedy for damages. This is so, whether or not the decision to opt out is ruled valid or not by the courts. Not only was Northeast Utilities powerless in respect of enforcing the merger with Consolidated Edison, Inc., Northeast Utilities was not able to obtain compensation for itself or its shareholders for expenses accrued pursuant to the agreed merger. It therefore follows that although the court denied Consolidated Edison the declaratory relief it sought, Consolidated Edison still emerged as the winners. Northeast Utilities suffered millions of dollars in damages but were unable to recover those damages for itself and its shareholders. This is so despite that fact that the damages were incurred in reasonable reliance upon the merger. Therefore, Northeast Utilities and its shareholders emerged as the losers in this case despite the fact that the court’s ruling was in Northeast Utilities’ favor. Rationale: The rationale for the court’s refusal for allowing the recovery of damages after the failed merger between Consolidated Edison and Northeast Utilities was explained by Miller (2006). Miller (2006) explains that in mergers and acquisitions involving public companies there is usually a provision that expressly excludes third party compensation. Such an exclusion compels the issuance of insurance and indemnities. It therefore follows that Northeast Utilities should have had an insurance policy in place for covering any losses accrued pursuant to a failed merger. As for the reasonable reliance test relative to misleading statements, the rationale is obvious. Misleading statements may be made innocently or negligently. It therefore follows that misleading statements may be made quite frequently and if all misleading statements were capable of preventing a merger, very few mergers would be executed. The courts have therefore devised a test that would ensure that claimants suffering from buyers’ remorse may not opt out of a merger for the sake of opting out. Unless the misleading statements is actually relied on by the party receiving it and ultimately induces the receiving party to complete the merger, the misleading statement will not be permitted to invalidate a merger agreement. Bibliography Basic Inc. v Levinson 475 U.S. 224 (1988 US). Consolidated Edison, Inc. v Northeast Utilities 240 F. Supp. 2d 387 (S.D.N.Y. 2003). Consolidated Edison, Inc. v. Northeast Utilities 426 F.3d 524 (2d. Cir. 2005). Jewel Cos., Inc. v. Pay Less Drug Stores Northwest, Inc.; 741 F.2d 1555 (9th Cir. 1994). Miller, K. “The ConEd Decision – One Year Later: Significant Implications for Public Company Mergers Appear Largely Ignored.” The Merger and Acquisition Lawyer. (October 2006) Vol. 10(9):1-8. Omnicare, Inc. v. NCS Healthcare, Inc.818 A.2d 914 (Del. 2003). Thomas, R. and Stair, R. “Revisiting Consolidated Edison – A Second Look at the Case that Has Many Questioning Traditional Assumptions Regarding the Availability of Shareholder Damages in Public Company Mergers.” The Business Lawyer, (February 2009) Vol. 64: 329-357. Read More