-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U3zDP7qN6JtXbUOJTf863LS6E6PfNhlKWGhlQ7rC1KT9Y64oEkYVSyt0PlxtCXox i5WsHJE1qyEAHesoMZwU1Q== 0000893220-02-001441.txt : 20021125 0000893220-02-001441.hdr.sgml : 20021125 20021125162959 ACCESSION NUMBER: 0000893220-02-001441 CONFORMED SUBMISSION TYPE: SC 14D9/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20021125 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: NCS HEALTHCARE INC CENTRAL INDEX KEY: 0001004990 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 341816187 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SC 14D9/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-47039 FILM NUMBER: 02839528 BUSINESS ADDRESS: STREET 1: 3201 ENTERPRISE PKWY STREET 2: STE 2200 CITY: BEACHWOOD STATE: OH ZIP: 44122 BUSINESS PHONE: 2165143350 MAIL ADDRESS: STREET 1: 1400 MCDONALD INVESTMENT CENTER STREET 2: 800 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: NCS HEALTHCARE INC CENTRAL INDEX KEY: 0001004990 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 341816187 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SC 14D9/A BUSINESS ADDRESS: STREET 1: 3201 ENTERPRISE PKWY STREET 2: STE 2200 CITY: BEACHWOOD STATE: OH ZIP: 44122 BUSINESS PHONE: 2165143350 MAIL ADDRESS: STREET 1: 1400 MCDONALD INVESTMENT CENTER STREET 2: 800 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114 SC 14D9/A 1 w66145sc14d9za.txt AMENDMENT NO.9 TO SCHEDULE 14D-9 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 SCHEDULE 14D-9 (AMENDMENT NO. 9) SOLICITATION/RECOMMENDATION STATEMENT UNDER SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934 NCS HEALTHCARE, INC. (Name of Subject Company) NCS HEALTHCARE, INC. (Name of Person Filing Statement) CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE (Title of Class of Securities) 62887410 (CUSIP Number of Class A Common Stock) CLASS B COMMON STOCK, PAR VALUE $0.01 PER SHARE (Title of Class of Securities) NOT APPLICABLE (CUSIP Number of Class B Common Stock) MARY BETH LEVINE, ESQ. SENIOR VICE PRESIDENT AND CORPORATE COUNSEL NCS HEALTHCARE, INC. 3201 ENTERPRISE PARKWAY, SUITE 220 BEACHWOOD, OHIO 44122 (216) 514-3350 (Name, Address and Telephone Number of Person Authorized to Receive Notice and Communications on Behalf of the Person Filing Statement) WITH COPIES TO: H. JEFFREY SCHWARTZ, ESQ. ROBERT B. PINCUS, ESQ. MEGAN LUM MEHALKO, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP BENESCH, FRIEDLANDER, COPLAN & ARONOFF LLP ONE RODNEY SQUARE 2300 BP TOWER, 200 PUBLIC SQUARE WILMINGTON, DELAWARE 19801 CLEVELAND, OHIO 44114 (302) 651-3000 (216) 363-4500
[ ] Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer. This Amendment No. 9 to Schedule 14D-9 amends and supplements the Solicitation/Recommendation Statement on Schedule 14D-9 originally filed by NCS HealthCare, Inc. (the "Company" or "NCS") on August 20, 2002 and amended on August 21, 2002, August 22, 2002, September 12, 2002, September 30, 2002, October 8, 2002, October 22, 2002, October 29, 2002 and October 30, 2002 relating to the tender offer by NCS Acquisition Corp. (the "Offeror"), a Delaware corporation and a wholly owned subsidiary of Omnicare, Inc., a Delaware corporation ("Omnicare"), for all of the outstanding shares of Class A Common Stock, par value $0.01 per share, of NCS and Class B Common Stock, par value $0.01 per share, of NCS, at a price of $3.50 per share, net to the seller in cash (the "Offer"). Except as otherwise indicated, the information set forth in the original Schedule 14D-9 and Amendments No. 1, No. 2, No. 3, No. 4, No. 5, No. 6, No. 7 and No. 8 thereto remains unchanged. ITEM 8. ADDITIONAL INFORMATION (b) LEGAL MATTERS Item 8(b) of the Schedule 14D-9 is hereby amended to add the following at the end thereof: On November 22, 2002, NCS filed a brief in the Supreme Court of the State of Delaware in answer to Omnicare's appeal of the Court of Chancery's dismissal of Counts II through V and granting of summary judgment with respect to Count I to NCS in the Delaware Lawsuit. On November 22, 2002, the Court of Chancery of the State of Delaware issued a memorandum opinion on the plaintiffs' motion for a preliminary injunction in the consolidated shareholders litigation brought against NCS (Consolidated C.A. No. 19786). The Court denied the plaintiffs' motion to enjoin the Genesis Merger and dismissed Counts II through V. The foregoing paragraph includes a summary of the memorandum opinion, and is qualified in its entirety by the full text of the memorandum opinion, a copy of which is filed as Exhibit 99.16 hereto, and is incorporated herein by reference. ITEM 9. EXHIBITS Item 9 of the Schedule 14D-9 is hereby supplemented by adding the following additional exhibits:
EXHIBIT NO. Exhibit 99.14 Appeal Brief filed by Omnicare in the Supreme Court of the State of Delaware on November 14, 2002. (Incorporated herein by reference to Exhibit (a)(1)(QQ) to Amendment No. 26 to Omnicare's Tender Offer Statement on Schedule TO/A, filed on November 19, 2002.)
2 Exhibit 99.15 Answering Brief filed by NCS in the Supreme Court of the State of Delaware on November 22, 2002.* Exhibit 99.16 Memorandum Opinion, issued on November 22, 2002.* Exhibit 99.17 Press Release issued by the Company on November 25, 2002.*
- ---------- * Filed herewith. 3 SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. NCS HEALTHCARE, INC. By: /s/ Kevin B. Shaw ------------------------------------- Kevin B. Shaw President and Chief Executive Officer Dated: November 25, 2002 4 EX-99.15 3 w66145exv99w15.txt ANSWERING BRIEF FILED BY NCS ON NOVEMBER 22, 2002 Exhibit 99.15 IN THE SUPREME COURT OF THE STATE OF DELAWARE
OMNICARE, INC. NO. 605, 2002 Plaintiff Below/ Appellant, v. NCS HEALTHCARE, INC., JON H. OUTCALT, KEVIN Appeal From Memorandum Opinions and B. SHAW, BOAKE A. SELLS, RICHARD L. Orders Dated October 25 & 29, 2002 Of The OSBORNE, GENESIS HEALTH VENTURES, INC., and Court of Chancery Of The State Of GENEVA SUB, INC., Delaware In And For New Castle County In Civil Action No. 19800 Defendants-Below/ Appellees.
APPELLEES NCS HEALTHCARE, INC., BOAKE A. SELLS AND RICHARD L. OSBORNE'S ANSWERING BRIEF Of Counsel: SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP BENESCH, FRIEDLANDER, COPLAN Edward P. Welch (# 671) & ARONOFF LLP Edward B. Micheletti (# 3794) Mark A. Phillips Katherine J. Neikirk (# 4129) 2300 BP Tower, 200 Public Square James A. Whitney (# 4161) Cleveland, Ohio 44114-2378 One Rodney Square (216) 363-4500 P.O. Box 636 Wilmington, Delaware 19899 (302) 651-3000 November 22, 2002 Attorneys for Defendants-Below Appellees NCS HealthCare, Inc., Boake A. Sells and Richard L. Osborne
TABLE OF CONTENTS
PAGE TABLE OF CASES AND AUTHORITIES ...................................................................... iv NATURE AND STAGE OF THE PROCEEDINGS ................................................................. 1 SUMMARY OF ARGUMENT ................................................................................. 4 STATEMENT OF FACTS .................................................................................. 5 A. The Parties ....................................................................... 5 B. Omnicare Attempts To Pressure NCS Into A Bankruptcy Deal, While NCS Attempts To Secure A Deal Providing Value To All Stakeholders ...................................................................... 6 C. Unlike Omnicare, Genesis Proposes A Transaction Providing A Recovery To All NCS Stakeholders .................................................. 7 D. After Six Months Of "Radio Silence," Omnicare Reappears With A Highly Conditional "Offer To Negotiate" ........................................... 7 E. Terms Of The Voting Agreements ................................................... 9 F. Applicable Provisions Of The NCS Certificate ...................................... 9 G. Seeking To Commence Litigation, Omnicare Belatedly Purchases Shares Of NCS Stock On July 30 .................................................... 11 ARGUMENT ............................................................................................ 12 I. THE COURT OF CHANCERY PROPERLY HELD THAT OMNICARE LACKED STANDING TO ASSERT BREACH OF FIDUCIARY DUTY CLAIMS BASED ON ACTIONS TAKEN (OR NOT TAKEN) ON OR BEFORE JULY 28, 2002. ......................................................... 12 A. Standard of Review ................................................................ 12
i B. Applicable Legal Standards ........................................................ 12 C. The NCS Board Owed No Fiduciary Duties To Omnicare When It Approved The NCS/Genesis Merger Agreement Because Omnicare Was Not A Stockholder At That Time .................................................... 13 D. The Court Of Chancery Correctly Held That Public Policy Detests The Purchase Of A Lawsuit ................................................. 18 II. THE COURT OF CHANCERY PROPERLY HELD THAT, AS A MATTER OF LAW, THE VOTING AGREEMENTS DO NOT CONSTITUTE A "TRANSFER" RESULTING IN "CONVERSION" UNDER SECTION 7 OF THE NCS CHARTER ............................................ 22 A. Scope of Review ................................................................... 22 B. Applicable Legal Standards ........................................................ 22 C. The Court Of Chancery Correctly Held That The Voting Agreements (And/Or The Proxies Contained Therein) Were Not A "Transfer Of Shares" (Or A Transfer Of Interest In Those Shares) Resulting In "Conversion" Under The NCS Charter ........................... 23 1. The Voting Agreements were proxies given "in connection with" the solicitation of NCS shares under Section 14 of the Exchange Act and, thus, not considered a "transfer" under Section 7(c)(5) of the NCS Charter .............................................................. 23 2. The Voting Agreements did not constitute a "transfer of shares" (or a transfer of a substantial interest of those shares) under Sections 7(a) and 7(d) of the NCS Charter .............................................................. 26 D. The Court May Also Consider The Fact That Section 7(d) Converts Class B Shares Only Upon An Actual Transfer Of Those Shares ............................................................................ 30
ii CONCLUSION .......................................................................................... 32
iii TABLE OF CASES AND AUTHORITIES
CASES PAGE(S) Account v. Hilton Hotels Corp., 780 A.2d 245 (Del. 2001) ............................................................... 12 Alabama By-Products Corp. v. Cede & Co., 657 A.2d 254 (Del. 1995) ............................................................... 20 Anadarko Petroleum Corp. v. Panhandle Eastern Corp., 545 A.2d 1171 (Del. 1988) .............................................................. 14 Andra v. Blount, 772 A.2d 183 (Del. Ch. 2000) ........................................................... 12 In re Beatrice Cos. Litig., Nos. 155, 1986, 156, 1986, 1987 WL 36708 (Del. Feb. 20, 1987) .......................... 21 Behrens v. Aeriel Communications Inc., C.A. No. 17436, 2001 WL 599870 (Del. Ch. May 18, 2001) ................................. 12 Brown v. Automated Mktg. Sys., Inc., C.A. No. 6715, 1982 WL 8782 (Del. Ch. Mar. 22, 1982) ................................... 15, 18, 19, 21 Cede & Co. v. Technicolor, Inc., 542 A.2d 1182 (Del. 1988) .............................................................. 20 Centaur Partners IV v. Nat'l Intergroup, Inc., 582 A.2d 923 (Del. 1990) ............................................................... 22 Continental Ins. Co. v. Rutledge & Co., C.A. No. 15539, 2000 WL 268297 (Del Ch. Feb. 15, 2000) ................................. 22 DuPont v. Wilmington Trust Co., 45 A.2d 510 (Del. Ch. 1946) ............................................................ 23
iv
CASES PAGE(S) Eagle Indus. v. DeVilbiss Health Care, Inc., 702 A.2d 1228 (Del. 1997) ...................................................... 22 Eliason v. Englehart, 733 A.2d 944 (Del. 1999) ....................................................... 31 Ellingwood v. Wolf's Head Oil Ref. Co., 38 A.2d 743 (Del. 1944) ........................................................ 23, 29 Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001) ........................................................ 13 Emerson Radio Corp. v. Int'l Jensen Inc., C.A. Nos. 15130, 14992, 1996 WL 483086 (Del. Ch. Aug. 20, 1996) ................ 14 Gagliardi v. Trifoods Int'l, Inc., 683 A.2d 1049 (Del. Ch. 1996) .................................................. 14 Garrett v. Brown, C.A. Nos. 8423, 8427, 1986 WL 6708 (Del. Ch. June 13) aff'd mem., 511 A.2d 1044 (Del. 1986) .......................................... 28, 29, 30 In re Gaylord Container Corp. S'holders Litig., 747 A.2d 71 (Del. Ch. 1999) .................................................... 15, 16, 19 Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., No. 372, 2001, 2002 WL 31303135 (Del. Oct. 11, 2002) ........................... 15 Grobow v. Perot, 539 A.2d 180 (Del. 1988), overruled on other grounds sub nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000) ...................................... 12 Guy v. Sills, C.A. No. 16201, 1998 WL 409346 (Del. Ch. July 10, 1998) ........................ 12 Harrah's Entm't, Inc. v. JCC Holding Co., 802 A.2d 294 (Del. Ch. 2002) ................................................... 22
v
CASES PAGE(S) Leung v. Schuler, C.A. No. 17089, 2000 WL 264328 (Del. Ch. Feb. 29, 2000) ............................ 14 Lewis v. Austen, C.A. No. 12937, 1999 WL 378125 (Del. Ch. June 2, 1999) ............................. 12 MacAndrews & Forbes Holdings, Inc. v. Revlon, Inc., C.A. No. 8126, 1985 WL 21129 (Del. Ch. Oct. 9, 1985) ............................... 15 Malpiede v. Townson, 780 A.2d 1075 (Del. 2001) .......................................................... 14 McIlquham v. Feste, C.A. No. 19042, 2002 WL 244859 (Del. Ch. Feb. 13, 2002) ............................ 22 Omnicare, Inc. v. NCS HealthCare, Inc., C.A. No. 19800, 2002 WL 31445168 (Del. Ch. Oct. 25, 2002) ("Standing Op.") .......................................... passim Omnicare, Inc. v. NCS HealthCare, Inc., C.A. No. 19800, 2002 WL 31445163 (Del. Ch. Oct. 29, 2002) ("SJ Op.") ................................................ passim Parnes v. Bally Entm't Corp., 722 A.2d 1243 (Del. 1999) .......................................................... 19 Sanders v. Devine, C.A. No. 14679, 1997 WL 599539 (Del. Ch. Sept. 24, 1997) ........................... 14, 20 Stroud v. Grace, 606 A.2d 75 (Del. 1992) ............................................................ 22 Stuart Kingston, Inc. v. Robinson, 596 A.2d 1378 (Del. 1991) .......................................................... 12, 13
vi
CASES PAGE(S) Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6 (1971) .................................................................. 26 Superwire.Com, Inc. v. Hampton, 805 A.2d 904 (Del. Ch. 2002) ....................................................... 23, 29 Tate & Lyle PLC v. Staley Continental, Inc., C.A. No. 9813, 1988 WL 46064 (Del. Ch. May 9, 1988) ................................ 15 Thorpe v. CERBCO, Inc., C.A. No. 11713, 1993 WL 35967 (Del. Ch. Jan. 26, 1993) ............................ 14, 20 U-H Acquisition Co. v. Barbo, C.A. No. 13279, 1994 WL 34688 (Del. Ch. Jan. 31, 1994) ............................. passim Waggoner v. Laster, 581 A.2d 1127 (Del. 1990) .......................................................... 22 Weiss v. Leewards Creative Crafts, Inc., C.A. No. 12384, 1993 WL 155493 (Del. Ch. Apr. 29), aff'd mem., 633 A.2d 372 (Del. 1993) ............................................... 13 Williams v. Geier, 671 A.2d 1368 (Del. 1996) .......................................................... 22
