The Costs and Benefits of Transactional Certainty: An Appraisal of Omnicare v. NCS Healthcare

Abstract:     
In Omnicare v. NCS Healthcare, the Delaware Supreme Court recently announced what appears to be a bright-line rule against transactional certainty in mergers and acquisitions. Even in the context of a friendly merger agreement - that is, a negotiated transaction not involving a "change in control" - target boards may not agree to a fully protected merger agreement. Instead, it is now a requirement of law that target boards always include an escape clause, in the form of a fiduciary out, in their merger agreements. As a result, targets can no longer follow a "precommitment strategy," offering contractual certainty as a means of negotiating a better deal for shareholders.

This article engages in a close analysis of the NCS opinion, first probing the doctrinal foundations then the policy implications of the majority's holding. As a matter of doctrine, I show that existing precedent neither compels nor supports the bright-line rule announced by the Court. Worse, as a matter of policy, the Court's open hostility to precommitment strategies is likely to harm shareholder welfare. Finally, I draw upon economic theory to propose an alternative rule that would preserve, under certain circumstances, the ability of target boards to follow an affirmative precommitment strategy.

Number of Pages in PDF File: 76

Keywords: Omnicare, NCS, takeover, merger, acquisition, deal protection, lock up, precommitment, fiduciary out, last period, final period, delaware supreme court, transactional certainty, merger agreement

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