Opinion ID: 1952721
Heading Depth: 1
Heading Rank: 28

Heading: These Deal Protection Devices Unenforceable

Text: In this case, the Court of Chancery correctly held that the NCS directors' decision to adopt defensive devices to completely lock up the Genesis merger mandated special scrutiny under the two-part test set forth in Unocal. [59] That conclusion is consistent with our holding in Paramount v. Time that safety devices adopted to protect a transaction that did not result in a change of control are subject to enhanced judicial scrutiny under a Unocal analysis. [60] The record does not, however, support the Court of Chancery's conclusion that the defensive devices adopted by the NCS board to protect the Genesis merger were reasonable and proportionate to the threat that NCS perceived from the potential loss of the Genesis transaction. Pursuant to the judicial scrutiny required under Unocal's two-stage analysis, the NCS directors must first demonstrate that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed.... [61] To satisfy that burden, the NCS directors are required to show they acted in good faith after conducting a reasonable investigation. [62] The threat identified by the NCS board was the possibility of losing the Genesis offer and being left with no comparable alternative transaction. The second stage of the Unocal test requires the NCS directors to demonstrate that their defensive response was reasonable in relation to the threat posed. [63] This inquiry involves a two-step analysis. The NCS directors must first establish that the merger deal protection devices adopted in response to the threat were not coercive or preclusive, and then demonstrate that their response was within a range of reasonable responses to the threat perceived. [64] In Unitrin, we stated:  A response is coercive if it is aimed at forcing upon stockholders a management-sponsored alternative to a hostile offer. [65]  A response is preclusive if it deprives stockholders of the right to receive all tender offers or precludes a bidder from seeking control by fundamentally restricting proxy contests or otherwise. [66] This aspect of the Unocal standard provides for a disjunctive analysis. If defensive measures are either preclusive or coercive they are draconian and impermissible. In this case, the deal protection devices of the NCS board were both preclusive and coercive. This Court enunciated the standard for determining stockholder coercion in the case of Williams v. Geier . [67] A stockholder vote may be nullified by wrongful coercion where the board or some other party takes actions which have the effect of causing the stockholders to vote in favor of the proposed transaction for some reason other than the merits of that transaction. [68] In Brazen v. Bell Atlantic Corporation, we applied that test for stockholder coercion and held that although the termination fee provision may have influenced the stockholder vote, there were `no structurally or situationally coercive factors' that made an otherwise valid fee provision impermissibly coercive under the facts presented. [69] In Brazen, we concluded the determination of whether a particular stockholder vote has been robbed of its effectiveness by impermissible coercion depends on the facts of the case. [70] In this case, the Court of Chancery did not expressly address the issue of coercion in its Unocal analysis. It did find as a fact, however, that NCS's public stockholders (who owned 80% of NCS and overwhelmingly supported Omnicare's offer) will be forced to accept the Genesis merger because of the structural defenses approved by the NCS board. Consequently, the record reflects that any stockholder vote would have been robbed of its effectiveness by the impermissible coercion that predetermined the outcome of the merger without regard to the merits of the Genesis transaction at the time the vote was scheduled to be taken. [71] Deal protection devices that result in such coercion cannot withstand Unocal's enhanced judicial scrutiny standard of review because they are not within the range of reasonableness. Although the minority stockholders were not forced to vote for the Genesis merger, they were required to accept it because it was a fait accompli. The record reflects that the defensive devices employed by the NCS board are preclusive and coercive in the sense that they accomplished a fait accompli. In this case, despite the fact that the NCS board has withdrawn its recommendation for the Genesis transaction and recommended its rejection by the stockholders, the deal protection devices approved by the NCS board operated in concert to have a preclusive and coercive effect. Those tripartite defensive measures  the Section 251(c) provision, the voting agreements, and the absence of an effective fiduciary out clause  made it mathematically impossible and realistically unattainable for the Omnicare transaction or any other proposal to succeed, no matter how superior the proposal. [72] The deal protection devices adopted by the NCS board were designed to coerce the consummation of the Genesis merger and preclude the consideration of any superior transaction. The NCS directors' defensive devices are not within a reasonable range of responses to the perceived threat of losing the Genesis offer because they are preclusive and coercive. [73] Accordingly, we hold that those deal protection devices are unenforceable.