AUTHORITIES PAGE(S) 6 Del. C. Sections 8-104, 8-301 ...................................................... 31 8 Del. C. Section 141(a) ............................................................ 13 Del. Supr. Ct. R. 8 .................................................................. 20, 21, 30 Del. Ch. C. R. 56(c) ................................................................. 22
vii NATURE AND STAGE OF THE PROCEEDINGS This appeal arises out of Omnicare, Inc.'s ("Omnicare") continuing attempts to thwart a stock-for-stock merger between NCS HealthCare, Inc. ("NCS") and Genesis Health Ventures, Inc. ("Genesis") (the "NCS/Genesis Merger") executed on July 28, 2002. Two days after the NCS/Genesis Merger was executed, on July 30, 2002, Omnicare (NCS's largest direct competitor) became an NCS stockholder for the first time when it purchased 1,000 shares of NCS common stock. On August 1, 2002, Omnicare commenced this litigation and announced its intention to commence an unsolicited tender offer for all outstanding shares of NCS common stock, which it did on August 8, 2002. (A423 Paragraphs 49, 50) On September 23, 2002, Omnicare filed a Second Amended Complaint alleging, among other things, that: (1) certain voting agreements between Genesis and two large NCS stockholders (the "Voting Agreements") entered into after the NCS Board of Directors (the "NCS Board") approved the NCS/Genesis Merger on July 28 violated NCS's Amended and Restated Certificate of Incorporation (the "NCS Charter") (Count I); (2) the NCS Board violated 8 Del. C.Section 141(a) by entering into an exclusivity agreement with Genesis on July 3, and approving the Voting Agreements and the NCS/Genesis Merger on July 28 (Count II); (3) the NCS Board breached its fiduciary duties by approving the NCS/Genesis Merger on July 28 and by declining to consider Omnicare's July 26 indication of interest (Count III); (4) Genesis aided and abetted these alleged breaches of fiduciary duties (Count IV); and (5) the termination fee provision of the NCS/Genesis Merger was invalid and unenforceable (Count V). Shortly before Omnicare filed its Second Amended Complaint, a purported class of NCS common stockholders (the "Stockholder Plaintiffs") filed a substantially similar consolidated complaint raising the same exact five counts. Unlike the Stockholder Plaintiffs' Complaint, however, nowhere in Omnicare's Second Amended Complaint did Omnicare allege (nor could it) that it owned shares of NCS stock on or before July 28, the key date giving rise to the allegations in the Second Amended Complaint. On September 30, 2002, Omnicare and the Stockholder Plaintiffs moved for summary judgment on Count I of their complaints, seeking a declaration that the Voting Agreements resulted in the automatic conversion of high vote Class B shares into lower vote Class A shares. Thereafter, on October 3, 2002, the NCS Defendants(1) moved to dismiss Omnicare's Second Amended Complaint, alleging Omnicare lacked standing because it did not purchase a single share of NCS stock until July 30, 2002. Following oral argument on October 24, 2002, the Court of Chancery dismissed Counts II through V of Omnicare's Second Amended Complaint on the grounds that Omnicare lacked standing to bring breach of fiduciary duty claims against the NCS Board. Recognizing the strong public policy against the purchase of a lawsuit, the Court held that "because there is no doubt that Omnicare purchased stock in NCS after the relevant information [concerning the NCS/Genesis Merger] came to light, Omnicare is precluded from asserting any fiduciary duty claims arising out of actions taken by the NCS Board before Omnicare's purchase of shares. . . ." (Standing Op. at 13)(2) The Court also rejected Omnicare's attempt to gain standing simply by virtue of its status as a bidder, finding no support in Delaware law for such a proposition. (Standing Op. at 18) The Court, however, refused to dismiss Count I on the grounds that Omnicare had standing as a current shareholder to seek a declaration concerning the current state of its voting rights as a Class A stockholder. (Standing Op. at 19-21) Thereafter, on October 29, 2002, the Court granted summary judgment in favor of defendants on Count I of Omnicare's Second Amended Complaint (and the Stockholder Plaintiffs' Complaint) on the grounds that the automatic conversion provision of the NCS Charter was not triggered, because the Voting Agreements relating to the proposed NCS/Genesis Merger did not constitute a "transfer" of shares. First, the Court found that Section 2(b) of the Voting Agreements, whereby Outcalt and Shaw promised to vote their shares in a certain way did not convey an interest in those shares to Genesis. (SJ Op. at - -------- (1) The "NCS Defendants" are NCS and two outside directors who comprise the NCS Independent Committee, Boake A. Sells and Richard L. Osborne. (2) Omnicare, Inc. v. NCS HealthCare, Inc., C.A. No. 19800, 2002 WL 31445168 (Del. Ch. Oct. 25, 2002), herein called ("Standing Op.") (attached as Exhibit A to Appellant's Opening Brief). Citations to Appellant's Opening Brief are cited as "OB at __." 2 11-15)(3) Second, the Court found that Section 2(c), whereby Outcalt and Shaw granted irrevocable proxies to Genesis, did not involve a transfer of a substantial ownership interest in their Class B shares, so the automatic conversion provision of Section 7(d) of the NCS Charter was not triggered. (SJ Op. at 15-16) The Court found further support for this holding in Section 7(c)(5) of the NCS Charter, which provides that, as here, the giving of a proxy in connection with a solicitation of proxies subject to Section 14 of the Exchange Act is not a "transfer" of shares under the NCS Charter. (SJ Op. at 16-20) On October 31, 2002, Omnicare filed a notice of appeal (and moved for expedition) on both of these decisions to the Supreme Court of the State of Delaware. In the meantime, on November 14, the Stockholder Plaintiffs had their day in court on their motion for a preliminary injunction, which substantively addressed the exact same four fiduciary duty counts (Counts II through V) that were dismissed on standing grounds from Omnicare's Second Amended Complaint. - -------- (3) Omnicare, Inc. v. NCS Healthcare, Inc., C.A. No. 19800, 2002 WL 31445163 (Del. Ch. Oct. 29, 2002), herein called ("SJ Op.") (attached as Exhibit B to Appellant's Opening Brief). 3 SUMMARY OF ARGUMENT 1.Denied. The Court of Chancery did not err in dismissing Counts II through V of the Second Amended Complaint because Omnicare did not purchase shares of NCS stock until after the events forming the basis of the Second Amended Complaint were publicly disclosed. At the time of the events in question, Omnicare was not a shareholder and, thus, was not owed fiduciary duties. Any other result obviates Delaware's long-standing policy of not permitting a shareholder to purchase a fiduciary duty lawsuit. Further, the Court of Chancery correctly declined to recognize an exception to the well-settled rule that breach of fiduciary duty claims must be based on an actual, existing fiduciary relationship at the time of the alleged breach based solely upon Omnicare's status as a hostile bidder. 2.Denied. The Court of Chancery did not err in finding that the execution of the Voting Agreements did not constitute a "transfer" or "conversion" of Class B common stock under the NCS Charter. First, pursuant to Section 7(c)(5) of the NCS Charter, the grant of irrevocable proxies was made "in connection with" a solicitation of proxies pursuant to Section 14 of the Exchange Act and, thus, was exempted from the prohibitions on transfers in the NCS Charter. Second, the grantof irrevocable proxies in the Voting Agreements did not result in a "transfer of shares" of Class B common stock (or a transfer of interest in those shares) and, thus, did not warrant the automatic conversion of those shares into lower-vote Class A common stock. 4 STATEMENT OF FACTS A. THE PARTIES Appellee NCS is a Delaware corporation with its principal place of business in Beachwood, Ohio. NCS is an independent provider of pharmacy services to long-term care institutions, including skilled nursing facilities, assisted living facilities and other institutional healthcare settings. Appellee Genesis is a Pennsylvania corporation with its principal place of business in Kennett Square, Pennsylvania. Defendant Geneva Sub, a wholly owned subsidiary of Genesis, is a Delaware corporation. Geneva Sub was formed by Genesis to acquire NCS. Appellees Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells and Richard L. Osborne comprise the NCS Board. Outcalt has been Chairman of the NCS Board since 1986. (A415, Paragraph 15) Shaw has been President of NCS since 1986, and Chief Executive Officer since 1995. (A416, Paragraph 16) Sells, who has been a director of NCS since 1993, and Osborne, who has been a director of NCS since 1986, comprise the Independent Committee of the NCS Board (the "Independent Committee"). (A416, Paragraphs 17, 18, 28) Appellees Outcalt and Shaw hold approximately 65% of the voting power of NCS by virtue of their beneficial ownership of substantially all of the outstanding shares of Class B common stock. (SJ Op. at 2) Specifically, Outcalt owns 202,063 shares of Class A common stock and 3,476,086 shares of Class B common stock. (A139) Shaw owns 28,905 shares of Class A stock and 1,141,134 shares of Class B stock. (A118) Under the NCS Charter, each outstanding share of Class A stock entitles the record holder to exercise one vote per share (A24 Section 2(a)), and each outstanding share of Class B stock entitles the record holder to exercise ten votes per share. (A24 Section 2(b)) Appellant Omnicare is a Delaware corporation with its principal place of business in Covington, Kentucky. Omnicare is NCS's largest direct competitor in the institutional pharmacy business. 5 B. OMNICARE ATTEMPTS TO PRESSURE NCS INTO A BANKRUPTCY DEAL, WHILE NCS ATTEMPTS TO SECURE A DEAL PROVIDING VALUE TO ALL STAKEHOLDERS Since 1999, the NCS Board has been (and remains) faced with managing a company in default on its debt - consisting of senior, subordinated and trade debt of approximately $350 million - with fiduciary duties to both shareholders and creditors. (A144) To address these financial difficulties, the NCS Board painstakingly investigated numerous restructuring alternatives for over two years. (A144-48) Specifically, NCS actively canvassed the market by having its advisors contact over fifty different entities to solicit their interest in a variety of transactions with NCS, none of which were willing to offer fair value to NCS stakeholders. (A199) Part of this two-year process also involved failed discussions with Omnicare about proposals Omnicare made to purchase NCS's assets under Section 363 of the United States Bankruptcy Code. In a letter dated July 20, 2001, Omnicare made its first Section 363 proposal for $225 million, conditioned upon, among other things, satisfactory completion of due diligence. (A145) This proposal failed to provide full recovery to NCS's creditors, let alone any recovery for NCS's shareholders. (A145) To foster negotiations, NCS sent Omnicare a standard confidentiality agreement, which Omnicare refused to execute. (A145-46) Thereafter, on August 29, 2001, Omnicare made a second Section 363 proposal for $270 million, still well below NCS's debt liability and still providing absolutely nothing to NCS shareholders. (A146) In late September 2001, almost two months after NCS sent Omnicare its proposed agreement, Omnicare finally agreed to execute a limited confidentiality agreement and due diligence commenced. (A146) By mid-November 2001, Omnicare was frustrated with NCS's refusal to accept a bankruptcy offer and began to negotiate exclusively with a committee of subordinated noteholders of NCS debt (the "Ad Hoc Committee"). (A147) In February 2002, the Ad Hoc Committee informed the NCS Board that Omnicare had prepared a third Section 363 bankruptcy proposal, which again provided for a Section 363 bankruptcy sale for $313,750,000, subject to an undefined purchase price adjustment. (A147) Once again, this 6 consideration was lower than the face value of NCS's outstanding obligations and provided no recovery to shareholders. C. UNLIKE OMNICARE, GENESIS PROPOSES A TRANSACTION PROVIDING A RECOVERY TO ALL NCS STAKEHOLDERS In January 2002, Genesis and NCS began discussing a potential transaction. (A147) Early in the negotiations, Genesis indicated that any proposal it made would be conditioned upon a significant majority of the bondholders and controlling voting interests supporting the transaction. (A147) In June 2002, Genesis proposed a transaction with no associated bankruptcy filing, and - for the first time since NCS began its search for restructuring alternatives recovery for NCS shareholders to the tune of $7.5 million in Genesis stock. (A147) By late June, the Genesis proposal had improved even more, but Genesis refused to proceed further without an exclusive negotiating agreement and reiterated that discussions were conditioned upon an agreement with note holders and stockholder voting agreements. (A147) Fearful of losing Genesis, and given the fact that no other comparable proposals had surfaced over the past two years, NCS entered into an exclusive negotiating agreement with Genesis on July 3 (the "Exclusivity Agreement"). (A147) The Exclusivity Agreement lasted two weeks, with a one-week extension if the parties failed to reach an agreement and were still negotiating in good faith. (A147) Early in the day on July 26, 2002, the expiration date of the Exclusivity Agreement, the Independent Committee authorized an extension through July 31 because the parties were still in good faith negotiations and close to a definitive merger agreement. (A148) D. AFTER SIX MONTHS OF "RADIO SILENCE," OMNICARE REAPPEARS WITH A HIGHLY CONDITIONAL "OFFER TO NEGOTIATE" Late in the business day on July 26, 2002 - after not communicating directly with NCS for six months - Omnicare sent NCS a two-page letter containing a highly conditional indication of interest in acquiring NCS at $3.00 per share in cash. (A148) Among other things, Omnicare's offer to negotiate was conditioned upon expedited due diligence of NCS, despite having the opportunity for substantial due diligence review during their earlier failed negotiations with NCS. (A148) 7 That evening, the Independent Committee met to discuss Omnicare's offer to negotiate and directed its financial advisor to request that Genesis improve the economic terms of the proposed transaction. (A148) In response to this request, on Saturday, July 27, Genesis proposed that the Notes be redeemed in cash at their full principal amount, plus accrued and unpaid interest, and modified the exchange ratio to increase the number of Genesis shares to be received by NCS shareholders by almost 80%. (A148) Thus, each share of NCS common stock would be converted into 0.1 shares of Genesis common stock (valued at the time at approximately $1.60 per share of NCS common stock). As a condition for these improvements, however, Genesis issued an ultimatum: accept the improved offer by midnight Sunday, July 28, 2002, or discussions would be terminated and the offer withdrawn. (A148) Accordingly, on July 28, the NCS Board was faced with a choice: execute the firm Genesis offer which provided recovery for all NCS shareholders (and which, according to Genesis, would be taken off the table if not accepted by midnight July 28), or roll the dice on Omnicare's belated "offer to negotiate" and risk losing any recovery for NCS stakeholders. Critically, the NCS Board considered several viable risks before making its decision, including: - The risk that Genesis would retract its offer providing recovery for all NCS stakeholders, leaving NCS with no offer at all. - The risk that Omnicare, following due diligence, would either (1) rescind its "offer to negotiate" or (2) downwardly adjust the contemplated dollar figure of that offer. - The risk that Omnicare would not be able to achieve the requisite consent approvals under its credit facility and, therefore, would not be able to finance a deal at the price contemplated by its offer to negotiate. - The risk that once Genesis was out of the picture, Omnicare would have every incentive to crush NCS by driving it back into bankruptcy negotiations, or avoid a deal altogether. 