PARTNERSHIPS,CORPORATIONS

AND THE VARIANTS

PROF. BRUCE MCCANN

SPRING SEMESTER LECTURE 5TAKEOVERSPP. 739-785

Business Organizations2009-2010 Lectures

Directors and Tender Offers

Lec. 5 Sem 2, 2011 Corps Prof. McCann

The “Enhanced Business Judgment Rule” Directors must determine if takeover proposal is in

the best interests of the corporation and its shareholders.

If they act to repel the takeover, their decision are shielded by the BJR if Directors first establish that they had reasonable

grounds for believing that the takeover posed a danger to corporate policy and effectiveness.

Burden is satisfied by showing “good faith” and “reasonable investigation”

Unocal

Lec. 5 Sem 2, 2011 Corps Prof. McCann

Is offer in the best interests of the corporation?

If contend it is not, the board must show: Offer is threat to corporate policy or effectiveness

Via evidence of investigation The defensive response is “proportional” to the threat.

Revlon

Lec. 5 Sem 2, 2011 Corps Prof. McCann

Once board takes steps to sell the corporation (or where sale inevitable) duty of board is to maximize the price. Defensive measures are “moot”.

Triggered at lease two ways: When corporation initiates active bidding process to

sell itself or When a corporation seeks to reorganize in such a way

that it involves a clear break-up of the company

Paramount v Time

Lec. 5 Sem 2, 2011 Corps Prof. McCann

Even an “all cash” sale can be a threat under Unocal where sale will defeat corporate strategic alliance of potentially greater benefit

So long as response does not preclude future offer for the combined alliance it is reasonable.

Where Board’s only response to a takeover is defensive and not an abandonment of the corporation’s continued existence, Revlon is not implicated

Paramount v Time

Lec. 5 Sem 2, 2011 Corps Prof. McCann

Unocal analysis: 1. Did the Paramount offer pose a threat to corporate

policy or effectiveness? Threat was the disruption of the strategic plan and risk

shareholders would not be able to learn of greater potential of the Warner merger

Board’s determination of whether threat exists in an all cash deal may go beyond examining whether offer is below fair value

2. Was the response “proportional”? Decision to restructure the transaction with Warner was not

out of proportion to the threat the Board perceived. Paramount retained the freedom to take over the new

company

Paramount v Time

Lec. 5 Sem 2, 2011 Corps Prof. McCann

Directors are obligated to chart a course for the corporation without regard to a “fixed investment horizon.”

Board is not under a per se duty to maximize shareholder value in the short term.

Paramount v. QVC

Lec. 5 Sem 2, 2011 Corps Prof. McCann

Directors face enhanced scrutiny where they approve of a transaction resulting in a sale of control while simultaneously adopting defensive measures to defeat another suitor.

Thu, Mar 1, 2001 Fri, Mar 2, 2001 Fri, Jul 20, 2001

Omnicare Chronology

~ Mar ??, 2001

NCS Healthcare defaults on $350 m in debt, shares reach $.09

Jul 20, 2001

Joel Gemunder (OMN CEO) for Omnicare Inc. proposes Omnicare Inc. buy NCS Healthcarein bankruptcy asset sale for $225m conditioned on due diligence

Fri, Jul 20, 2001 Sat, Jul 21, 2001 Wed, Aug 1, 2001

Omnicare Chronology

Jul 20, 2001

Joel Gemunder (OMN CEO) for Omnicare Inc. proposes Omnicare Inc. buy NCS Healthcarein bankruptcy asset sale for $225m conditioned on due diligence

Aug ??, 2001

Omnicare Inc. increases bid to $270 m in BK asset sale (less than NCS Healthcare outstanding debt). NCS Shareholders would receive zero.

Wed, Aug 1, 2001 Thu, Aug 2, 2001 Tue, Jan 1, 2002

Omnicare Chronology

Aug ??, 2001

Omnicare Inc. increases bid to $270 m in BK asset sale (less than NCS Healthcare outstanding debt). NCS Shareholders would receive zero.

Jan ??, 2002

Genesis is contacted by Ad Hoc Committee of Noteholders re NCS Healthcare and enters into confidentiality agreement. Starts due diligence investigation of NCS Healthcare.

Tue, Jan 1, 2002 Wed, Jan 2, 2002 Thu, May 16, 2002

Omnicare Chronology

Jan ??, 2002

Genesis is contacted by Ad Hoc Committee of Noteholders re NCS Healthcare and enters into confidentiality agreement. Starts due diligence investigation of NCS Healthcare.

