In an earlier post, I discussed the Delaware supreme court's puzzling decision in Omnicare v. NCS Healthcare, 818 A.2d 914 (Del. 2003). We noted therein that the NCS-Genesis merger agreement required NCS’ board to submit the Genesis deal to a shareholder vote even if the board withdrew its recommendation that the shareholders approve the deal. This is known as a § 251 clause. As with so much else in the Omnicare decision, the majority's treatment of § 251 is quite troubling.
In Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), the Delaware supreme court had held that directors could not submit a merger to shareholders without making a recommendation that it be approved. The Delaware legislature later overturned that result by adopting DGCL § 251(c), which provides: “The terms of the agreement may require that the agreement be submitted to the stockholders whether or not the board of directors determines at any time subsequent to declaring its advisability that the agreement is no longer advisable and recommends that the stockholders reject it.”
In Omnicare, however, the Delaware supreme court held that § 251 did not trump the fiduciary duties of directors: “Taking action that is otherwise legally possible, however, does not ipso facto comport with the fiduciary responsibilities of directors in all circumstances. . . . Section 251 provisions . . . are "presumptively valid in the abstract." Such provisions in a merger agreement may not, however, ‘validly define or limit the directors' fiduciary duties under Delaware law or prevent the [NCS] directors from carrying out their fiduciary duties under Delaware law.’” 818 A.2d at 937-38. If so, however, what is the point of § 251? The court seems to have eviscerated § 251 of any utility.