8 - The risk that Omnicare would not guarantee to pay off NCS's creditors in full. (A213-14) The NCS Board made the right decision for all its constituencies, and chose the option providing guaranteed recovery for all NCS stakeholders by approving the NCS/Genesis Merger.(4) E. TERMS OF THE VOTING AGREEMENTS Once the NCS/Genesis Merger Agreement was approved by the NCS Board, Outcalt and Shaw executed the Voting Agreements. Under the Voting Agreements, Outcalt and Shaw agreed to vote, or cause to be voted, all of the shares (both Class A and Class B) owned by them: (1) in favor of the NCS/Genesis Merger and against a competing transaction; (2) against any proposal in opposition to or in competition with the NCS/Genesis Merger; and (3) against other narrowly defined transactions (i.e., liquidation of NCS or declaration of an extraordinary dividend). (A113 Section 2(b)) To this end, Outcalt and Shaw granted irrevocable proxies to Genesis to vote their shares in favor of the NCS/Genesis Merger and against certain competing transactions. (A113 Section 2(c)) Finally, Outcalt and Shaw agreed not to "transfer" any of their NCS shares prior to the effective date of the NCS/Genesis Merger. (A112 Section 2(a)) F. APPLICABLE PROVISIONS OF THE NCS CERTIFICATE Three provisions of the NCS Charter, all of which are found in Article IV, Section 7, are relevant to this appeal.(5) (SJ Op. at 4) The anti-transfer provision provides: - -------- (4) The terms of the NCS/Genesis Merger, including the various deal protection provisions, are the subject of pending shareholder litigation in the Court of Chancery and are not directly relevant to the issues of standing and charter interpretation raised by Omnicare on this appeal. (5) Omnicare claims that a fourth provision defining the term "beneficial ownership" (Section 7(g)) is also relevant. However, this narrow definition is, by its express terms, inapplicable to either the "transfer" or "conversion" provisions of the NCS Charter and, thus, irrelevant to Omnicare's motion for summary judgment. (SJ Op. at 4) 9 [N]o person holding any shares of Class B Common Stock may transfer, and the Corporation shall not register the transfer of, such shares of Class B Common Stock or any interest therein, whether by sale, assignment, gift, bequest, appointment or otherwise, except to a "Permitted Transferee"6 of such person. (A28 Section 7(a)) (emphasis added) The "conversion" provision of the NCS Charter provides that: Any purported transfer of shares of Class B Common Stock other than to a Permitted Transferee shall automatically, without any further act or deed on the part of the Corporation or any other person, result in the conversion of such shares into shares of Class A Common Stock on a share-for-share basis, effective on the date of such purported transfer. The Corporation may, as a condition to transfer or registration of transfer of shares of Class B Common Stock to a purported Permitted Transferee, require that the record holder establish to the satisfaction of the Corporation, by filing with the Corporation or the transfer agent an appropriate affidavit or certificate or such other proof as the Corporation may deem necessary, that such transferee is a Permitted Transferee. (A31-32 Section 7(d)) (emphasis added) Notably, the conversion of Class B stock under the express terms of Section 7(d) takes place only upon a "transfer of shares," and not upon a transfer of an interest in those shares. (A31-32 Section 7(d)) The NCS Charter also expressly provides that the giving of a proxy in connection with a solicitation of proxies does not constitute a transfer of Class B stock. Specifically, the NCS Charter states that: - -------- (6) The NCS Defendants agree that Genesis was not a "Permitted Transferee" as that term is defined under Sections 7(a)(1)-(a)(7) of the NCS Charter. 10 The giving of a proxy in connection with a solicitation of proxies subject to the provisions of Section 14 of the Securities Exchange Act of 1934 (or any successor provision thereof) and the rules and regulations promulgated thereunder shall not be deemed to constitute the transfer of an interest in the shares of Class B Common Stock which are the subject of such proxy. (A31 Section 7(c)(5)) (emphasis added) This broad exception, which applies only to Class B shares, is triggered when a proxy is given "in connection with" a public proxy solicitation, and is not merely limited to a proxy given "pursuant to" such a solicitation. The exception clearly acknowledges the reality that Class B shareholders, whose stock is not publicly traded, may provide proxies "in connection with" a public solicitation of the Class A shares regulated by Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The obvious intent of the exception is to apply to situations such as here, where the Class A shares will be publicly solicited, since the section applies only to Class B stockholders, who would not otherwise be the subject of a public solicitation of proxies. G. SEEKING TO COMMENCE LITIGATION, OMNICARE BELATEDLY PURCHASES SHARES OF NCS STOCK ON JULY 30 On July 29, 2002, Omnicare repeated its highly conditional indication of interest to acquire NCS for $3.00 per share in cash. (A150) Again, this expression of interest was conditioned upon completion of due diligence. (A150) After public announcement of the NCS/Genesis Merger, Omnicare purchased 1,000 shares of NCS Class A common stock, becoming an NCS shareholder for the first time. (Standing Op. at 6-7) 11 ARGUMENT I. THE COURT OF CHANCERY PROPERLY HELD THAT OMNICARE LACKED STANDING TO ASSERT BREACH OF FIDUCIARY DUTY CLAIMS BASED ON ACTIONS TAKEN (OR NOT TAKEN) ON OR BEFORE JULY 28, 2002. A. STANDARD OF REVIEW. The Court of Chancery properly dismissed Counts II through V of Omnicare's Second Amended Complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted. This Court's review of that discrete legal decision is de novo. See Account v. Hilton Hotels Corp., 780 A.2d 245, 248 (Del. 2001). B. APPLICABLE LEGAL STANDARDS. On a Rule 12(b)(6) motion to dismiss, the Court will assume the truth of all well-pleaded allegations in the complaint. See Grobow v. Perot, 539 A.2d 180, 187 n.6 (Del. 1988), overruled on other grounds sub nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000); Behrens v. Aerial Communications Inc., C.A. No. 17436, 2001 WL 599870, at *2 (Del. Ch. May 18, 2001). Because Omnicare's Second Amended Complaint failed to allege facts that "establish each and every element of a claim upon which relief could be granted," it was properly dismissed. Lewis v. Austen, C.A. No. 12937, 1999 WL 378125, at *4 (Del Ch. June 2, 1999). Questions of standing are properly considered on a motion to dismiss, Andra v. Blount, 772 A.2d 183, 188 (Del. Ch. 2000) (granting motion to dismiss for lack of standing); Guy v. Sills, C.A. No. 16201, 1998 WL 409346, at *1 (Del. Ch. July 10, 1998), and the Court need concern itself only "with the question of who is entitled to mount a legal challenge and not with the merits of the subject matter of the controversy." Stuart Kingston, Inc. v. Robinson, 596 A.2d 1378, 1382 (Del. 1991). 12 C. THE NCS BOARD OWED NO FIDUCIARY DUTIES TO OMNICARE WHEN IT APPROVED THE NCS/GENESIS MERGER AGREEMENT BECAUSE OMNICARE WAS NOT A STOCKHOLDER AT THAT TIME. Omnicare carefully avoids addressing the key legal principle underlying the Court of Chancery's decision to dismiss Counts II through V of its Second Amended Complaint for lack of standing, namely that "only persons who were stockholders at the time of an alleged wrongdoing have standing to sue corporate directors for breach of fiduciary duty." (Standing Op. at 9)(7) As the Court of Chancery properly recognized, standing to sue "refers to the 'right of a party to invoke the jurisdiction of a court to enforce a claim or redress a grievance.'" U-H Acquisition Co. v. Barbo, C.A. No. 13279, 1994 WL 34688, at *3 (Del. Ch. Jan. 31, 1994) ("U-Haul") (quoting Stuart Kingston, 596 A.2d at 1382). In deciding whether a party has standing to bring a claim, a court must "consider[] who is entitled to bring a lawsuit rather than the merits of the particular controversy." Id. (emphasis in original). "In order to achieve standing, the plaintiff's interest in the controversy must be distinguishable from the interest shared by . . . the public in general." Stuart Kingston, 596 A.2d at 1382 (citing Sprague v. Casey, 550 A.2d 184 (Pa. 1988)). "[S]tate courts apply the concept of standing as a matter of self-restraint to avoid the rendering of advisory opinions at the behest of parties who are 'mere intermeddlers.'" Id. (quoting Crescent Park Tenants Assoc. v. Realty Equities Corp. of New York, 275 A.2d 433 (N.J. 1971)). In the corporate context, any question of standing has to be considered in light of the most basic concept of corporate governance, namely, that under 8 Del. C. Section 141(a), the board of directors has the ultimate responsibility for managing the business and affairs of the company on behalf of its stockholders. To this end, this Court has consistently held that directors of Delaware corporations owe a triad of fiduciary duties to their stockholders - due care, loyalty and good faith - each of which must be discharged at all times. See, e.g., Emerald Partners v. Berlin, 787 A.2d 85, 90 (Del. 2001). Directors of a corporation owe no fiduciary duties to prospective shareholders or other unrelated third parties (such as potential bidders). See, e.g., Weiss v. Leewards Creative Crafts, - -------- 7 This tactical decision is curious, given that Omnicare conceded at oral argument below that this was the general rule. (Transcript of October, 24, 2002 Oral Argument at 45) (Standing Op. at 9) 13 Inc., C.A. No. 12384, 1993 WL 155493, at *3 (Del. Ch. Apr. 29), aff'd mem., 633 A2d 372 (Del. 1993); Emerson Radio Corp. v. International Jensen Inc., C.A. Nos. 15130, 14992, 1996 WL 483086, at *13 (Del. Ch. Aug. 20, 1996) (duty to negotiate with bidders "owed solely to . . . stockholders, as a corollary of the Board's fiduciary duty to achieve the highest available value for shareholders"); Gagliardi v. Trifoods Int'l, Inc., 683 A.2d 1049, 1055 (Del. Ch. 1996). Accordingly, as the Court of Chancery properly recognized, in order for a party to have standing to raise "a breach of fiduciary duty claim[, it] must be based on an actual, existing fiduciary relationship between the plaintiff and the defendants at the time of the alleged breach." (Standing Op. at 9-10) (emphasis added) Indeed, this key principle - which provides integrity and certainty to the corporate governance process - has been consistently enforced by this Court and in numerous decisions of the Court of Chancery. See, e.g., Anadarko Petroleum Corp. v. Panhandle Eastern Corp., 545 A.2d 1171, 1178 (Del. 1988) (fiduciary duty of loyalty of corporate board to prospective stockholders "arises only upon establishment of the underlying relationship"); Leung v. Schuler, C.A. No. 17089, 2000 WL 264328, at *6 (Del. Ch. Feb. 29, 2000) ("[T]o successfully state a claim for breach of the fiduciary duty of disclosure, the plaintiff must have been owed a fiduciary duty at the time of the alleged breach").(8) This important concept has also been consistently applied in the bidder context to find that plaintiff bidders who were not stockholders at the time of the complained-about wrong, such as Omnicare here, lack standing to bring fiduciary-based claims. See, e.g., U-Haul, 1994 WL 34688, at *5 (holding that arms-length tender offeror who was not a unitholder lacked standing to bring - -------- 8 See also Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001) (complaint must allege the existence of a fiduciary relationship as an element of a claim for aiding and abetting asserted breach of fiduciary duty); Sanders v. Devine, C.A. No. 14679, 1997 WL 599539, at *5 (Del. Ch. Sept. 24, 1997) ("In order to prevail on a breach of fiduciary duty claim, plaintiff . . . must first establish that at the time [of the alleged breach] he was a person to whom a fiduciary duty was owed."); Thorpe v. CERBCO, Inc., C.A. No. 11713, 1993 WL 35967, at *3 (Del. Ch. Jan. 26, 1993) (plaintiffs had "no direct right to be awarded judicial relief" for alleged breaches of duty that occurred before they became stockholders). 14 fiduciary duty claims against general partner); In re Gaylord Container Corp. S'holders Litig., 747 A.2d 71, 77 n.7 (Del. Ch. 1999) (bidder's standing to challenge defensive measures enacted by the target is tied to its status as a stockholder); see also Brown v. Automated Mktg. Sys., Inc., C.A. No. 6715, 1982 WL 8782, at *2 (Del. Ch. Mar. 22, 1982) (holding that purchaser of stock lacked standing to pursue individual claims based on pre-purchase breaches of fiduciary duty in approving a merger agreement).(9) In U-Haul, the Court of Chancery squarely addressed the standing issue raised here in the context of a limited partnership, holding that U- Haul, a non-unitholder tender offeror, was not owed any fiduciary duties by the general partners. U-Haul, 1994 WL 34688, at *5. The Court of Chancery concluded that "U-Haul therefore lacks standing to bring a claim for breach of a fiduciary duty by the general partners because it could not be owed any fiduciary duty by the general partners." Id. Although U-Haul interpreted limited partnership law, the Court of Chancery relied upon Delaware corporation law in reaching its decision. It is well settled that, just as a board of directors owes fiduciary duties to its stockholders, a general partner owes fiduciary duties to its limited partners and unitholders. See, e.g., Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., No. 372, 2001, 2002 WL 31303135, at *5 (Del. Oct. 11, 2002). - -------- (9) See also Tate & Lyle PLC v. Staley Continental, Inc., C.A. No. 9813, 1988 WL 46064, at *4 (Del. Ch. May 9, 1988) (finding standing where shareholder plaintiff was also a bidder); MacAndrews & Forbes Holdings, Inc. v. Revlon, Inc., C.A. No. 8126, 1985 WL 21129, at *1 (Del. Ch. Oct. 9, 1985) (allowing bidder who owned 30,000 shares on date of alleged breach to pursue individual claims). For this reason, Omnicare's reliance on these (and similar) cases (OB at 13-14) is misplaced. 15 Not surprisingly, Omnicare fails to address the U-Haul decision in its opening brief.