Opinion ID: 1952721
Heading Depth: 1
Heading Rank: 29

Heading: Effective Fiduciary Out Required

Text: The defensive measures that protected the merger transaction are unenforceable not only because they are preclusive and coercive but, alternatively, they are unenforceable because they are invalid as they operate in this case. Given the specifically enforceable irrevocable voting agreements, the provision in the merger agreement requiring the board to submit the transaction for a stockholder vote and the omission of a fiduciary out clause in the merger agreement completely prevented the board from discharging its fiduciary responsibilities to the minority stockholders when Omnicare presented its superior transaction. To the extent that a [merger] contract, or a provision thereof, purports to require a board to act or not act in such a fashion as to limit the exercise of fiduciary duties, it is invalid and unenforceable. [74] In QVC, [75] this Court recognized that [w]hen a majority of a corporation's voting shares are acquired by a single person or entity, or by a cohesive group acting together [as in this case], there is a significant diminution in the voting power of those who thereby become minority stockholders. [76] Therefore, we acknowledged that [i]n the absence of devices protecting the minority stockholders, stockholder votes are likely to become mere formalities, where a cohesive group acting together to exercise majority voting powers have already decided the outcome. [77] Consequently, we concluded that since the minority stockholders lost the power to influence corporate direction through the ballot, minority stockholders must rely for protection solely on the fiduciary duties owed to them by the directors. [78] Under the circumstances presented in this case, where a cohesive group of stockholders with majority voting power was irrevocably committed to the merger transaction, [e]ffective representation of the financial interests of the minority shareholders imposed upon the [NCS board] an affirmative responsibility to protect those minority shareholders' interests. [79] The NCS board could not abdicate its fiduciary duties to the minority by leaving it to the stockholders alone to approve or disapprove the merger agreement because two stockholders had already combined to establish a majority of the voting power that made the outcome of the stockholder vote a foregone conclusion. The Court of Chancery noted that Section 251(c) of the Delaware General Corporation Law now permits boards to agree to submit a merger agreement for a stockholder vote, even if the Board later withdraws its support for that agreement and recommends that the stockholders reject it. [80] The Court of Chancery also noted that stockholder voting agreements are permitted by Delaware law. In refusing to certify this interlocutory appeal, the Court of Chancery stated it is simply nonsensical to say that a board of directors abdicates its duties to manage the `business and affairs' of a corporation under Section 141(a) of the DGCL by agreeing to the inclusion in a merger agreement of a term authorized by § 251(c) of the same statute. Taking action that is otherwise legally possible, however, does not ipso facto comport with the fiduciary responsibilities of directors in all circumstances. [81] The synopsis to the amendments that resulted in the enactment of Section 251(c) in the Delaware corporation law statute specifically provides: the amendments are not intended to address the question of whether such a submission requirement is appropriate in any particular set of factual circumstances. Section 251 provisions, like the no-shop provision examined in QVC, are presumptively valid in the abstract. [82] 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. [83] Genesis admits that when the NCS board agreed to its merger conditions, the NCS board was seeking to assure that the NCS creditors were paid in full and that the NCS stockholders received the highest value available for their stock. In fact, Genesis defends its bulletproof merger agreement on that basis. We hold that the NCS board did not have authority to accede to the Genesis demand for an absolute lock-up. The directors of a Delaware corporation have a continuing obligation to discharge their fiduciary responsibilities, as future circumstances develop, after a merger agreement is announced. Genesis anticipated the likelihood of a superior offer after its merger agreement was announced and demanded defensive measures from the NCS board that completely protected its transaction. [84] Instead of agreeing to the absolute defense of the Genesis merger from a superior offer, however, the NCS board was required to negotiate a fiduciary out clause to protect the NCS stockholders if the Genesis transaction became an inferior offer. By acceding to Genesis' ultimatum for complete protection in futuro, the NCS board disabled itself from exercising its own fiduciary obligations at a time when the board's own judgment is most important, [85] i.e. receipt of a subsequent superior offer. Any board has authority to give the proponent of a recommended merger agreement reasonable structural and economic defenses, incentives, and fair compensation if the transaction is not completed. To the extent that defensive measures are economic and reasonable, they may become an increased cost to the proponent of any subsequent transaction. Just as defensive measures cannot be draconian, however, they cannot limit or circumscribe the directors' fiduciary duties. Notwithstanding the corporation's insolvent condition, the NCS board had no authority to execute a merger agreement that subsequently prevented it from effectively discharging its ongoing fiduciary responsibilities. The stockholders of a Delaware corporation are entitled to rely upon the board to discharge its fiduciary duties at all times. [86] The fiduciary duties of a director are unremitting and must be effectively discharged in the specific context of the actions that are required with regard to the corporation or its stockholders as circumstances change. [87] The stockholders with majority voting power, Shaw and Outcalt, had an absolute right to sell or exchange their shares with a third party at any price. This right was not only known to the other directors of NCS, it became an integral part of the Genesis agreement. In its answering brief, Genesis candidly states that its offer came with a condition  Genesis would not be a stalking horse and would not agree to a transaction to which NCS's controlling shareholders were not committed. The NCS board was required to contract for an effective fiduciary out clause to exercise its continuing fiduciary responsibilities to the minority stockholders. [88] The issues in this appeal do not involve the general validity of either stockholder voting agreements or the authority of directors to insert a Section 251(c) provision in a merger agreement. In this case, the NCS board combined those two otherwise valid actions and caused them to operate in concert as an absolute lock up, in the absence of an effective fiduciary out clause in the Genesis merger agreement. In the context of this preclusive and coercive lock up case, the protection of Genesis' contractual expectations must yield to the supervening responsibility of the directors to discharge their fiduciary duties on a continuing basis. The merger agreement and voting agreements, as they were combined to operate in concert in this case, are inconsistent with the NCS directors' fiduciary duties. To that extent, we hold that they are invalid and unenforceable. [89]