May 16, 2002

Genesis makes clear not interested in being Stalking Horse

Thu, May 16, 2002 Fri, May 17, 2002 Wed, Jun 26, 2002

Omnicare Chronology

May 16, 2002

Genesis makes clear not interested in being Stalking Horse

Jun 26, 2002

At urging of NCS Healthcare Genesis increases offer to $24m in Genesis stock for NCS Shareholders but demands exclusivity agreement

Wed, Jun 26, 2002 Thu, Jun 27, 2002 Wed, Jul 3, 2002

Omnicare Chronology

Jun 26, 2002

At urging of NCS Healthcare Genesis increases offer to $24m in Genesis stock for NCS Shareholders but demands exclusivity agreement

Jul 3, 2002

Ad Hoc Committee of Noteholders meets to consider exclusivity agreement, signs. Genesis delivers form of merger agreement plus shareholder agreements for Outcalt (NCS Chair) and Shaw (NCS CEO) (who hold majority of NCS Healthcare voting shares)

Wed, Jul 3, 2002 Thu, Jul 4, 2002 Fri, Jul 26, 2002

Omnicare Chronology

Jul 3, 2002

Ad Hoc Committee of Noteholders meets to consider exclusivity agreement, signs. Genesis delivers form of merger agreement plus shareholder agreements for Outcalt (NCS Chair) and Shaw (NCS CEO) (who hold majority of NCS Healthcare voting shares)

Jul 26, 2002

Omnicare Inc. , aware something is going on because NCS Healthcare share price increasing, faxes proposal to NCS Healthcare offering to pay NCS Healthcare debt with interest plus $3/sh for NCS Shareholders. Offer conditioned on completing due diligence and receiving certain consents

Jul 26, 2002

Judith Mencher (AHC rep) calls Joel Gemunder (OMN CEO) to warn due diligence "out" was a deal breaker. Omnicare Inc. decides will not eliminate requirement

Jul 26, 2002

Omnicare Inc. calls NCS Healthcare to discuss fax but NCS Healthcare does not respond because of exclusivity agreement

Jul 26, 2002

Independent Committee of NCS Board Members meets re Omnicare Inc. fax and decides not worth jeopardizing Genesis offer to bargain further with Omnicare Inc. but does go back to Genesis to seek improved terms based on the Omnicare Inc. fax

Fri, Jul 26, 2002 Sat, Jul 27, 2002 Sun, Jul 28, 2002

Omnicare ChronologyJul 26, 2002

Omnicare Inc. , aware something is going on because NCS Healthcare share price increasing, faxes proposal to NCS Healthcare offering to pay NCS Healthcare debt with interest plus $3/sh for NCS Shareholders. Offer conditioned on completing due diligence and receiving certain consents

Jul 26, 2002

Judith Mencher (AHC rep) calls Joel Gemunder (OMN CEO) to warn due diligence "out" was a deal breaker. Omnicare Inc. decides will not eliminate requirement

Jul 26, 2002

Omnicare Inc. calls NCS Healthcare to discuss fax but NCS Healthcare does not respond because of exclusivity agreement

Jul 26, 2002

Independent Committee of NCS Board Members meets re Omnicare Inc. fax and decides not worth jeopardizing Genesis offer to bargain further with Omnicare Inc. but does go back to Genesis to seek improved terms based on the Omnicare Inc. fax

Jul 27, 2002

Genesis improves its terms to retire the notes altogether, increaser ration of stock swap in favor of NCS Shareholders added interest to debt payback. Required deal by midnight of next day.

Jul 28, 2002

Independent Committee of NCS Board Members meets for less than an hour to consider Genesis offer. Votes unanimously to recommend board accept the offer.

Jul 28, 2002

Full board then met and first approves Outcalt (NCS Chair) and Shaw (NCS CEO) voting agreements, thus making NCS Shareholders approval a "fait accompli" regardless of future offers from Omnicare Inc. or anyone else. Board then approves merger agreement and agrees it will recommend merger to NCS Shareholders

Jul 28, 2002

NCS Healthcare board signs merger agreement which (a) requires they relay merger vote to NCS Shareholders even if the board withdraws its support, and (b) prohibits NCS Healthcare from entering into discussions with 3rd party unless have "good faith" belief 3rd party proposal likely to result in superior transaction.

Sun, Jul 28, 2002 Mon, Jul 29, 2002 Thu, Aug 1, 2002

Omnicare Chronology

Jul 28, 2002

Independent Committee of NCS Board Members meets for less than an hour to consider Genesis offer. Votes unanimously to recommend board accept the offer.

Jul 28, 2002

Full board then met and first approves Outcalt (NCS Chair) and Shaw (NCS CEO) voting agreements, thus making NCS Shareholders approval a "fait accompli" regardless of future offers from Omnicare Inc. or anyone else. Board then approves merger agreement and agrees it will recommend merger to NCS Shareholders

Jul 28, 2002

NCS Healthcare board signs merger agreement which (a) requires they relay merger vote to NCS Shareholders even if the board withdraws its support, and (b) prohibits NCS Healthcare from entering into discussions with 3rd party unless have "good faith" belief 3rd party proposal likely to result in superior transaction.

