The Delaware Supreme Court's decision in Omnicare Inc. v. NCS Healthcare Inc. has been strongly criticized ever since it was issued back in 2003. The 3-2 majority in the case held that a seller must always have an effective fiduciary out in a merger agreement. Lawyers immediately complained that the holding ignored the reality that a company might be able to maximize its value only by committing itself irrevocably to a deal. Myron Steele, who dissented along with then-Supreme Court Chief Justice E. Norman Veasey, said at a conference later in 2003 that the decision might have the life expectancy of a fruit fly.
Steele succeeded Veasey as chief justice the next year, but the Supreme Court never returned to Omnicare, and the Court of Chancery has addressed it rarely and obliquely. But on Sept. 30, Chancery Vice Chancellor John Noble offered important guidance on Omnicare and helpful commentary on several other issues in a ruling where he declined to enjoin the proposed $210 million sale of Openlane Inc. to KAR Auction Services Inc. The deal closed three days after the ruling.
Openlane was a public company, but its board and executive officers owned 68% of the stock, and the deal was structured like a private-company sale in several respects. The board didn't retain an investment bank to provide a fairness opinion, which is very unusual in public deals, and agreed that $26 million of the merger consideration would be held in an escrow account for 18 months against certain costs that KAR might incur as a result of the acquisition.
Most importantly, within 24 hours after the merger agreement was signed, Openlane's officers and board members provided written consents in which they agreed to vote their shares for the deal, which made a topping bid impossible. The Openlane shareholder plaintiffs claimed the structure ran afoul of Omnicare.
Noble disagreed. In Omnicare, the chairman and the CEO of Omnicare jointly agreed to vote their controlling stake in the company for a sale to Genesis Health Ventures Inc. at $1.63 in cash per target share when the deal was signed. NCS then came in with a spoiler bid of $3.50 a share and sued successfully to void the voting agreement. But in Openlane, Noble held, the target's shareholders did not agree to vote for the deal when it was signed, and their execution of consents was perfectly legal under Delaware law.
As a result, "Omnicare may be dead in practice, even if not in law for targets where written consent by shareholders is permitted," wrote Kirkland & Ellis LLP partner Daniel Wolf and associate David Feirstein in a memo to clients. That's an important qualification because many public companies do not allow shareholders to act by written consent.
Noble added in a footnote that regardless of what Omnicare says, it should come into play only when a better offer for the target surfaces. "Hostile bidders are on notice that Delaware courts may not enforce a merger agreement that lacks a fiduciary out if they present a board with a superior offer," he wrote. "If, however, a merger agreement lacks a fiduciary out and no better offer has emerged, why should the Court enjoin the merger?"
The judge blessed the Openlane board's decision not to use an investment banker, though he strongly discouraged even small companies from following suit. If, the judge wrote, "a small company is managed by a board with an impeccable knowledge of the company's business, the court may consider the size of the company in determining what is reasonable and appropriate" in terms of hiring a banker to render a fairness opinion or undertake a market check. "Impeccable knowledge" is a very high standard.
Noble also made two points that will be helpful for corporate defendants. The Openlane plaintiffs claimed that the acceleration of the directors' options in a sale compromised their independence, but Noble held that the practice "is a routine aspect of merger agreements" and rejected the claim. He also said that the sales process was not tainted because Openlane CEO Peter Kelly had agreed to stay on with KAR after the consummation of the transaction. The board knew of Kelly's plans to stay on, and, Noble wrote, the post-closing retention of "a competent executive may be viewed as value-adding by an acquiror." Finally, Kelly stood to receive $10 million from Openlane's sale versus a reported annual salary of $332,000 at KAR.
David Marcus covers law for The Deal magazine.