VideoIf there's anything a dealmaker hates, it's uncertainty. But thanks to the controversial Delaware Supreme Court decision in Omnicare Inc. v. NCS HealthCare Inc., more uncertainty in mergers and acquisitions may lie ahead.
In a rare 3-2 split decision last April, Delaware's highest court invalidated a merger agreement between NCS and Genesis Health Ventures that was protected by a shareholder lockup, a commonly used technique for ensuring that a deal will be consummated. Calling the lockup and other deal-protection devices "coercive" and "preclusive," the court reversed a Delaware Court of Chancery decision that tolerated the lockup—through which Genesis had essentially frozen out Omnicare's superior offer for NCS.
Not all lockups are designed expressly to seal a negotiated deal. Stock-option lockups, asset lockups, and breakup fees are types of lockups that let suitors claim a consolation prize if their offers are trumped between the signing of a merger agreement and the shareholder vote. In a shareholder lockup, by contrast, an acquirer secures the backing of large or controlling shareholders prior to the actual vote, an approach naturally more common in the pursuit of smaller companies.
The decision in Omnicare doesn't put an end to shareholder lockups, but it does undercut the effectiveness of the tactic. "Those of us who practice in the area don't believe, and didn't before this case, that in normal circumstances you could lock up a deal all the way," says Frederick S. Green, senior partner and head of the M&A practice at Weil, Gotshal & Manges LLP in New York. "But if there was ever a fact pattern where you might get yourself comfortable that you could do it, it was this one."
Genesis of the Case
The story behind Omnicare begins in late 1999, when NCS, a Beachwood, Ohio-based provider of pharmacy services to long-term-care institutions, began to suffer from a decline in government and third-party reimbursements. In February 2000, it hired a financial adviser to help find an acquirer or equity investor, but an exhaustive search turned up only one offer, which required filing for bankruptcy and arranging a so-called Section 363 bankruptcy asset sale, for an amount well below its debt.
Unhappy with that option, NCS changed advisers in December 2000 and continued its search for a financial savior. By early 2001, the company was in default on some $350 million in debt. Then, in the summer of that year, NCS began talks with another potential suitor—Omnicare, an 800-pound gorilla in the institutional-pharmacy business, with 2002 sales of $2.6 billion. But Covington, Kentucky-based Omnicare also proposed a 363 sale, conditioned on due diligence, that would pay down more of the debt but, again, leave nothing for shareholders.
As 2002 dawned, NCS's business began to revive, giving its board renewed hope that a better offer could be found. In January, a committee of NCS creditors began discussions with Genesis, a Kennett Square, Pennsylvania, provider of health-care services for the elderly. Genesis signed a confidentiality agreement with NCS and began due diligence.
The NCS board wanted to find a "stalking-horse" bidder, one that would establish a baseline valuation for the company. But Genesis had no interest in that role. It saw a good fit in NCS—and a potential rival in Omnicare, which had previously outbid Genesis for another company.
In June 2002, Genesis privately made an offer to merge with NCS, paying off the NCS debt and giving shareholders $24 million worth of Genesis stock. But there was a catch: Genesis wanted a lockup. Specifically, it demanded voting agreements that would irrevocably commit the Class B shares (with 10 votes per share) of NCS chairman Jon H. Outcalt and president and CEO Kevin B. Shaw in favor of the deal. Together, the two owned a minority of total shares outstanding, but more than 65 percent of the voting power of the company's stock.
Genesis also insisted on inserting a "force-the-vote" provision in the merger agreement, under Section 251(c) of Delaware General Corporation Law, enabling the merger proposal to be put to a shareholder vote even if the NCS board didn't endorse the merger. Finally, Genesis required that the merger agreement omit an effective "fiduciary out," a clause that would have allowed the board to terminate the deal if another bidder made a superior offer.
As Genesis and NCS were completing the merger terms, Omnicare began to suspect that some deal for NCS's equity was being negotiated. In late July, Omnicare suddenly proposed a debt-plus-stock acquisition, conditioned on due diligence. NCS then took that proposal to Genesis, which privately responded on July 27 by upping its offer and demanding acceptance by midnight the next day.
On July 28, the NCS board accepted the Genesis offer, executing the shareholder lockup and other provisions. Four days later, Omnicare filed suit in the Delaware Court of Chancery to stop the NCS-Genesis merger. At the same time, it announced it would launch a tender offer for NCS's shares, at $3.50 a share—more than twice the value of the Genesis deal. On October 6, Omnicare made an irrevocable cash offer of $3.50 for all outstanding NCS shares, and the four-person NCS board (which included Outcalt and Shaw, the two majority shareholders) withdrew its recommendation of the Genesis offer.
Reader Comments» Post a comment