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

Heading: An Analysis of the Process Leading to the Lock-up Reflects a Quintessential, Disinterested and Informed Board Decision Reached in Good Faith

Text: The Majority has adopted the Vice Chancellor's findings and has assumed arguendo that the NCS board fulfilled its duties of care, loyalty, and good faith by entering into the Genesis merger agreement. Indeed, this conclusion is indisputable on this record. The problem is that the Majority has removed from their proper context the contractual merger protection provisions. The lock-ups here cannot be reviewed in a vacuum. A court should review the entire bidding process to determine whether the independent board's actions permitted the directors to inform themselves of their available options and whether they acted in good faith. [92] Going into negotiations with Genesis, the NCS directors knew that, up until that time, NCS had found only one potential bidder, Omnicare. Omnicare had refused to buy NCS except at a fire sale price through an asset sale in bankruptcy. Omnicare's best proposal at that stage would not have paid off all creditors and would have provided nothing for stockholders. The Noteholders, represented by the Ad Hoc Committee, were willing to oblige Omnicare and force NCS into bankruptcy if Omnicare would pay in full the NCS debt. Through the NCS board's efforts, Genesis expressed interest that became increasingly attractive. Negotiations with Genesis led to an offer paying creditors off and conferring on NCS stockholders $24 million  an amount infinitely superior to the prior Omnicare proposals. But there was, understandably, a sine qua non. In exchange for offering the NCS stockholders a return on their equity and creditor payment, Genesis demanded certainty that the merger would close. If the NCS board would not have acceded to the Section 251(c) provision, if Outcalt and Shaw had not agreed to the voting agreements and if NCS had insisted on a fiduciary out, there would have been no Genesis deal! Thus, the only value-enhancing transaction available would have disappeared. NCS knew that Omnicare had spoiled a Genesis acquisition in the past, [93] and it is not disputed by the Majority that the NCS directors made a reasoned decision to accept as real the Genesis threat to walk away. [94] When Omnicare submitted its conditional eleventh-hour bid, the NCS board had to weigh the economic terms of the proposal against the uncertainty of completing a deal with Omnicare. [95] Importantly, because Omnicare's bid was conditioned on its satisfactorily completing its due diligence review of NCS, the NCS board saw this as a crippling condition, as did the Ad Hoc Committee. As a matter of business judgment, the risk of negotiating with Omnicare and losing Genesis at that point outweighed the possible benefits. [96] The lock-up was indisputably a sine qua non to any deal with Genesis. A lock-up permits a target board and a bidder to exchange certainties. [97] Certainty itself has value. The acquirer may pay a higher price for the target if the acquirer is assured consummation of the transaction. The target company also benefits from the certainty of completing a transaction with a bidder because losing an acquirer creates the perception that a target is damaged goods, thus reducing its value. This Court approved the recognition by the Court of Chancery of the value of certainty in Rand v. Western Air Lines. [98] The Court of Chancery upheld the decision of the board of Western Air Lines to grant its only bidder a stock option agreement to acquire 30% of Western's stock for an amount representing the closing price on the last trading day before execution of the merger agreement. [99] The Court recognized that the lock-up agreement foreclose[d] further bidding, but noted that the board had canvassed the market, found only one party willing to acquire Western, and made a decision calculated to maximize stockholder value by pursuing the only viable prospect that remained. [100] The Court also noted that, in return for the lock-up, the acquirer agreed to limit its own outs that would prevent consummation of the merger. The merging parties, then, exchanged certainties by locking up the deal, which was approved by the Court of Chancery and affirmed by this Court. [101] While the present case does not involve an attempt to hold on to only one interested bidder, the NCS board was equally concerned about exchanging certainties with Genesis. If the creditors decided to force NCS into bankruptcy, which could have happened at any time as NCS was unable to service its obligations, the stockholders would have received nothing. The NCS board also did not know if the NCS business prospects would have declined again, leaving NCS less attractive to other bidders, including Omnicare, which could have changed its mind and again insisted on an asset sale in bankruptcy. Situations will arise where business realities demand a lock-up so that wealth-enhancing transactions may go forward. Accordingly, any bright-line rule prohibiting lock-ups could, in circumstances such as these, chill otherwise permissible conduct.