Business Organizations
2009-2010 Lectures
PARTNERSHIPS,
CORPORATIONS
AND THE VARIANTS
PROF. BRUCE MCCANN
SPRING SEMESTER LECTURE 5
TAKEOVERS
PP. 739-785
Directors and Tender Offers
 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”

Lec. 5 Sem 2, 2011 Corps
Prof. McCann
Unocal
 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.
Lec. 5 Sem 2, 2011 Corps
Prof. McCann
Revlon
 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
Lec. 5 Sem 2, 2011 Corps
Prof. McCann
Paramount v Time
 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
Lec. 5 Sem 2, 2011 Corps
Prof. McCann
Paramount v Time
 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

Lec. 5 Sem 2, 2011 Corps
Prof. McCann
Paramount v Time
 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.
Lec. 5 Sem 2, 2011 Corps
Prof. McCann
Paramount v. QVC
 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.
Lec. 5 Sem 2, 2011 Corps
Prof. McCann
Omnicare Chronology
Jul 20, 2001
~ Mar ??, 2001
Joel Gemunder (OMN CEO) f
proposes Omnicare Inc. buy
in bankruptcy asset sale for $
conditioned on due diligence
NCS Healthcare
defaults on $350 m in
debt, shares reach $.09
Thu, Mar 1, 2001
Fri, Mar 2, 2001
Fri, Jul 20, 2001
Omnicare Chronology
Jul 20, 2001
Aug ??, 2001
Joel Gemunder (OMN CEO) for Omnicare Inc.
proposes Omnicare Inc. buy NCS Healthcare
in bankruptcy asset sale for $225m
conditioned on due diligence
Omnicare Inc. increases bid to
m in BK asset sale (less than N
Healthcare outstanding debt).
Shareholders would receive ze
Fri, Jul 20, 2001
Sat, Jul 21, 2001
Wed, Aug 1, 2001
Omnicare Chronology
Jan ??, 2002
Aug ??, 2001
Genesis is contacted by Ad Hoc
Committee of Noteholders re N
Healthcare and enters into con
agreement. Starts due diligenc
investigation of NCS Healthcar
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
Jan ??, 2002
May 16, 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
Genesis makes clear not
interested in being Stalking Ho
Wed, Jan 2, 2002
Thu, May 16, 2002
Omnicare Chronology
Jun 26, 2002
May 16, 2002
At urging of NCS Healthcare
Genesis increases offer to $24m
Genesis stock for NCS Shareho
but demands exclusivity agreem
Genesis makes clear not
interested in being Stalking Horse
Thu, May 16, 2002
Fri, May 17, 2002
Wed, Jun 26, 2002
Omnicare Chronology
Jul 3, 2002
Jun 26, 2002
Ad Hoc Committee of Noteholde
exclusivity agreement, signs. G
of merger agreement plus shar
for Outcalt (NCS Chair) and Sha
hold majority of NCS Healthcare
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
Jul 26, 2002
Omnicare Inc. , aware somethin
because NCS Healthcare share
faxes proposal to NCS Healthca
NCS Healthcare debt with inter
NCS Shareholders. Offer cond
due diligence and receiving ce
Jul 26, 2002
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)
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 N
Healthcare does not respond
because of exclusivity agreeme
Jul 26, 2002
Independent Committee of NCS
meets re Omnicare Inc. fax and
jeopardizing Genesis offer to b
Omnicare Inc. but does go back
improved terms based on the O
Wed, Jul 3, 2002
Thu, Jul 4, 2002
Fri, Jul 26, 2002
Omnicare Chronology
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 28, 2002
Independent Committee of NCS Bo
Members meets for less than an ho
consider Genesis offer. Votes unan
to recommend board accept the of
Jul 28, 2002
Joel
due diligence
are Inc.
ement
Jul 27, 2002
Jul 26, 2002
Omnicare Inc. calls NCS
Healthcare to discuss fax but NCS
Healthcare does not respond
because of exclusivity agreement
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 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
Full board then met and first appro
Chair) and Shaw (NCS CEO) votin
making NCS Shareholders approv
regardless of future offers from O
else. Board then approves merge
agrees it will recommend merger t
Jul 28, 2002
NCS Healthcare board signs merge
(a) requires they relay merger vote
even if the board withdraws its sup
prohibits NCS Healthcare from ent
with 3rd party unless have "good fa
proposal likely to result in superior
Sun, Jul 28, 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.
Aug 1, 2002
Omnicare Inc. files suit to enjoi
Healthcare merger with Genesi
announces tender offer at $3.50
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 29, 2002
Omnicare Inc. faxes letter to NCS
Healthcare with draft merger agreement
having already issued press release.
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
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
NCS
r agreement
release.
Thu, Aug 1, 2002
Aug 8, 2002
Independent Committee of NCS
Members and full board meet s
and confer with outside counse
to determine whether Omnicare
offer "superior" because of con
Fri, Aug 2, 2002
Thu, Aug 8, 2002
Omnicare Chronology
Aug 8, 2002
Omnicare Inc. begins tender
offer and seeks meeting
with NCS Healthcare
Aug 19, 2002
Independent Committee of NCS
Members and full board meet o
separately and confer with outs
Still unable to determine wheth
Inc. offer "superior" because o
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 19, 2002
Sep 10, 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
NCS Healthcare requests, and
a waiver of merger agreement p
to allow NCS Healthcare to disc
Omnicare Inc. despite no findin
offer
Mon, Aug 19, 2002
Tue, Aug 20, 2002
Tue, Sep 10, 2002
Omnicare Chronology
Sep 10, 2002
NCS Healthcare requests, and Genesis grants,
a waiver of merger agreement prohibition
to allow NCS Healthcare to discuss with
Omnicare Inc. despite no finding of superior
offer
Tue, Sep 10, 2002
Wed, Sep 11, 2002
Oct 6, 2002
Omnicare Inc. irrevocably
commits to purchase of all
shares for $3.50 in cash
Sun, Oct 6, 2002
Omnicare Chronology
Oct 21, 2002
NCS Healthcare board withdraws
support for Genesis merger
Mon, Oct 7, 2002
Mon, Oct 21, 2002
Stalking Horse
 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.
Lec. 6 Sem 2, pp 739-774 Corps
Prof. McCann
DGCL Section 251 - Mergers
 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.
Lec. 6 Sem 2, pp 739-774 Corps
Prof. McCann
Omnicare Refinements to Unocal
 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.”
Lec. 6 Sem 2, pp 739-774 Corps
Prof. McCann
“Force The Vote” Provisions
 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.
Lec. 6 Sem 2, pp 739-774 Corps
Prof. McCann
Break Up Fee
 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.
Lec. 6 Sem 2, pp 739-774 Corps
Prof. McCann