Omnicare, Inc. v. Ncs Healthcare, Inc.

818 A.2d 914 (Del. 2003)

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Nature of the Case

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Facts

NCS began to experience greater difficulty in collecting accounts receivables, which led to a precipitous decline in the market value of its stock. NCS common shares that traded above $20 in January 1999 were worth as little as $5 at the end of that year. By early 2001, NCS was in default on approximately $350 million in debt. NCS began to explore strategic alternatives that might address the problems it was confronting. By October 2000, NCS had only received one non-binding indication of interest valued at $190 million, substantially less than the face value of NCS's senior debt. NCS's financial condition continued to deteriorate. In April 2001, NCS received a formal notice of default and acceleration from the trustee for holders of the Notes. The Noteholders formed a committee to represent their financial interests (the 'Ad Hoc Committee'). NCS invited Omnicare, Inc. to begin discussions regarding a possible transaction. On July 20, Joel Gemunder, Omnicare's President and CEO, sent Shaw a written proposal to acquire NCS in a bankruptcy sale under Section 363 of the Bankruptcy Code. This proposal was for $225 million subject to satisfactory completion of due diligence. In August 2001, Omnicare increased its bid to $270 million but still proposed to structure the deal as an asset sale in bankruptcy. This was substantially lower than the face value of NCS's outstanding debt. In January 2002, Genesis was contacted by members of the Ad Hoc Committee concerning a possible transaction with NCS. Genesis executed NCS's standard confidentiality agreement and began a due diligence review. Genesis had recently emerged from bankruptcy because, like NCS, it was suffering from dwindling government reimbursements. Genesis made it clear that if it were going to engage in any negotiations with NCS, it would not do so as a 'stalking horse.' In June 2002, Genesis proposed a transaction that would take place outside the bankruptcy context. Genesis agreed to offer a total of $24 million in consideration for the NCS common stock, or an additional $4 million, in the form of Genesis common stock. After NCS executed an exclusivity agreement, Genesis provided NCS with a draft merger agreement, a draft Noteholders' support agreement, and draft voting agreements for Outcalt and Shaw, who together held a majority of the voting power of the NCS common stock. Genesis and NCS negotiated the terms of the merger agreement over the next three weeks. During those negotiations, the Independent Committee and the Ad Hoc Committee persuaded Genesis to improve the terms of its merger. By late July 2002, Omnicare thought NCS was negotiating a transaction that would potentially present a competitive threat to Omnicare. Omnicare also came to believe, in light of a run-up in the price of NCS common stock, that whatever transaction NCS was negotiating probably included a payment for its stock. The Omnicare board of directors met on the morning of July 26 and, on the recommendation of its management, authorized a proposal to acquire NCS that did not involve a sale of assets in bankruptcy. Omnicare suggested it would retire NCS's senior and subordinated debt at par plus accrued interest, and pay the NCS stockholders $3 cash for their shares. Omnicare's proposal, however, was expressly conditioned on negotiating a merger agreement, obtaining certain third party consents, and completing its due diligence. Despite the exclusivity agreement, the Independent Committee met to consider a response to Omnicare. It concluded that discussions with Omnicare presented an unacceptable risk that Genesis would abandon merger discussions. Genesis proposed substantially improved terms. First, it proposed to retire the Notes in accordance with the terms of the indenture, thus eliminating the need for Noteholders to consent to the transaction. This change involved paying all accrued interest plus a small redemption premium. Second, Genesis increased the exchange ratio for NCS common stock to one-tenth of a Genesis common share for each NCS common share, an 80% increase. Third, it agreed to lower the proposed termination fee in the merger agreement from $10 million to $6 million. In return for these concessions, Genesis stipulated that the transaction had to be approved by midnight the next day, July 28, or else Genesis would terminate discussions and withdraw its offer. The board concluded that 'balancing the potential loss of the Genesis deal against the uncertainty of Omnicare's letter, results in the conclusion that the only reasonable alternative for the Board of Directors is to approve the Genesis transaction.' The board then resolved that the merger agreement and the transactions contemplated thereby were advisable and fair and in the best interests of all the NCS stakeholders. The NCS board further resolved to recommend the transactions to the stockholders for their approval and adoption. A merger agreement between NCS and Genesis and the stockholder voting agreements were executed later that day. (The Court of Chancery held that it was not a per se breach of fiduciary duty that the NCS board never read the NCS/Genesis merger agreement word for word.). On July 29, 2002, hours after the NCS/Genesis transaction was executed, Omnicare faxed a letter to NCS restating its conditional proposal and attaching a draft merger agreement. Later that morning, Omnicare issued a press release publicly disclosing the proposal. On August 1, 2002, Omnicare filed a lawsuit attempting to enjoin the NCS/Genesis merger and announced that it intended to launch a tender offer for NCS's shares at a price of $3.50 per share. On August 8, 2002, Omnicare began its tender offer. By letter dated that same day, Omnicare expressed a desire to discuss the terms of the offer with NCS. Omnicare's letter continued to condition its proposal on satisfactory completion of a due diligence investigation of NCS. The board was unable to determine that Omnicare's expressions of interest were likely to lead to a 'Superior Proposal,' as the term was defined in the NCS/Genesis merger agreement. On October 6, 2002, Omnicare irrevocably committed itself to a transaction with NCS. This litigation was commenced to prevent the consummation of the inferior Genesis transaction.