(10) Moreover, Omnicare's citation to various decisions involving "stockholder-bidders" is of no assistance. (see generally OB at 13) Indeed, in each of those cases, the bidder whose standing was at issue was a stockholder in the defendant corporation at the time of the alleged breach of fiduciary duty. (Standing Op. at 15) Ultimately, Omnicare cannot cite to a single decision by any Delaware court in which a bidder who did not own stock in a target corporation at the time of the challenged corporate actions was permitted to pursue claims against the target's board of directors for breach of fiduciary duty. This undeniable lack of authority leads to the conclusion that the Court of Chancery properly held that Omnicare lacked standing to pursue its fiduciary-based claims against the NCS Board for actions the NCS Board took (or failed to take) before Omnicare became a stockholder. It is undisputed that Omnicare did not become a stockholder of NCS until after the NCS Board executed the Exclusivity Agreement with Genesis on July 3, and approved the NCS/Genesis Merger on July 28. (OB at 13) As a result, there is not even a "bare thread" to support Omnicare's standing to sue NCS for breach of fiduciary duty or violation of Section 141(a). Gaylord Container, 747 A.2d at 77 n.7. Nor should this Court authorize a new policy of permitting bidders such as Omnicare unfettered access to the courts to sue directors of companies of which they are not stockholders simply because they are a "bidder." As the Court below aptly explained in dismissing this misguided policy argument: Delaware courts have shown considerable latitude in entertaining fiduciary duty litigation brought by stockholders who are also themselves bidders for control. The only consistent limitation placed on those persons is that they also be stockholders at all relevant times and, thus, among those to whom a duty was - -------- (10) During the proceedings below, Omnicare refused to meaningfully address U-Haul even after NCS raised it in its motion to dismiss, claiming only that it involved "the wholly inapplicable context of limited partnership law." (Plaintiff's Memorandum of Law in Opposition to the NCS Defendants' Motion to Dismiss Omnicare's Second Amended Complaint Paragraph 16) 16 owed, even if they only own one share. Of course, this rule is not based on the economic significance of such a bidder's investment, which is often immaterial. Instead, it is based on a purely legal or equitable notion that limits to those having a relationship with the corporation the right to sue over its internal affairs. (Standing Op. at 17-18) (emphasis added) The asserted basis for Omnicare's unwarranted policy extension is that Omnicare "has a personal stake in the outcome of the present controversy." (OB at 13) As the Court below correctly recognized, if that basis was accepted, it is not immediately apparent what the limits of this doctrine would be. (Standing Op. at 18)(11) In attempting to manufacture a sufficient stake for standing purposes, Omnicare has turned the traditional analysis of standing on its head. Omnicare undoubtedly has an "interest" in preventing the merger of NCS and Genesis. It may even be considered to be, in the words of the trial court, a "highly motivated" bidder for NCS. (Standing Op. at 20-21) That Omnicare was "motivated" to purchase NCS stock only after learning of the NCS/Genesis Merger Agreement, despite having sought to acquire the assets of NCS for more than a year, brings this characterization into question. In any case, the interest that is relevant in determining whether Omnicare has standing is whether it has an interest in how the NCS Board discharged its fiduciary duties in connection with its decision to agree to the proposed merger with Genesis, not whether it would benefit from any relief granted. With respect to such claims, Omnicare is, in fact, a "mere intermeddler" who, at the time of those actions, was "not in any respect a participant in the corporation" (Standing Op. at 17) and had absolutely no entitlement to mount a legal challenge to any actions of the NCS Board. Nor can Omnicare plausibly contend that, as a current shareholder, it is somehow prejudiced by the lower court's ruling, as NCS stockholders have had their day in court on the substantive issues raised on Counts II through V. Ultimately, Omnicare is urging this Court to create an entirely new doctrine of standing to assist putative bidders in challenging corporate - -------- (11) Specifically, the Court below explained that: "If, as Omnicare suggests, persons external to those relationships are acknowledged to have standing to sue to enforce them, it is not immediately apparent why competing bidders are the only ones to whom such standing might be accorded." (Standing Op. at 18 n.29) 17 decision-making. In essence, Omnicare would have the Court find that a complete stranger to the corporate entity has standing to prosecute claims against directors for past breaches and violations of duties that were never owed to that party and for which it could never otherwise assert a right to relief. Omnicare has not, and cannot, cite any basis for adopting this extraordinary proposition in this State. This Court should reaffirm that only "those having a relationship with the corporation [have] the right to sue over its internal affairs" (Standing Op. at 18) and reject Omnicare's ill-defined concept of "bidder standing." D. THE COURT OF CHANCERY CORRECTLY HELD THAT PUBLIC POLICY DETESTS THE PURCHASE OF A LAWSUIT. Omnicare's belated purchase of shares of NCS stock does not cure its lack of standing because, as explained by the Court below, to permit otherwise would violate "a long standing Delaware public policy against the 'evil' of purchasing stock in order 'to attack a transaction which occurred prior to the purchase of the stock.'" (Standing Op. at 11, citing Rosenthal v. Burry Biscuit Corp., 60 A.2d 106, 111 (Del. Ch. 1948)) Accordingly, the Court of Chancery held that "because there is no doubt that Omnicare purchased stock in NCS after the relevant information [about the NCS/Genesis Merger] came to light, Omnicare is precluded from asserting any fiduciary duty claims arising out of actions taken by the NCS Board before Omnicare's purchase of shares on July 29, 2002." (Standing Op. at 13) To reach this conclusion, the Court below relied upon long- standing "general equitable principles" against purchasing a lawsuit. See, e.g., Brown, 1982 WL 8782, at *2 (emphasis added) (holding that purchaser of stock lacked standing to pursue individual claims based on alleged breaches of fiduciary duty in approving a merger agreement that had occurred before plaintiff had purchased stock). In Brown, the Court of Chancery summarized this general equitable principle as follows: [T]he purchaser ought to take things as he found them when he voluntarily acquired an interest. If he was defrauded in the purchase, he should sue the vendor. As to the corporation and its managers, so long as he is not injured in what he got when he purchased, and holds exactly what he got and in the condition in which he got it, there is no ground for complaint. 18 1982 WL 8782, at *2 (quoting Home Fire Ins. Co. v. Barber, 93 N.W. 1024, 1029 (Neb. 1903)). This public policy has been "vigorously enforced through recent times." (Standing Op. at 11-12, citing IM2 Merchandising & Mfg., Inc. v. Tirex Corp., C.A. No. 18077, 2000 WL 1664168, at *6 (Del. Ch. Nov. 2, 2000)) Omnicare attempts to distinguish Brown by incorrectly claiming that the claims at issue in that case were derivative, not individual. (OB at 15) The Brown opinion plainly describes the action before the Court as a "purported class action brought on behalf of the public shareholders of Automated Marketing Systems, Inc." Brown, 1982 WL 8782, at *1 (emphasis added). Rather than dismissing a derivative action under 8 Del. C. Section 327, the Court in Brown applied the "general equitable principles" that underlie that statute to dismiss an individual action brought by a stockholder who acquired shares only after the actions of which she complained. See Brown, 1982 WL 8782, at *2-3. Indeed, even a cursory review of Brown reveals the extent to which Brown's claims were identical to Omnicare's here. Brown was challenging a board's approval of a merger agreement which "she [felt] to be unfair to the public shareholders," but she purchased stock after the agreement was announced. Id. at *2. Such suits are indisputably individual or direct, regardless of whether the shareholder is also a bidder. See, e.g., Parnes v. Bally Entm't Corp., 722 A.2d 1243, 1245 (Del. 1999). Indeed, rather than directly address the important public policy against purchasing a lawsuit, Omnicare instead chooses to muddy the water on appeal by erroneously claiming that the Court of Chancery improperly "engraft[ed] the standing requirements of 8 Del. C. Section 327" onto individual claims. Nothing could be further from the truth. The Court of Chancery merely noted that the equitable policy outlined in Brown was codified in the derivative suit context by 8 Del. C. Section 327, and that the equitable policy was not limited to derivative claims alone. (Standing Op. at 11) The Court below continued by correctly recognizing that the "general equitable principles" outlined in Brown have been applied to preclude stockholders who later acquire their shares from prosecuting direct claims as well,(12) and also analogized the present case to those cases holding that plaintiffs who purchase stock after disclosures have been - -------- (12) Gaylord Container, 747 A.2d at 82 & n.15 (noting that plaintiffs "who buy stock and challenge the earlier adoption of properly disclosed defensive measure" should be "barred from recovery"). 19 made cannot pursue claims for breaches of the duty of disclosure.(13) (Standing Op. at 11-12) Moreover, Omnicare's reliance on this Court's decision in Alabama By-Products is misplaced. As this Court held in the context of an appraisal action, "[t]he stockholder's change in status from equity owner to corporate creditor renders any standing requirement based on stock ownership an impossibility." Alabama By-Products Corp. v. Cede & Co., 657 A.2d 254, 266 (Del. 1995). Here, there is nothing "impossible" about Omnicare owning NCS stock at the time of the alleged breach of fiduciary duties. The concern in Alabama By-Products was that the continuous ownership requirement of 8 Del. C. Section 327 would bar the individual claims attached to the appraisal action. See Alabama By-Products, 657 A.2d at 266; Cede & Co. v. Technicolor, Inc., 542 A.2d 1182, 1188 (Del. 1988). It is not the continuous ownership requirement that is relevant here, but rather the contemporaneous ownership requirement. It is one thing to claim that a stockholder who lost shares by perfecting appraisal rights retains the ability to sue for breaches of fiduciary duty which occurred while owning stock. It is quite another thing to claim that a non-stockholder can, with full knowledge of the terms of a merger agreement, buy stock and then attack the agreement. Unable to offer a plausible argument for why it should be permitted to buy a lawsuit, Omnicare attempts to end-run the lower court's decision by substantively raising for the first time on appeal the concept of a "continuing wrong" by the NCS Board. (OB at 11-12) Omnicare candidly admits that "[t]he trial court acknowledged none of this," surely because Omnicare did not seek relief for a purported "continuing wrong" in its Second Amended Complaint, or raise the issue in its briefing to the Court of Chancery below. (Id.) For this reason alone, this Court is justified in rejecting this argument. See Del. Supr. Ct. R. 8. In any event, Omnicare's belated claim of - -------- (13) Thorpe, 1993 WL 35967, at *3 ("[W]hile plaintiffs may have standing to complain about any breach of duty that occurs while they are shareholders they have no direct right to be awarded judicial relief for [acts that occurred before they purchased stock.]"); Sanders, 1997 WL 599539, at *5 ("In the present case, plaintiff was not a stockholder at the time the prospectus was issued, therefore, as a matter of law, there can be no liability under any fiduciary duty theories for the disclosures made in connection with the offering."). 20 "continuing wrong" is nothing more than a creative attempt to divert the proper focus from the NCS Board's decision to enter into the NCS/Genesis Merger Agreement on July 28, at which time Omnicare was not a stockholder. Indeed, any so-called "continuing wrong" (if such even exists) must necessarily stem from the NCS Board's action taken (or not taken) on or before that time. See, e.g., In re Beatrice Cos. Litig., Nos. 155, 1986, 156, 1986, 1987 WL 36708, at *3 (Del. Feb. 20, 1987) ("In the case of a proposed merger, the plaintiff must have been a stockholder at the time the terms of the merger were agreed upon because it is the terms of the merger, rather than the technicality of its consummation, which are challenged."); Brown, 1982 WL 8782, at *2 ("[I]t is not the merger itself that constitutes the wrongful act of which plaintiff complains, but rather it is the fixing of the terms of the transaction. . . ."). Likewise, Omnicare's argument (made for the first time on appeal) that the NCS/Genesis Merger Agreement vis a vis Section 141(a) results in a "continuing wrong" must fail. Specifically, Omnicare contends that the NCS Board, "by invoking (and refusing to disclaim) an invalid and unenforceable contract pursuant to which they purport to have abdicated for all time their unremitting fiduciary obligations to consider other acquisition proposals (including Omnicare's)," somehow continues to violate Section 141(a). (OB at 20) Once again, this Court may dismiss this argument without consideration, because Omnicare failed to raise it either in its Second Amended Complaint or in its briefing before the Court of Chancery. See Del. Supr. Ct. R. 8.(14) Even on its merits, however, this argument must be rejected, as it presumes the very contention Omnicare lacks standing to assert: that the NCS/Genesis Merger Agreement is "invalid and unenforceable." Indeed, accepting this argument would eviscerate the traditional equitable principles espoused in cases such as Brown and U-Haul by permitting non-stockholders to belatedly purchase shares after the announcement of a merger agreement and attack the directors' "continuing" decision not to breach it. This Court should not permit such a result. - -------- (14) It is worth repeating here that the substantive fiduciary and statutory duty claims raised in Counts II through V of the Second Amended Complaint are not before the Court at this time, and are currently pending before the Court of Chancery by virtue of the Stockholder Plaintiffs' ongoing lawsuit. 