I got a very interesting question from an adopter of my Business Associations casebook:
Do you think Omnicare is still relevant/good law after SB 313? Could a governance agreement under 122(18) include an agreement with an acquirer (who holds some shares in the target) that the board must submit a merger to a shareholder vote at some future date without any fiduciary duty out clause. (And as in Omnicare, also have a separate agreement by the target’s controlling shareholder to vote yes for the merger)?'
For the benefit of the uninitiated, in Omnicare, Inc. v. NCS Healthcare, Inc., decided by the Delaware Supreme Court in 2003, the primary legal issues revolved around the validity of a merger agreement and the use of "lock-up" provisions that could potentially coerce shareholder approval. The decision underscored the importance of ensuring that corporate boards remain free to fulfill their fiduciary duties to shareholders, especially in the context of mergers and acquisitions.
Omnicare, Inc. and Genesis Health Ventures, Inc. both sought to acquire NCS Healthcare, Inc., a company facing financial difficulties. NCS's board of directors agreed to a merger with Genesis, and this agreement included several defensive measures: a voting agreement where certain NCS shareholders committed in advance to support the merger, and a "force-the-vote" provision requiring the merger to be submitted to a shareholder vote even if the board withdrew its recommendation. Omnicare subsequently made a higher offer to acquire NCS, which the NCS board believed was financially superior to Genesis's offer. However, due to the lock-up provisions, the NCS board was unable to terminate the merger agreement with Genesis.
The Delaware Supreme Court held that the merger agreement between NCS and Genesis was invalid. The Court found that the combination of the lock-up provisions and the force-the-vote provision was coercive and precluded the NCS board from exercising their fiduciary duty to seek the best value reasonably available to shareholders. The court emphasized that such arrangements improperly restricted the board's ongoing statutory and fiduciary obligations to protect the interests of the company's shareholders. Accordingly, such an agreement could only be upheld if it included a fiduciary out.
A "fiduciary out" clause is a provision that allows a company's board of directors to terminate a contract under certain circumstances, without incurring liability to the counterparty. This clause is particularly important in the mergers and acquisitions context when a better offer is made by another party after a merger agreement has already been signed. The fiduciary out clause is designed to ensure that the board can continue to act in the best interests of the shareholders by considering superior proposals, even if an initial agreement is in place. It provides a legal and ethical "out" for the board to accept a more favorable deal without facing penalties for breaching the original agreement, thereby aligning the board's actions with their fiduciary duties to maximize shareholder value.
SB 313 refers to a bill that became law in Delaware this year. It amended Delaware corporate law in a number of respects. It created new section 122(18) of the Delaware General Corporation Law, which provides that a corporation shall have the power to:
Notwithstanding § 141(a) of this title, make contracts with one or more current or prospective stockholders (or one or more beneficial owners of stock), in its or their capacity as such, in exchange for such minimum consideration as determined by the board of directors (which may include inducing stockholders or beneficial owners of stock to take, or refrain from taking, one or more actions); provided that no provision of such contract shall be enforceable against the corporation to the extent such contract provision is contrary to the certificate of incorporation or would be contrary to the laws of this State (other than § 115 of this title) if included in the certificate of incorporation. Without limiting the provisions that may be included in any such contracts, the corporation may agree to: (a) restrict or prohibit itself from taking actions specified in the contract, (b) require the approval or consent of one or more persons or bodies before the corporation may take actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders or beneficial owners of stock of the corporation), and (c) covenant that the corporation or one or more persons or bodies will take, or refrain from taking, actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders or beneficial owners of stock of the corporation). Solely for purposes of applying the proviso in the first sentence of this subsection, a restriction, prohibition or covenant in any such contract that relates to any specified action shall not be deemed contrary to the laws of this State or the certificate of incorporation by reason of a provision of this title or the certificate of incorporation that authorizes or empowers the board of directors (or any one or more directors) to take such action. With respect to all contracts made under this paragraph (18), the corporation shall be subject to the remedies available under the law governing the contract, including for any failure to perform or comply with its agreements under such contract.
As the bill's synopsis explains:
... new § 122(18) specifically authorizes a corporation to enter into contracts with one or more of its stockholders or beneficial owners of its stock, for such minimum consideration as approved by its board of directors, and provides a non-exclusive list of contract provisions by which a corporation may agree to:
a. restrict or prohibit future corporate actions specified in the contract;
b. require the approval or consent of one or more persons or bodies (including the board of directors or one or more current or future directors, stockholders or beneficial owners of stock) before the corporation may take actions specified in the contract; and
c. covenant that the corporation or one or more persons or bodies (including the board of directors or one or more current or future directors, stockholders or beneficial owners of stock) will take, or refrain from taking, future actions specified in the contract.
