Omnicare: Coercion and the New Unocal Standard

I. INTRODUCTIONWhen Omnicare, Inc. v. NCS Healthcare, Inc.1 was decided ten years ago, it was widely derided as one of the worst corporate law opinions since Smith v. Van Gorkom.2 In fact, Chief Justice Myron Steele of the Delaware Supreme Court remarked at a conference not long after that the opinion would likely have the life span of a "fruit fly."3 I subsequently offered up a modest, and perhaps lonely, defense of the Omnicare decision published in the pages of this Journal.4 In that defense, I argued that when sellers grant buyers deal certainty there should be no expectation that such an act provides sellers any value, notwithstanding nominal payments buyers might make in exchange for that incremental certainty.5 In fact, deal certainty should be expected to lead to low-ball offers.6 I argued that Omnicare, for all its faults, was helpful because it placed fiduciary limits on sellers in situations in which sellers are not able to credibly resist buyer demands for additional transactional certainty.7 These fiduciary limits, by pre-committing sellers to a process that ensures a minimal degree of competition, or at least the threat of it, force buyers to reveal private information about their valuations of the sellers.8 Buyers, for their part, need not be denied deal certainty by Omnicare's controversial rule. They can still get the transactional certainty they wish, but they have to pay for it.Like other modest defenses, my defense of Omnicare was hardly sufficient to protect the opinion's integrity. Now, all these years later, although it is still in my notebook, Omnicare is slightly the worse for wear. Practitioners have learned to live with-or more correctly-work around the decision. Deal protections are perhaps as formidable as they have ever been. While the Supreme Court has not had an opportunity to directly revisit the issue, the Chancery Court has taken the opportunities that have been regularly presented to it to peel back the ruling's effect and distinguish the facts before it from Omnicare's holding. Following the opinion, the courts could have taken Omnicare as a cue to move the needle on a long-standing debate about the proper limits on board action, but they collectively decided against that course of action. In recent years, as practitioners have introduced transactional innovations in response to Omnicare, the courts have regularly blessed them.Notwithstanding the fruit fly rhetoric, Omnicare may have a much longer life than many of its critics predict. In part, that is because of a second, now less controversial, aspect of the opinion. In Omnicare, the Delaware Supreme Court made it clear that it would apply Unocal9 to the analysis of board decisions to adopt deal protection measures in friendly transactions not involving a change of control.10 Looking back now, subjecting deal protection measures to intermediate scrutiny was undoubtedly correct, but, at the time, there were many in practice who believed that Paramount v. Time11 provided a green light to dealmakers to negotiate almost any deal protections subject to business judgment deference. The clarification of the proper standard of review for deal protections in the context of a friendly merger is an important and enduring contribution of Omnicare.Of course, in the years since Omnicare, there have been a series of subtle doctrinal changes that now call into serious question the efficacy of Unocal's intermediate standard. The development of the Unocal doctrine in recent years has tended to reduce its plasticity and scope. In part, it appears, having given itself the power to review deal protections in negotiated transactions, the court has since backed away from an aggressive application of that oversight. The result is that Unocal has been largely supplanted by what one might understand as a preliminary inquiry into the competitive posture of a transaction, and then a more constricted view of Unocal's reach. Where transactions do not benefit from alternative bids, courts will be highly deferential to board decisions to grant buyers defensive measures. …