21 II. THE COURT OF CHANCERY PROPERLY HELD THAT, AS A MATTER OF LAW, THE VOTING AGREEMENTS DO NOT CONSTITUTE A "TRANSFER" RESULTING IN "CONVERSION" UNDER SECTION 7 OF THE NCS CHARTER. A. SCOPE OF REVIEW. On appeal from a motion for summary judgment, the standard of appellate review is de novo. See Centaur Partners IV v. Nat'l Intergroup, Inc., 582 A.2d 923, 926 (Del. 1990). Likewise, the interpretation of a corporate charter is a question of law subject to de novo review. Waggoner v. Laster, 581 A.2d 1127, 1134 (Del. 1990). B. APPLICABLE LEGAL STANDARDS. Summary judgment may be granted where, as here, no genuine dispute of material fact exists and one party is entitled to judgment as a matter of law. See Del. Ch. Ct. R. 56(c); Williams v. Geier, 671 A.2d 1368, 1375 (Del. 1996); Continental Ins. Co. v. Rutledge & Co., C.A. No. 15539, 2000 WL 268297, at *1 (Del. Ch. Feb. 15, 2000) ("Chancery Court Rule 56 gives that court the inherent authority to grant summary judgment sua sponte against a party seeking summary judgment . . . when the 'state of the record is such that the non- moving party is clearly entitled to such relief.'") (quoting Stroud v. Grace, 606 A.2d 75, 81 (Del. 1992)). In interpreting a corporate instrument such as a certificate of incorporation, Delaware courts apply principles of contract law. See, e.g., Waggoner, 581 A.2d at 1134 ("A certificate of incorporation is viewed as a contract among shareholders, and general rules of contract interpretation apply to its terms."); Harrah's Entm't, Inc. v. JCC Holding Co., 802 A.2d 294, 309 (Del. Ch. 2002) ("In general terms, corporate instruments such as charters and bylaws are interpreted in the same manner as other contracts."). Where the language of a corporate instrument is plain and clear (as the NCS Charter is here), "the Court will not resort to extrinsic evidence in order to aid in interpretation, but will enforce the contract in accordance with the plain meaning of its terms." McIlquham v. Feste, C.A. No. 19042, 2002 WL 244859, at *5 (Del. Ch. Feb. 13, 2002); see also Eagle Indus. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1233 (Del. 1997); Harrah's Entm't, 802 A.2d at 309. 22 When interpreting a particular provision of a certificate, "the instrument should be considered in its entirety, and all of the language reviewed together in order to determine the meaning intended to be given to any portion of it." See Superwire.Com, Inc. v. Hampton, 805 A.2d 904, 910 (Del. Ch. 2002) (quoting Ellingwood v. Wolf's Head Oil Ref. Co., 38 A.2d 743, 747 (Del. 1944)). Contracts should be construed to give effect to the intent of the parties. See DuPont v. Wilmington Trust Co., 45 A.2d 510, 520 (Del. Ch. 1946). C. THE COURT OF CHANCERY CORRECTLY HELD THAT THE VOTING AGREEMENTS (AND/OR THE PROXIES CONTAINED THEREIN) WERE NOT A "TRANSFER OF SHARES" (OR A TRANSFER OF INTEREST IN THOSE SHARES) RESULTING IN "CONVERSION" UNDER THE NCS CHARTER. In granting summary judgment to defendants, the lower court was appropriately concerned about protecting the voting rights of Class B shareholders, holding that "[t]here simply is no reason to believe that the drafters of the NCS Charter sought to prevent the holders of the Class B shares from exercising their uncontested majority voting power to adopt a plan and agreement of merger already approved and authorized by the NCS board of directors." (SJ Op. at 21). With this concern in mind, the Court correctly held that the Voting Agreements (and/or the proxies contained in Section 2(c) therein) did not constitute a "transfer" of Class B shares (or a transfer of interest in those shares) under the NCS Charter warranting a "conversion" of those shares. For the following reasons, the Court's decision below must be upheld. 1. THE VOTING AGREEMENTS WERE PROXIES GIVEN "IN CONNECTION WITH" THE SOLICITATION OF NCS SHARES UNDER SECTION 14 OF THE EXCHANGE ACT AND, THUS, NOT CONSIDERED A "TRANSFER" UNDER SECTION 7(C)(5) OF THE NCS CHARTER. As the Court below explained, a "review of the Voting Agreements and the Merger Agreement clearly show that Outcalt and Shaw granted the Section 2(c) proxies 'in connection with' an anticipated solicitation of proxies from the holders of the Class A shares." (SJ Op. at 20) Thus, the Voting Agreements - which are essentially Outcalt and Shaw's decision to vote in favor of the NCS/Genesis Merger, backed up by the grant of proxies to Genesis to vote those shares in such a fashion - are not considered a "transfer" under Section 7(c)(5) of the NCS Charter. 23 Specifically, Section 7(c)(5) of the NCS Charter provides that: The giving of a proxy in connection with a solicitation of proxies subject to the provisions of Section 14 of the Securities Exchange Act of 1934 (or any successor provision thereof) and the rules and regulations promulgated thereunder shall not be deemed to constitute the transfer of an interest in the shares of Class B Common Stock which are the subject of such proxy. (A31 Section 7(c)(5)) (emphasis added) Pursuant to Section 2(c) of the Voting Agreements, Outcalt and Shaw granted irrevocable proxies allowing Genesis to vote their shares in favor of the NCS/Genesis Merger. (SJ Op. at 20) Outcalt and Shaw entered into those Voting Agreements to facilitate the solicitation of proxies from NCS Class A shareholders for purposes of effectuating the NCS/Genesis Merger (and for which they had agreed to vote in favor). (Id.) Specifically, the Court below determined that the Voting Agreements were entered into "in connection with" the forthcoming solicitation process by NCS, as follows: The Voting Agreements recite that Outcalt and Shaw signed them "in order to induce [Genesis] to enter into the Merger Agreement." In the Merger Agreement, NCS obligated itself to hold a special meeting of its stockholders at the earliest practicable date for the purpose of obtaining stockholder approval of the Merger. The Merger Agreement also contemplates that, in connection with such meeting, the holders of NCS common stock will be furnished with a proxy statement prepared by NCS in accordance with the provisions of the Securities Exchange Act of 1934 and the "company shall solicit from the Company Stockholders proxies in favor of the Merger." The necessary connection is also apparent from the language of Section 2(b) of 24 the Voting Agreements that ties the promise to vote to that anticipated special meeting. (SJ Op. at 20) As a result, the Court held that Outcalt and Shaw did not, under the plain language of Section 7(c)(5), "transfer" their shares by virtue of the proxies. Thus, the giving of the proxies under Section 2(c) of the Voting Agreements did not trigger the anti-transfer provisions under Section 7(a), or the "conversion" provisions under Section 7(d).(15) Omnicare's two arguments on this point are unavailing. First, Omnicare claims that Section 7(c)(5) is inapplicable because "the provisions of Section 14 of the Exchange Act are applicable only to a solicitation of proxies with respect to securities registered pursuant to Section 12 of the Exchange Act" and "Class B common stock is not registered under Section 12." (OB at 32) This argument misses the point. Of course, the Class B shares owned by Outcalt and Shaw are not directly subject to the Exchange Act because (unlike Class A shares) they are not publicly traded, and never were intended to be so. However (as the lower Court recognized), the only reasonable way to construe Section 7(c)(5) - which applies only to shares of Class B stock - is to read that provision to encompass circumstances such as here, where Class B stockholders grant proxies "in connection with" a solicitation of Class A shares. (SJ Op. at 18-19) Indeed, narrowly construing Section 7(c)(5) to cover only proxies of Class B shares given "pursuant to" a solicitation under Section 14 of the Exchange Act would not only re-write the plain language of Section 7(c)(5), but would also render that provision utterly meaningless, because such a solicitation of Class B shares could never take place.(16) - -------- (15) Indeed, the Court below further held that the mere "giving of the proxies themselves did not result in the conversion of the Class B shares," especially because "the proxies are really just a convenient way to enforce the terms of the voting agreements found in Section 2(b). . . [and] are limited in scope . . . and can only be exercised in the manner and to the extent that the owners of the shares themselves promised to vote them." (SJ Op. at 15) (16) The Court below also noted that such a reading "makes common sense. In accordance with Article IV, Section 2(c) of the NCS Charter (with certain exceptions), the Class A and Class B shares 'vote together as a (continued...) 25 Second, Omnicare argues that the Voting Agreements could not have been entered into "in connection with" a solicitation of Class A shares because they were entered into before that solicitation commenced. (OB at 32) Again, this narrow interpretation of the phrase "in connection with" under Section 7(c)(5) misses the mark. As the Court below correctly held, Omnicare's "constrictive reading [of Section 7(c)(5)] is plainly unjustified by the language of that section," as well as incongruous with analogous case law construing the phrase in the securities law context.(17) (SJ Op. at 19) Thus, the Court below properly refused to engraft onto Section 7(c)(5) a requirement that the proxy be given "pursuant to," rather than "in connection with," a solicitation of proxies under Section 14 of the Exchange Act. (SJ Op. at 19) Moreover, Omnicare's argument overlooks that Section 5.3(a) of the NCS/Genesis Merger Agreement expressly provides that NCS will hold a stockholder meeting and solicit proxies in favor of the NCS/Genesis Merger. (A89) 2. THE VOTING AGREEMENTS DID NOT CONSTITUTE A "TRANSFER OF SHARES" (OR A TRANSFER OF A SUBSTANTIAL INTEREST OF THOSE SHARES) UNDER SECTIONS 7(A) AND 7(D) OF THE NCS CHARTER. The Court below held that Sections 7(a) and 7(d) of the NCS Charter are triggered upon the transfer of Class B shares (or "a substantial part of the total ownership interests associated with those shares"). (SJ Op. at 10-11) Although Section 7(a) expressly covers transfers of interests in Class B shares, the Court also read Section 7(d) as "being broad enough to encompass actual share transfers as well as other situations in which some interest in those shares although less than full legal or equitable ownership is transferred." (Id.) The Court noted that "to fall within the ambit of Section 7(d), the interest transferred - -------- (16) (continued...) single class in the election of directors . . . and with respect to all other matters to be submitted to the stockholders of the Corporation for a vote.'" Thus, it is to be expected that anyone soliciting proxies at NCS would solicit them from both the Class A and Class B stockholders." (SJ Op. at 19) 17 (SJ Op. at 21, citing Manhattan Cas. Co. v. Bankers Life & Cas. Co., 404 U.S. 6, 12-13 (1971). 26 must represent a substantial part of the total ownership interests associated with the shares in question." (SJ Op. at 11) Omnicare argues that Outcalt and Shaw have effectively transferred the greatest interest in their Class B shares (their voting power) to Genesis by virtue of the Voting Agreements, and effectively gave up all existing and future interests in those shares because the Voting Agreements virtually assure consummation of the NCS/Genesis Merger. (OB at 29-30) The Court below, however, properly recognized that Section 2(b) of the Voting Agreements is not a "transfer," but evidence of Outcalt and Shaw's right to vote their shares as they saw fit. (SJ Op. at 12-13) Specifically, the Court held that it could not: conclude that the mere promise to vote the shares found in Section 2(b) of the Voting Agreements amounts to a transfer of any part of Outcalt's or Shaw's ownership interests in the shares. On July 28, 2002, each of Outcalt and Shaw had the power to vote his shares as he saw fit, as well as the power to bind himself to exercise that power by contract. Section 2(b) of the Voting Agreements simply expresses their promises to vote those shares in a particular manner, in order to induce Genesis to enter into the Merger Agreement with NCS. Genesis did not, thereby, obtain any of their power to vote the shares. Instead, Genesis obtained at most a legal right to compel Outcalt or Shaw to perform in accordance with the terms of their contracts. (SJ Op. at 13) (emphasis added) Omnicare argues, however, that the Court's analysis is flawed because it treats the Voting Agreements "as if they do nothing more than provide a mechanism for implementing voting decisions that Outcalt and Shaw have already made." (OB at 26) Omnicare further argues even if one ignores the "beneficial ownership" provision, the Voting Agreements nonetheless resulted in a transfer to Genesis of a "substantial interest" in the Class B shares owned by Outcalt and Shaw because the Voting Agreements grant Genesis voting powers by virtue of the proxies contained in those agreements. (OB at 29) These arguments miss the mark. The lower court's conclusion is on par with the Court of Chancery's decision in Garrett v. Brown, which involved a restriction on share 27 transfers (and interests) strikingly similar to the provisions found in Section 7 of the NCS Charter. See C.A. Nos. 8423, 8427, 1986 WL 6708 (Del. Ch. June 13, 1986), aff'd mem., 511 A.2d 1044 (Del. 1986). As here, the issue in Garrett was whether an agreement among a class of stockholders containing extensive restrictions on alienability and voting rights was a prohibited transfer within the meaning of that stockholders' agreement. The Court in Garrett concluded that a transfer of "interest" in those shares did not occur, because "the Stockholders' Agreement [does] not in any way limit the stockholders' freedom to vote their shares as they see fit. That being the case, it would be inappropriate to read the definition of transfer to include a voting agreement." Id. at *2. Relying on the holding in Garrett, and focusing on Outcalt and Shaw's right as stockholders to exercise their voting power as they saw fit, the lower court held that "[w]hen [Outcalt and Shaw] agreed to the terms of Section 2(b) of [the Voting Agreements], they certainly were making a choice to vote their shares in favor of the Merger. By voting their shares, or agreeing how to vote them at a later meeting, neither Outcalt nor Shaw can be thought to have transferred that power to vote to anyone else." (SJ Op. at 14-15) (emphasis added) Moreover, Section 2(c) of the Voting Agreement does not change this result because "the proxies are really just a convenient way to enforce the terms of the voting agreements found in Section 2(b)." (SJ Op. at 15) Ultimately, Omnicare's entire argument on appeal rests on having this Court accept that the unrelated definition of "beneficial ownership" in Section 7(g) of the NCS Charter is tantamount to an "interest" in shares of Class B stock under Sections 7(a) and 7(d). Thus, Omnicare contends, Outcalt and Shaw effectively transferred beneficial ownership (and therefore, an interest in their Class B shares) to Genesis by virtue of the Voting Agreements. Section 7(g), however, is irrelevant to the analysis of the operation of Sections 7(a) and 7(d). Specifically, Section 7(g) of the NCS Charter provides that: For purposes of this Section 7, "beneficial ownership" shall mean possession of the power to vote or to direct the vote or to dispose of or to direct the disposition of the shares of Class B Common Stock in question, and a "beneficial owner" of a share of Class B Common Stock shall be the person having beneficial ownership thereof. (A32 Section 7(g)) 28 As the lower Court correctly recognized, the only place that the phrase "beneficial ownership" appears in Section 7 of the NCS Charter is in Section 7(e), which merely provides the "beneficial owner" the right to have those shares registered in his name. (SJ Op. at 4 n.3) Critically, there is no cross- reference of Section 7(g) with either Section 7(a) or Section 7(d). This Court must reject Omnicare's request to re-write those Sections to incorporate reference to Section 7(g). Garrett, 1986 WL 6708, at *8. In any event, the grant of the proxy under Section 2(c) of the Voting Agreements cannot be construed as a transfer of "beneficial ownership" (or any type of ownership) from Outcalt and Shaw to Genesis. The proxy is merely the enforcement mechanism for ensuring that Outcalt and Shaw's promise to vote their shares in favor of the NCS/Genesis Merger takes place. Indeed, as the lower court astutely held: "If the Merger Agreement is ultimately consummated, it will be because the NCS board of directors approved it and the holders of a majority of the NCS voting power voted to ratify it. It will not be because Outcalt and Shaw 'transferred beneficial ownership' of the Class B shares to Genesis, or because Genesis 'imposed' that agreement on the Class A shareholders." (SJ Op. at 17) Moreover, Omnicare's contention that Outcalt and Shaw transferred all but "mere physical possession" of their Class B shares to Genesis is a non-starter in light of Section 2(a) of the Voting Agreements. (OB at 30) When interpreting a contract or certificate of incorporation, the Court should consider the entire instrument and all of its language to determine the meaning of a specific provision. See Ellingwood v. Wolf's Head Oil Ref. Co., 38 A.2d 743, 747 (Del. 1944); Superwire.Com, 805 A.2d at 910. Omnicare does not contest that Section 2(a) limits Outcalt and Shaw's ability to transfer their NCS shares. (A129-30 Section 2(a); A135) If Outcalt and Shaw had actually transferred ownership of their Class B shares to Genesis under the Voting Agreements, then there would have been no need for the Section 2(a) restrictions on Outcalt and Shaw's ability to transfer their NCS shares. Such a strained interpretation of the Voting Agreements renders Section 2(a) completely meaningless.