As I see it, there are four possible answers to my adopter's question:
1. Who cares? This flippant answer is premised on the view that Omnicare is more or less a dead letter. In a bench ruling in Optima International of Miami, Inc. v. WCI Steel, Inc., Vice Chancellor Lamb opined that "Omnicare is of questionable continued vitality.” At the very least, courts have given "a limited reading and application of Omnicare going forward." Megan W. Shaner, Revisiting Omnicare: What Does Its Status 10 Years Later Tell Us?, 38 J. Corp. L. 865, 884 (2013). Personally, I think Omnicare was bad law and bad policy. But it remains on Delaware's books (and, accordingly, in my casebook). So I am disinclined to embrace this answer.
2. Who knows? SB 313 was rushed through the legislative process with very little time taken to seriously evaluate it. Many commentators think the bill was not well thought out and was poorly drafted. There are rumors that the Delaware bar (which de facto drafts Delaware corporate law) plans to revisit the bill next year to clean it up. On this view, the bill leaves a lot of open questions (including the one at bar) that will need to work their way through the courts. Personally, I lean somewhat towards this view.
3. Yes, SB 313 does gut Omnicare. In the immediate reaction to SB 313's introduction, I tweeted that: "Am I wrong in thinking that the statute negates Omnicare, Inc. v. NCS Healthcare, Inc.?" Basically, Omnicare rested on the proposition that a board has continuing fiduciary duties that preclude it from entering into binding precommitments. New section 122(18) appears to allow boards to enter into agreements containing binding precommitments.
4. Probably not. Legislative history rarely figures prominently in Delaware corporate law decisions, but there is a passage in the legislative synopsis that is worth pondering:
New § 122(18) does not relieve any directors, officers or stockholders of any fiduciary duties they owe to the corporation or its stockholders, including with respect to deciding to cause the corporation to enter into a contract with a stockholder or beneficial owner of stock and with respect to deciding whether to perform, or cause the corporation to perform, or to breach, the contract, whether in connection with their management of the corporation’s business and affairs in the ordinary course or their approval of extraordinary transactions, such as a sale of the corporation. New § 122(18) also does not affect the case law empowering a court to grant equitable relief in respect of a contract, such as when a contract is set aside because the counterparties thereto have aided and abetted a breach of fiduciary duty or when a court reviews director actions under an enhanced form of judicial scrutiny. See e.g. Paramount Communications Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994); ACE Limited v. Capital Re Corporation, 747 A.2d 95 (Del. Ch. 1999). Instead, the amendments are intended to promote a policy of granting such relief based on the application of equitable principles, including equitable principles relating to fiduciary duties and public policy.
If we take seriously the proposition that 122(18) does not relieve the board of "any fiduciary duties," that would seem to include the fiduciary duties as set forth in Omnicare (assuming we do not adopt answer 1). This is particularly so because the passage goes on to note that the new provision does not impact the caselaw involving enhanced scrutiny. Omnicare was an enhanced scrutiny case, after all.
(In passing, I note that I find the statement that "the amendments are intended to promote a policy of granting such relief based on the application of equitable principles, including equitable principles relating to fiduciary duties and public policy" puzzling. Promote how? With what result?)
Finally, when SB 313 first was introduced, I tweeted that "the new language in 122(18) [seems to] invite a Schnell v. Chris-Craft end run," observing that "[i]t would seem easy enough for a court to say that "inequitable action does not become permissible simply because it is legally possible."
Joan Heminway appears to agree, as she argues that post-SB 313 shareholder agreements should include a fiduciary out:
If the parties truly intend for fiduciary duties to trump the contract (as the bill proponents have claimed) and we can anticipate challenges in that regard based on the nature of the agreement, stockholder agreements should provide in advance for the eventuality of a conflict. Otherwise, a stockholder agreement authorized under DGCL § 122(18) may be found either invalid ex post because the board’s original approval of the agreement may later be determined to have been a breach of the directors’ fiduciary duties (for failure to include a fiduciary out, as in Omnicare) or unenforceable in litigation over a board decision to breach or refrain from breaching the agreement in the face of a perceived fiduciary duty conundrum related to the corporation’s performance under the terms of the agreement. A well-crafted fiduciary out (which would undoubtedly be somewhat bespoke, as it should be in the M&A context, based on the nature of the corporation’s obligations in the contract) should help avoid litigation, or at least enable its early dismissal, in the event of either type of legal claim.
Personally, I lean towards some combination of this answer and #2. But I welcome thoughts.