Jul 29, 2002

Omnicare Inc. faxes letter to NCS Healthcare with draft merger agreement having already issued press release.

Aug 1, 2002

Omnicare Inc. files suit to enjoin NCS Healthcare merger with Genesis and announces tender offer at $3.50/sh

Thu, Aug 1, 2002 Fri, Aug 2, 2002 Thu, Aug 8, 2002

Omnicare Chronology

Jul 29, 2002

Omnicare Inc. faxes letter to NCS Healthcare with draft merger agreement having already issued press release.

Aug 1, 2002

Omnicare Inc. files suit to enjoin NCS Healthcare merger with Genesis and announces tender offer at $3.50/sh

Aug 8, 2002

Omnicare Inc. begins tender offer and seeks meeting with NCS Healthcare

Aug 8, 2002

Independent Committee of NCS Board Members and full board meet separately and confer with outside counsel. Unable to determine whether Omnicare Inc. offer "superior" because of conditions

Thu, Aug 8, 2002 Fri, Aug 9, 2002 Mon, Aug 19, 2002

Omnicare Chronology

Aug 8, 2002

Omnicare Inc. begins tender offer and seeks meeting with NCS Healthcare

Aug 8, 2002

Independent Committee of NCS Board Members and full board meet separately and confer with outside counsel. Unable to determine whether Omnicare Inc. offer "superior" because of conditions

Aug 19, 2002

Independent Committee of NCS Board Members and full board meet once more separately and confer with outside counsel. Still unable to determine whether Omnicare Inc. offer "superior" because of conditions

Mon, Aug 19, 2002 Tue, Aug 20, 2002 Tue, Sep 10, 2002

Omnicare Chronology

Aug 19, 2002

Independent Committee of NCS Board Members and full board meet once more separately and confer with outside counsel. Still unable to determine whether Omnicare Inc. offer "superior" because of conditions

Sep 10, 2002

NCS Healthcare requests, and Genesis grants, a waiver of merger agreement prohibitionto allow NCS Healthcare to discuss with Omnicare Inc. despite no finding of superior offer

Tue, Sep 10, 2002 Wed, Sep 11, 2002 Sun, Oct 6, 2002

Omnicare Chronology

Sep 10, 2002

NCS Healthcare requests, and Genesis grants, a waiver of merger agreement prohibitionto allow NCS Healthcare to discuss with Omnicare Inc. despite no finding of superior offer

Oct 6, 2002

Omnicare Inc. irrevocably commits to purchase of all shares for $3.50 in cash

Mon, Oct 7, 2002 Mon, Oct 21, 2002

Omnicare Chronology

Oct 21, 2002

NCS Healthcare board withdraws support for Genesis merger

Stalking Horse

Lec. 6 Sem 2, pp 739-774 Corps Prof. McCann

The initial bidder with whom the debtor negotiates a purchase agreement is called the "stalking horse" bidder. The term is an old hunting term referring to either a real horse or an image of a horse (typically some type of screen) behind which a hunter would hide to conceal himself from, and get closer to, his prey.

DGCL Section 251 - Mergers

Lec. 6 Sem 2, pp 739-774 Corps Prof. McCann

Board of each corporation must first adopt resolution approving merger agreement.

Agreement shall set forth terms of the merger, mode of bringing into effect, manner of converting shares.

The agreement shall then be submitted to the shareholders of each corporation for vote on no less than 20 days notice. Merger is not effective until requisite number of shares approve it.

Omnicare Refinements to Unocal

Lec. 6 Sem 2, pp 739-774 Corps Prof. McCann

Where defensive measures are invoked to protect a merger agreement, Unocal proportionality test is applied as follows:

1. Court must first determine if the measures are preclusive or coercive. If either, measures are illegal.

2. If measures pass that threshold test, then the Board must establish their measures were within a “range of reasonable responses.”

“Force The Vote” Provisions

Lec. 6 Sem 2, pp 739-774 Corps Prof. McCann

Refers to board commitment to suitor that the board will submit the proposed transaction to the shareholders for a vote even if the board does not recommend that the shareholders approve the transaction.

Such provisions now expressly permitted under Delaware law and the Model Act

Why bother? Because often the merger agreement is signed simultaneously with voting agreements binding the majority of shares to vote for the transaction if it is put to a vote. The suitor knows the transaction will be approved even if, under a “fiduciary out,” the board must withdraw its approval.

Break Up Fee

Lec. 6 Sem 2, pp 739-774 Corps Prof. McCann

Also known as a “Termination Fee”, it is a fee commonly paid to a prospective purchaser if a contemplated transaction is not consummated for reasons specified in the purchase agreement, including the seller’s acceptance of a competing bid.

It is intended both to reimburse a "stalking horse" bidder for costs incurred in connection with due diligence and to compensate for the time, resources, effort and lost opportunity costs and risks incurred by a disappointed purchaser.