(18) - -------- 18 Section 2(a) further belies Omnicare's claim that, under Section 7(g) of the NCS Charter, Outcalt and Shaw have transferred "beneficial ownership" to Genesis. Section 7(e) of the NCS Charter clearly contemplates that, because a "beneficial owner" has the right to force NCS to register shares in its name, there can be only one "beneficial owner" of Outcalt or Shaw's shares. (SJ Op. at 12 n.14) 29 Finally, Omnicare criticizes the Court of Chancery for refusing to address "the application of the broader prohibition of Section 7(a) . . . [and] fail[ing] to recognize that a transfer of an interest in the shares might be deemed void under Section 7(a) without resulting in automatic conversion of the shares pursuant to Section 7(d)." (OB at 25) Once again, Omnicare has only itself to blame, as it did not raise this specific contention in either its Second Amended Complaint or before the Court of Chancery.(19) Accordingly, the Court need not consider this argument. See Del. Supr. Ct. R. 8. In any event, Omnicare's point is misleading; the Court of Chancery did carefully consider the relationship between Section 7(a) and Section 7(d) (SJ Op. at 10-11) and concluded that Outcalt and Shaw did not transfer an "interest" by either the agreement to vote or the proxy contained in the Voting Agreements, thus disposing of any suggestion that the Voting Agreements violated any part of the NCS Charter. (Id. at 11, 15) Manifestly, the Court of Chancery did address the application of both Section 7(a) and Section 7(d), and found no violation of the NCS Charter. D. THE COURT MAY ALSO CONSIDER THE FACT THAT SECTION 7(D) CONVERTS CLASS B SHARES ONLY UPON AN ACTUAL TRANSFER OF THOSE SHARES. The Court may also consider the fact that under the plain language of the Voting Agreements, Outcalt and Shaw did not transfer their shares of Class B stock to Genesis and, thus, their shares have not been "converted" into lower-vote Class A shares under Section 7(d) of the NCS Charter. Under Section 2(b) of the Voting Agreements, Outcalt and Shaw merely agreed to vote their NCS shares in favor of the NCS/Genesis Merger, against any competing transaction and against other narrowly defined transactions. Such a limitation of their voting rights is not a "transfer of shares" as envisioned under Section 7(d) of the NCS Charter. See, e.g., Garrett, 1986 WL 6708, at *10 (pledge to vote shares a certain way was held not to be a "transfer" of restricted shares, and did not limit shareholders' freedom in voting shares the way they saw fit). - -------- (19) Indeed, under Count I of the Complaint, Omnicare asked the Court of Chancery to declare that Outcalt and Shaw's shares "have been converted into Class A Shares." (A427 Paragraph 62) Put simply, Omnicare's contention that the transfer of interest is void under 7(a) is irrelevant to the relief requested under Count I. 30 Section 7(d) provides that "[a]ny purported transfer of shares of Class B Common Stock other than to a Permitted Transferee shall automatically . . . result in the conversion of such shares into shares of Class A Common Stock. . . . " (A31 Section 7(d)) (emphasis added) The plain language of Section 7(d) provides that conversion will occur only upon a transfer of shares, not the transfer of an interest in those shares. This is supported by reading the NCS Certificate in its entirety, which distinguishes in a number of places between a "transfer of shares" and a "transfer of interest" in shares. Compare A31 Section 7(d) (making "[a]ny purported transfer of shares of Class B Common Stock" result in automatic conversion of such shares into Class A shares) (emphasis added) with A28 Section 7(a) (prohibiting "transfer of, such shares of Class B Common Stock or any interest therein"); A31 Section 7(c)(5) (stating that granting of proxy in connection with proxy solicitation "shall not be deemed to constitute the transfer of an interest in the shares of Class B Common Stock"). Here, Omnicare argues that Outcalt and Shaw transferred some of their voting power to Genesis --not the shares themselves. See Eliason v. Englehart, 733 A.2d 944, 946 (Del. 1999) ("A proxy is evidence of an agent's authority to vote shares owned by another.") (emphasis added). Indeed, Outcalt and Shaw did not (as Omnicare contends) transfer all of their voting power to Genesis by virtue of their proxies. (OB at 28-29) Rather, Outcalt and Shaw retained voting power for transactions and issues unrelated to the NCS/Genesis Merger, such as decisions relating to NCS's business operations on an ongoing basis.(20) (A122 Section 2b; A130 Section 2(b)) Accordingly, the decisions of the Court of Chancery should be affirmed. - -------- (20) Omnicare's argument that the phrase "transfer of shares" used in Section 7(d) includes a transfer of interest in those shares is also undermined by the Delaware Uniform Commercial Code's explanation of when a transfer of securities has occurred. Under the Delaware UCC, a transfer of shares is not effective, and the transferee gains no rights in those shares, until the shares have actually been delivered to the transferee. See 6 Del. C. Sections 8-104, 8-301. Here, Omnicare has not shown (nor can it) that Outcalt and Shaw have delivered their shares of Class B stock to Genesis. 31 CONCLUSION For all of the foregoing reasons, the NCS Defendants respectfully request that this Court affirm the opinions of the Court of Chancery dismissing Counts II through V of Omnicare's Second Amended Complaint and granting summary judgment to Defendants on Count I of Omnicare's Second Amended Complaint. /s/ Edward P. Welch ------------------------------ Edward P. Welch (# 671) Edward B. Micheletti (# 3794) Katherine J. Neikirk (# 4129) James A. Whitney (# 4161) SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP One Rodney Square P.O. Box 636 Wilmington, Delaware 19899-0636 (302) 651-3000 Attorneys for the NCS Defendants OF COUNSEL: Mark A. Phillips BENESCH, FRIEDLANDER, COPLAN & ARONOFF LLP 2300 BP Tower, 200 Public Square Cleveland, Ohio 44114-2378 (216) 363-4500 DATED: November 22, 2002 32 CERTIFICATE OF SERVICE I hereby certify that on November 22, 2002, I caused two copies of the Appellees NCS Healthcare, Inc., Boake A. Sells and Richard L. Osborne's Answering Brief to be served upon the following counsel of record in the manner indicated below. BY HAND DELIVERY Donald J. Wolfe, Jr., Esquire Potter Anderson & Corroon LLP 1313 North Market Street Wilmington, Delaware 19801 Jon E. Abramczyk, Esquire Morris, Nichols, Arsht & Tunnell 1201 North Market Street Wilmington, Delaware 19801 David C. McBride, Esquire Young, Conaway, Stargatt & Taylor LLP 1000 West Street, 17th Floor Wilmington, Delaware 19899 Edward M. McNally, Esquire Morris, James, Hitchens & Williams LLP 222 Delaware Avenue, 10th Floor Wilmington, Delaware 19801 BY FEDERAL EXPRESS Paul Vizcarrondo, Esquire Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 /s/ Katherine J. Neikirk -------------------------- Katherine J. Neikirk (# 4129) EX-99.16 4 w66145exv99w16.txt MEMORANDUM OPINION AND ORDER ISSUED ON 11/22/2002 Exhibit 99.16 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY IN RE NCS HEALTHCARE, INC., ) Consolidated SHAREHOLDERS LITIGATION. ) C.A. No. 19786 MEMORANDUM OPINION AND ORDER SUBMITTED: NOVEMBER 14, 2002 DECIDED: NOVEMBER 22, 2002 REVISED: NOVEMBER 25, 2002 Joseph A. Rosenthal, Esquire, ROSENTHAL, MONHAIT, GROSS & GODDESS, P.A., Wilmington, Delaware; Robert J. Kriner, Jr., Esquire, CHIMICLES & TIKELLIS, LLP, Wilmington, Delaware; Richard B. Bemporad, Esquire, LOWEY DANNENBERG BEMPORAD & SELINGER, P.C., White Plains, New York; Daniel A. Osborn, Esquire, BEATIE AND OSBORN, LLP, New York, New York, Attorneys for Plaintiffs Edward P. Welch, Esquire, Edward B. Micheletti, Esquire, Katherine J. Neikirk, Esquire, James A. Whitney, Esquire, SKADDEN ARPS SLATE MEAGHER & FLOM, LLP, Wilmington, Delaware; Mark A. Philips, Esquire, Megan L. Mehalko, Esquire, H. Jeffrey Schwartz, Esquire, BENESCH, FRIEDLANDER, COPLAN & ARONOFF LLP, Cleveland, Ohio; Attorneys for Defendants NCS Healthcare, Inc., Boake A. Sells, and Richard L. Osbourne Jon E. Abramczyk, Esquire, MORRIS, NICHOLS, ARSHT & TUNNELL, Wilmington, Delaware; Frances Floriano Goins, Esquire, Thomas G. Kovach, Esquire, SQUIRES, SANDERS & DEMPSEY, LLP, Cleveland, Ohio; Attorneys for Defendant John H. Outcalt Edward M. McNally, Esquire, Michael A. Weidinger, Esquire, Elizabeth A. Brown, Esquire, MORRIS, JAMES, HITCHENS & WILLIAMS, LLP, Wilmington, Delaware; James R. Bright, Esquire, Timothy G. Warner, Esquire, SPIETH, BELL, McCURDY & NEWELL CO., L.P.A., Cleveland, Ohio; Attorneys for Defendant Kevin B. Shaw David C. McBride, Esquire, Bruce L. Silverstein, Esquire, Christian Douglas Wright, Esquire, Adam W. Poff, Esquire, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Paul Vizcarrondo, Jr., Esquire, Theodore N. Mirvis, Esquire, Mark Gordon, Esquire, John F. Lynch, Esquire, Lauryn P. Gouldin, Esquire, James J. Park, Esquire, WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Attorneys for Defendants Genesis Health Ventures, Inc. and Geneva Sub, Inc. LAMB, Vice Chancellor I. The board of directors of an insolvent, publicly traded Delaware corporation agreed to the terms of a merger pursuant to which all of its creditors will be paid in full and the corporation's stockholders will exchange their shares for the shares of a publicly traded Pennsylvania corporation. Several months after approving the merger agreement, but before the stockholder vote was scheduled, the board of directors of the Delaware corporation withdrew its prior recommendation in favor of the merger. It did this after deciding that a competing proposal was a superior transaction. In fact, the competing bid offers the company's stockholders an amount of cash equal to more than twice the current market value of the shares to be received in the merger. It also treats the corporation's other stakeholders on equal terms. The merger agreement contains a provision authorized by Delaware's corporation law, requiring that the agreement be placed before the corporation's stockholders for a vote, even if the board of directors no longer recommends it. In addition, in connection with that agreement, two stockholders of the Delaware entity, who hold a majority of the voting power, agreed unconditionally to vote all of their shares in favor of the merger. Thus, the terms of the agreements make it virtually certain that the proposed transaction will obtain stockholder approval. 1 The plaintiffs all hold shares of the corporation's common stock. Their complaint alleges the target directors breached their fiduciary duty of care when they approved a merger agreement and associated voting agreements without proper investigation. They allege that the directors, although aware of the existence of the bidder that has now emerged with the superior proposal, did not properly explore that company's readiness and willingness to enter into an agreement on superior terms. The plaintiffs have moved for a preliminary injunction in an effort to prevent the proposed merger from taking place. If an injunction issues, it is obvious that the stockholders will wind up with a better deal than the one they will get under the existing merger agreement. The question before this court is not, however, whether one deal is better than the other. If it were, the answer would be readily ascertainable from the directors' decision to rescind their earlier favorable recommendation. Instead, the question is whether there is a reasonable likelihood that, at trial, those directors will be shown to have breached the fiduciary duties they owe to all the corporation's stakeholders when they approved the merger transaction and the attendant voting agreements. The court has carefully reviewed and considered the factual record submitted on the motion for preliminary injunction, as well as the applicable law. From this review, it has become apparent that the plaintiffs have not carried their burden of showing a reasonable likelihood that the directors failed to properly 2 discharge their fiduciary duties in connection with their consideration and approval of the merger agreement. On the contrary, the record suggests that those directors pursued a rational process, in good faith and without self-interest, and were adequately apprised of all material information reasonably necessary to their decision. Moreover, the plaintiffs have failed to show a likelihood of success on their claim challenging the voting agreements and related "deal protection" provisions of the merger agreement under the intermediate standard of reasonableness review applied under Delaware law. II. A. The Parties The plaintiffs own an unspecified number of shares of NCS Class A common stock. They represent a class consisting of all holders of Class A common stock. As of July 28, 2002, NCS had 18,461,599 Class A shares and 5,255,210 Class B shares outstanding. Defendant NCS Healthcare, Inc. ("NCS" or "the Company") is a Delaware corporation headquartered in Beachwood, Ohio. NCS is a leading independent provider of pharmacy services to long-term care institutions including skilled nursing facilities, assisted living facilities and other institutional healthcare facilities. NCS common stock consists of Class A shares and Class B shares. The 3 Class B shares are entitled to ten votes per share and the Class A shares are entitled to one vote per share. The shares are virtually identical in every other respect. Defendant Jon Outcalt is Chairman of the NCS board of directors. Outcalt owns 202,063 shares of NCS Class A common stock and 3,476,086 shares of Class B common stock. Defendant Kevin Shaw is President, CEO and a director of NCS. At the time the merger agreement at issue in this dispute was executed with Genesis, Shaw owned 28,905 shares of NCS Class A common stock and 1,141,134 shares of Class B common stock. The NCS board has two other members, defendants Boake Sells and Richard Osborne (collectively with Outcalt and Shaw, the "Director Defendants"). Sells