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Delaware to Directors: Don’t Do Done Deals

By Meredith M. Brown & William D. Regner
The M&A Lawyer, April 2003, at 1

Nearly four months after the outcome was announced, the Delaware Supreme
Court issued an opinion explaining why it reversed, in a 3-2 split decision, a Delaware
Chancery Court decision that would have allowed a fully locked-up merger between NCS
Healthcare and Genesis Health Ventures to go forward. The majority opinion in
Omnicare, Inc. v. NCS Healthcare, Inc. essentially adopts a bright-line requirement that
directors of Delaware target companies must negotiate an effective "fiduciary out" in
merger agreements subject to stockholder approval.

Background

NCS, on the brink of insolvency, hired bankers to help it find a merger partner.
Although more than 50 potential buyers were contacted, only one bid emerged, at a price
less than NCS’s outstanding debt. NCS began discussions with Omnicare, which was
interested only in a deal, structured as an asset sale in bankruptcy, which would have
provided little to NCS’s noteholders and nothing to its stockholders. NCS contacted
Genesis, which was willing to offer a price that would allow full repayment of NCS’s debt
as well as a payment to NCS stockholders. At the eleventh hour, Omnicare made a higher
competing bid, but insisted on a due diligence condition. Genesis sweetened its bid in
response, but demanded that NCS agree to a fully locked-up deal within 24 hours or else
Genesis would walk. NCS accepted the Genesis proposal.

The merger agreement between NCS and Genesis included a requirement,
permitted under Delaware General Corporation Law § 251(c), that the merger be put to
a stockholder vote, even if the NCS board no longer recommended the deal. At the time
the merger agreement was signed, NCS stockholders with a majority of the voting power
committed to vote for the transaction. Together, these two provisions, insisted upon by
Genesis, guaranteed that the transaction with Genesis would be approved, even if a

 Meredith M. Brown and William D. Regner are Partners of Debevoise & Plimpton in New York
City.

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