is a graduate of the Harvard Business School. He was Chairman and CEO at Revco Drugstores in Cleveland, Ohio from 1987 to 1992, when he was replaced by new owners. He has been unemployed since 1992 and lives off investment income and venture capital investing. He currently sits on the boards of both public and private companies. Osborne is a full-time professor at the Weatherhead School of Management at Case Western Reserve University. He has been at the university for over thirty years. Osborne currently sits on at least seven corporate boards other than NCS. Defendant Genesis Health Ventures, Inc. is a Pennsylvania corporation with its principal place of business in Kennett Square, Pennsylvania. It is a leading provider of healthcare and support services to the elderly. Defendant Geneva Sub, 4 Inc., a wholly owned subsidiary of Genesis, is a Delaware corporation formed by Genesis to acquire NCS. B. NCS Begins Its Search For Restructuring Alternatives Beginning in late 1999, changes in the timing and level of reimbursements by government and third-party providers adversely affected market conditions in the health care industry. As a result, NCS began to experience greater difficulty in collecting accounts receivables, which led to a precipitous decline in the market value of its stock. NCS common shares that traded above $20 in January 1999 were worth as little as $5 at the end of that year. By early 2001, NCS was in default on approximately $350 million in debt, including $206 million in senior bank debt and $102 million of its 5 3/4% Convertible Subordinated Debentures (the "Notes"). After these defaults, NCS common stock traded in a range of $0.09 to $0.50 per share until days before the announcement of the transaction at issue in this case. NCS quickly began to explore strategic alternatives that might address the problems it was confronting. As part of this effort, in February 2000, NCS retained UBS Warburg, L.L.C. to identify potential acquirers and possible equity investors. UBS Warburg contacted over fifty different entities to solicit their interest in a variety of transactions with NCS. UBS Warburg had marginal success in its efforts, and by October 2000, NCS had only received one non-binding 5 indication of interest valued at $190 million, substantially less than the face value of NCS's senior debt. This proposal was reduced by 20% after the offeror conducted its due diligence review. In December 2000, NCS terminated its relationship with UBS Warburg and retained Brown, Gibbons, Lang & Company as its exclusive financial advisor. During this period, NCS's financial condition continued to deteriorate and, in April 2001, NCS received a formal notice of default and acceleration from the trustee for holders of the Notes.(1) At about that time, NCS began discussions with various investor groups regarding a restructuring in a "pre-packaged" bankruptcy, but NCS did not receive any proposal that it believed provided adequate consideration for its stakeholders. Full recovery for NCS's creditors was a remote prospect, and any recovery for NCS stockholders seemed impossible. C. NCS Negotiates With Omnicare In the summer of 2001, NCS invited Omnicare, Inc. to begin discussions with Brown Gibbons regarding a possible transaction. On July 20, Joel Gemunder, Omnicare's President and CEO, sent Shaw a written proposal to acquire NCS in a bankruptcy sale under Section 363 of the Bankruptcy Code. This proposal was for $225 million subject to satisfactory completion of due diligence. (1) As NCS's financial condition worsened, the Noteholders formed a committee to represent their financial interests (the "Ad Hoc Committee"). 6 NCS asked Omnicare to execute a confidentiality agreement so that more detailed discussions could take place. The form of agreement NCS sent to Omnicare on July 27,200l was the same as that executed by at least thirty-six other parties that had pursued potential transactions with NCS. The confidentiality agreement was particularly important with respect to Omnicare because Omnicare was NCS's largest competitor.(2) Omnicare refused to execute the confidentiality agreement in that form and, in particular, objected to a provision prohibiting it from soliciting NCS's customers outside the ordinary course of Omnicare's business.(3) After protracted discussions, Omnicare executed a modified confidentiality agreement in late September 2001. That agreement allowed NCS to send certain due diligence materials to Omnicare, but, due to its limited scope, NCS was forced to withhold certain highly sensitive, non-public competitive information. In August 2001, Omnicare increased its bid to $270 million, but still proposed to structure the deal as an asset sale in bankruptcy. Even at $270 million, Omnicare's proposal was substantially lower than the face value of NCS's (2) Institutional pharmacy companies like Omnicare and NCS have proprietary interests in the cost structures of their pharmacies, and strive to keep this information confidential. (3) Discovery has revealed that, at the same time, Omnicare was attempting to lure away NCS's customers through what it characterized as the "NCS Blitz." The "NCS Blitz" was an effort by Omnicare to target NCS's customers. Omnicare has engaged in an "NCS Blitz" a number of times, most recently while NCS and Omnicare were in discussions in July and August 2001. 7 outstanding debt. It would have provided only a small recovery for Omnicare's Noteholders and no recovery for its stockholders. In October 2001, NCS sent Glen Pollack of Brown Gibbons to meet with Omnicare's financial advisor, Merrill Lynch, to discuss Omnicare's interest in NCS. At this meeting, Pollack identified potential synergies in an NCS/Omnicare merger and, in light of these synergies, pressed Omnicare to propose a merger transaction rather than an asset sale in bankruptcy. Omnicare responded that it was not interested in any transaction other than an asset sale in bankruptcy. There was no further contact between Omnicare and NCS between November 2001 and January 2002. Instead, Omnicare began secret discussions with Judy K. Mencher, a representative of the Ad Hoc Committee. In these discussions, Omnicare continued to pursue a transaction structured as a sale of assets in bankruptcy. In February 2002, the Ad Hoc Committee notified the NCS board that Omnicare had proposed an asset sale in bankruptcy for $313,750,000. Before July 2002, this represented the highest proposal Omnicare would offer, but the proposal was still less than the face value of NCS's debt and provided no recovery to NCS's stockholders. When Omnicare actually sent a draft asset purchase agreement to the Ad Hoc Committee, however, the Committee's members thought the agreement, "did not represent the deal" they had been discussing with Omnicare. NCS and Brown Gibbons thereafter kept in communication with the Ad Hoc Committee, 8 and were aware of the progress of the negotiations between the Committee and Omnicare. D. The NCS Board Creates An Independent Committee In January 2002, Genesis was contacted by members of the Ad Hoc Committee concerning a possible transaction with NCS, and Genesis agreed to consider the possibility. Genesis executed NCS's standard confidentiality agreement and began a due diligence review. Genesis had recently emerged from bankruptcy because, like NCS, it was suffering from dwindling government reimbursements. Genesis previously lost a bidding war to Omnicare in a different transaction. This led to bitter feelings between the principals of both companies. More importantly, this bitter experience for Genesis led to its insistence on exclusivity agreements and lock-ups in any potential transaction with NCS. NCS's operating performance was improving by early 2002. As NCS's performance improved, the NCS directors began to believe that it might be possible for NCS to enter into a transaction that would provide some recovery for NCS stockholders' equity. In March 2002, NCS decided that it should, but was not required to, form an independent committee of board members who were neither NCS employees nor major NCS stockholders (the "Independent Committee"). The NCS board thought 9 this was necessary because, due to NCS's precarious financial condition, it felt that fiduciary duties were owed to the enterprise as a whole rather than solely to NCS stockholders. Sells and Osborne were selected as the sole members of the committee, and given authority to consider and negotiate possible transactions for NCS. The entire NCS board, however, retained authority to approve any transaction. The Independent Committee retained the same legal and financial counsel as the NCS board. The Independent Committee met for the first time on May 14,2002. At that meeting Pollack suggested that NCS seek a "stalking-horse merger partner" to obtain the highest possible value in any transaction.(4) The Independent Committee agreed with the suggestion. On May 16, 2002, Scott Berlin of Brown Gibbons, Glen Pollack and Boake Sells met with George Hager, CFO of Genesis, and Michael Walker, who was Genesis's CEO. At that meeting, Genesis made it clear that if it were going to engage in any negotiations with NCS, it would not do so as a "stalking horse."(5) As one of its advisors testified, "We didn't want to be someone who set forth a valuation for NCS which would only result in that valuation . . . being publicly disclosed, and thereby creating an environment where Omnicare felt to maintain its (4) Pollack Dep. at 166. (5) Hager Dep. at 24. 10 competitive monopolistic positions, that they had to match and exceed that level."(6) Thus, Genesis "wanted a degree of certainty that to the extent [it] w[as] willing to pursue a negotiated merger agreement . . . , [it] would be able to consummate the transaction [it] negotiated and executed."(7) On or about June 3, 2002, Pollack discussed with Mencher and Eric Scroggins (an advisor to the Ad Hoc Committee), the progress of negotiations with Genesis. He told them that Genesis continued to conduct due diligence and appeared interested in a transaction. Pollack also told them that Omnicare's representative had not returned repeated phone calls. Scroggins told Pollack that Scroggins had been in regular contact with Omnicare's banker. In June 2002, Genesis proposed a transaction that would take place outside the bankruptcy context, and, although it did not provide full recovery for NCS's Noteholders, it provided the possibility that NCS stockholders would be able to recover something for their investment. As discussions continued, the terms proposed by Genesis continued to improve. On June 25, the economic terms of the Genesis proposal included repayment of the NCS senior debt in full, full assumption of trade credit obligations, an exchange offer or direct purchase of the NCS Notes providing NCS Noteholders with a combination of cash and Genesis (6) LaNasa Dep. at 37. (7) Pollack Dep. at 115. 11 common stock equal to the par value of the NCS Notes (not including accrued interest), and $20 million in value for the NCS common stock. Structurally, the Genesis proposal continued to include consents from a significant majority of the Noteholders as well as support agreements from stockholders owning a majority of the NCS voting power. E. Genesis And NCS Sign An Exclusivity Agreement NCS's financial advisors and legal counsel met again with Genesis and its legal counsel on June 26, 2002, to discuss a number of transaction-related issues. At this meeting, Pollack asked Genesis to increase its offer to NCS stockholders. Genesis agreed to consider this request. Thereafter, Pollack and Hager had further conversations as a result of which Genesis agreed to offer a total of $24 million in consideration for the NCS common stock, or an additional $4 million, in the form of Genesis common stock. Also at the June 26 meeting, Genesis's representatives demanded that, before any further negotiations take place, NCS agree to enter into an exclusivity agreement with it. As Hager from Genesis explained it: 12 [I]f they wished us to continue to try to move this process to a definitive agreement, that they would need to do it on an exclusive basis with us. We were going to, and already had incurred significant expense, but we would incur additional expenses . . . , both internal and external, to bring this transaction to a definitive signing. We wanted them to work with us on an exclusive basis for a short period of time to see if we could reach agreement.(8) On June 27, 2002, Genesis's legal counsel delivered a draft form of exclusivity agreement for review and consideration by NCS's legal counsel. The Independent Committee then met on July 3, 2002, to consider the proposed exclusivity agreement. Pollack presented a summary of the terms of a possible Genesis merger, which had continued to improve. The then-current Genesis proposal included (1) repayment of the NCS senior debt in full, (2) payment of par value for the Notes (without accrued interest) in the form of a combination of cash and Genesis stock, (3) payment to NCS stockholders in the form of $24 million in Genesis stock, plus (4) the assumption, because the transaction was to be structured as a merger, of additional liabilities to trade and other unsecured creditors. Although the two proposals are somewhat awkward to compare, due to their different transaction forms, the Genesis proposal was clearly far superior to the latest bid from Omnicare. First, the Noteholders were to receive 100% of the face value of the Notes, rather than between 70% and 80%. Second, (8) Hager Dep. at 68. 13 the stockholders were to receive approximately $1 per share, as opposed to nothing. Finally, given the structure of the transaction as a merger, rather than an asset sale in bankruptcy, the trade and other unsecured creditors stood to receive full value for their claims. In light of this very favorable proposal, the Independent Committee then considered Genesis's demand for a 30-day exclusivity agreement. Although the committee recognized the value of the Genesis proposal, it negotiated a shorter duration for the agreement. Genesis ultimately agreed to an initial 16-day period, followed by an additional week if, at the end of the 16 days, the parties were still engaged in negotiations. Accordingly, the exclusivity agreement, which was dated as of July 1 but not executed until July 3, 2002, was set to expire on July 19, with one possible automatic extension until July 26. After NCS executed the exclusivity agreement, Genesis provided NCS with a draft merger agreement, a draft Noteholders' support agreement, and draft voting agreements for Outcalt and Shaw, who together held a majority of the voting power of the NCS common stock. Genesis and NCS negotiated the terms of the merger agreement over the next three weeks. During those negotiations, the Independent Committee and the Ad Hoc Committee persuaded Genesis to improve the terms of its merger. The parties were still negotiating by July 19, and the exclusivity period was automatically extended to July 26. At that point, NCS and 14 Genesis were close to executing a merger agreement and related voting agreements. Genesis proposed a short extension of the exclusivity agreement so a deal could be finalized. On the morning of July 26, 2002, the Independent Committee authorized an extension of the exclusivity period through July 31. F. July 26: Omnicare Proposes To Negotiate By late July 2002, Omnicare came to believe that NCS was negotiating a transaction, possibly with Genesis or another of Omnicare's competitors, that would potentially present a competitive threat to Omnicare. Omnicare also came to believe, in light of a run-up in the price of NCS common stock, that whatever transaction NCS was negotiating probably included a payment for its stock. Thus, the Omnicare board of directors met on the morning of July 26 and, on the recommendation of its management, authorized a proposal to acquire NCS that did not involve a sale of assets in bankruptcy. On the afternoon of July 26, 2002, Omnicare faxed to NCS a letter outlining a proposed acquisition. The letter suggested a transaction in which Omnicare would retire NCS's senior and subordinated debt at par plus accrued interest, and pay the NCS stockholders $3 cash for their shares. Omnicare's proposal, however, was expressly conditioned on negotiating a merger agreement, obtaining certain third party consents, and completing its due diligence. 15 Mencher saw the July 26 Omnicare letter and realized that, while its economic terms were attractive, the "due diligence" condition substantially undercut its strength. In an effort to get a better proposal from Omnicare, Mencher telephoned Gemunder and told him that Omnicare was unlikely to succeed in its bid unless it dropped the "due diligence outs." She explained this was the only way a bid at the last minute would be able to succeed. Gemunder considered Mencher's warning "very real," and followed up with his advisors. They, however, insisted that he retain the due diligence condition "to protect [him] from doing something foolish." Taking this advice to heart, Gemunder decided not to drop the due diligence condition. Late in the afternoon of July 26, 2002, NCS representatives received voicemail messages from Omnicare asking to discuss the letter. The exclusivity agreement prevented NCS from returning those calls. In relevant part, that agreement precluded NCS from "engag[ing] or particpat[ing] in any discussions or negotiations with respect to a Competing Transaction or a proposal for one."(9) The July 26 letter from Omnicare certainly met the definition of a "Competing Transaction." (9) Keener Aff. Ex. 27. 16 Despite the exclusivity agreement, the Independent Committee met to consider a response to Omnicare. It concluded that discussions with Omnicare about its July 26 letter presented an unacceptable risk that Genesis would abandon merger discussions. The Independent Committee believed that, given Omnicare's past bankruptcy proposals and unwillingness to consider a merger, as well as its decision to negotiate exclusively with the Ad Hoc Committee, the risk of losing the Genesis proposal was too substantial. The committee foresaw that, if Genesis withdrew, Omnicare's conditional proposal would "spiral down" to either another bankruptcy proposal, or worse, no proposal at all. After this discussion, the Independent Committee instructed Pollack to use Omnicare's letter to negotiate for improved terms with Genesis. G. July 28: The Independent Committee And NCS Board Approve The Genesis Merger Agreement And The Voting Agreements Genesis responded to this request on July 27 by proposing substantially improved terms. First, it proposed to retire the Notes in accordance with the terms of the indenture, thus eliminating the need for Noteholders to consent to the transaction. This change involved paying all accrued interest plus a small redemption premium. Second, Genesis increased the exchange ratio for NCS common stock to one-tenth of a Genesis common share for each NCS common share, an 80% increase. Third, it agreed to lower the proposed termination fee in the merger agreement from $10 million to $6 million. In return for these 17 concessions, Genesis stipulated that the transaction had to be approved by midnight, July 28, or else Genesis would terminate discussions and withdraw its offer. The Independent Committee and the NCS board both scheduled meetings for July 28. The committee met first. Although that meeting lasted less than an hour, the minutes reflect that the directors were fully informed of all material facts relating to the proposed transaction. Most importantly, they received reports on the financial terms of the proposed transaction, the restrictive fiduciary out provision in the merger agreement, and Genesis's insistence on voting agreements from Outcalt and Shaw. They also reviewed Genesis's financial condition, including its ability to finance the proposed transaction. And they received an opinion from their financial advisor as to the fairness of the proposed transaction to NCS and its stockholders, from a financial point of view. The committee noted that consents were no longer required from the Noteholders, due to the revised terms of the transaction, and discussed the fact that, if the merger agreement was approved, Outcalt and Shaw were prepared to execute the required voting agreements. After concluding that Genesis was sincere in establishing the midnight deadline, the committee voted unanimously to recommend the transaction to the full board. 18 The full board met thereafter. After receiving similar reports and advice from its legal and financial advisors, the board first voted to authorize the voting agreements with Outcalt and Shaw, for purposes of Section 203 of the Delaware General Corporation Law ("DGCL").(10) After familiarizing itself with the merger terms,(11) the board then resolved that the merger agreement and the transactions contemplated thereby were advisable and fair and in the best interests of all the stakeholders of the Company and further resolved to recommend the transactions to the stockholders for their approval and adoption. Of particular note, the board considered the risks posed by the Omnicare proposal to its deal with Genesis. Sells noted that, given NCS's past negotiations with Omnicare that had led only to Section 363 bankruptcy proposals, NCS could not assume that Omnicare's proposal would likely result in an agreement superior to the Genesis offer. The board considered the risk that Omnicare, following due (10) The board was notified by its legal counsel that "under the terms of the merger agreement and because NCS shareholders representing in excess of 50% of the outstanding voting power would be required by Genesis to enter into stockholder voting agreements contemporaneously with the signing of the merger agreement, and would agree to vote their shares in favor of the merger agreement, shareholder approval of the merger would be assured even if the NCS Board were to withdraw or change its recommendation. These facts would prevent NCS from engaging in any alternative or superior transaction in the future." Pollack Dep. Ex. 38 at 41. (11) Outcalt received numerous drafts and made sure he understood any changes to the final version before signing it. Osborne clearly recalls having the terms of the agreement thoroughly explained to him, and he comprehended the explanations. It was not a per se breach of fiduciary duty that the NCS board did not read the NCS/Genesis merger agreement word for word. See, e.g., Smith v. Van Gorkom, 488 A.2d 858, 883 n.25 (Del. 1985). 19 diligence, would either rescind its offer, or downwardly adjust the contemplated dollar figure of that offer. The board also considered the risk that Omnicare would not be able to achieve the requisite consent approvals from its credit facility and, therefore, would not have been able to finance a deal at the price proposed in its July 26 letter. After a thorough discussion of the July 26 letter from Omnicare, the board concluded that "balancing the potential loss of the Genesis deal against the uncertainty of Omnicare's letter, results in the conclusion that the only reasonable alternative for the Board of Directors is to approve the Genesis transaction."(12) A definitive merger agreement between NCS and Genesis (and thereafter, the voting agreements) were executed later that day. H. The NCS/Genesis Merger Agreement And The Voting Agreements Among other things, the NCS/Genesis merger agreement provided the following: - NCS stockholders would receive 1 share of Genesis common stock in exchange for every 10 shares of NCS common stock held; - NCS stockholders could exercise appraisal rights under 8 Del. C. Section 262; - NCS would redeem NCS's Notes in accordance with their terms; (12) Keener Aff. Ex. 35. 20 - NCS would submit the merger agreement to NCS stockholders regardless of whether the NCS board continued to recommend the merger;(13) - NCS would not enter into discussions with third parties concerning an alternative acquisition of NCS, or provide non-public information to such parties, unless (1) the third party provided an unsolicited, bona fide written proposal documenting the terms of the acquisition; (2) the NCS board believed in good faith that the proposal was or was likely to result in an acquisition on terms superior to those contemplated by the NCS/Genesis merger agreement; and (3) before providing non-public information to that third party, the third party would execute a confidentiality agreement at least as restrictive as the one in place between NCS and Genesis; and - If the merger agreement were to be terminated, under certain circumstances NCS would be required to pay Genesis a $6 million termination fee and/or Genesis's documented expenses, up to $5 million. Further, Outcalt and Shaw (in their capacity as NCS stockholders) entered into voting agreements with Genesis. Significantly, those agreements provided, among other things, that: - Outcalt and Shaw were acting in their capacity as NCS stockholders in executing the agreements, not in their capacity as NCS directors or officers; - Neither Outcalt nor Shaw would transfer their shares prior to the stockholder vote on the merger agreement; - Outcalt and Shaw agreed to vote all of their shares in favor of the merger agreement; and (13) Section Del. C. Section 251(c) explicitly permits such a provision to appear in a merger agreement. 21 - Outcalt and Shaw granted to Genesis an irrevocable proxy to vote their shares in favor of the merger agreement. The merger agreement further provided that if either Outcalt or Shaw breached the terms of the voting agreements, Genesis would be entitled to terminate the merger agreement and potentially receive a $6 million termination fee. I. Subsequent Events On July 29, 2002, hours after the NCS/Genesis transaction was executed, Omnicare faxed a letter to NCS restating its conditional proposal and attaching a draft merger agreement. Later that morning, Omnicare issued a press release publicly disclosing the proposal. On August 1, 2002, Omnicare filed a lawsuit(14) attempting to enjoin the NCS/Genesis merger, and announced that it intended to launch a tender offer for NCS's shares at a price of $3.50 per share. On August 8,2002, Omnicare began its tender offer. By letter dated that same day, Omnicare expressed a desire to discuss the terms of the offer with NCS. Omnicare's letter continued to condition its proposal on satisfactory completion of a due diligence investigation of NCS. (l4) This lawsuit was subsequently dismissed in its entirety by two decisions of this court. See Omnicare v. NCS Healthcare, Inc., 2002 WL 31445168 (Del. Ch. Oct. 25, 2002); Omnicare v. NCS Healthcare, Inc., 2002 31445163 (Del. Ch. Oct. 29, 2002). Those decisions are currently the subject of an expedited appeal to the Delaware Supreme Court. 22 On August 8, 2002, and again on August 19, 2002, the NCS Independent Committee and full board of directors met separately to consider the Omnicare tender offer in light of the Genesis merger agreement. NCS's outside legal counsel and NCS's financial advisor attended both meetings. As a result of those meetings, the NCS board recommended that its stockholders not tender into the tender offer because the board felt the tender offer was "illusory," "conditional," and "uncertain." The board was unable to determine that Omnicare's expressions of interest were likely to lead to a "Superior Proposal," as the term was defined in the NCS/Genesis merger agreement, and thus the board was contractually prohibited from discussing Omnicare's expression of interest with Omnicare. On September 10, 2002, NCS requested and received a waiver from Genesis allowing NCS to enter into discussions with Omnicare without first having to determine that Omnicare's proposal was a "Superior Proposal." On September 13, NCS's legal and financial advisors met with Gemunder, and thereafter on several occasions with Omnicare's advisors, to discuss Omnicare's tender offer and merger proposal. Finally, on October 6, 2002, Omnicare irrevocably committed itself to a transaction with NCS. Pursuant to the terms of its proposal, Omnicare agreed to acquire all the outstanding NCS Class A and Class B shares at a price of $3.50 per share in cash. As a result of this irrevocable offer, on October 21, 2002, the NCS 23 board withdrew its recommendation that the stockholders vote in favor of the NCS/Genesis merger agreement. NCS's financial advisor withdrew its fairness opinion of the NCS/Genesis merger agreement as well. In August 2002, NCS stockholder plaintiffs filed complaints in this action. The complaints were superseded by an amended complaint filed on September 20, 2002. On October 29, 2002, this court granted summary judgment against Count I of the plaintiffs' complaint, which raised contract interpretational issues under the NCS Certificate of Incorporation. This preliminary injunction application is based on the fiduciary duty claims that have not been dismissed in this court's previous summary judgment ruling. III. A preliminary injunction is extraordinary relief that may be granted only where a party demonstrates: (1) a reasonable probability of success on the merits at a final hearing; (2) that the failure to issue a preliminary injunction will result in immediate and irreparable harm; and (3) that the harm to the plaintiffs if relief is denied will outweigh the harm to the defendants if relief is granted.(15) The (l5) See, e.g., SI Mgmt. L.P. v. Wininger, 707 A.2d 37,40 (Del. 1998); Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 179 (Del. 1986); In re Anderson, Clayton S'holders Litig., 519 A.2d 694,698 (Del. Ch. 1986); see also In re IXC Communications, Inc. S'holders Litig., 1999 WL 1009174, at * 4 (Del. Ch. Oct. 27, 1999) (stating "[tlhis [preliminary injunctive] relief is extraordinary and the test is stringent"). 24 plaintiffs bear the burden of establishing each of these necessary elements,(16) because injunctive relief "will never be granted unless earned."(17) The extraordinary remedy "is granted only sparingly and only upon a persuasive showing that it is urgently necessary, that it will result in comparatively less harm to the adverse party, and that, in the end, it is unlikely to be shown to have been issued improvidently."(18) IV. A. The Plaintiffs Have Failed To Establish A Reasonable Probability Of Success On The Merits Of Their Claims The court begins by considering the appropriate standard of review to apply to the board's approval of the transaction at issue. All four of the NCS directors were eminently qualified to serve, and the plaintiffs do not seriously argue that any of the directors is conflicted in relation to the merger.(19) Plaintiffs also do not argue (16) See Roberts v. General Instrument Corp., 1990 WL 118356, at *7 (Del. Ch. Aug. 13, 1990). (17) Lenehan v. National Computer Analysts Corp., 310 A.2d 661,664 (Del. Ch. 1973). (l8) Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571,579 (Del. Ch. 1998). (19) Plaintiffs did argue in their opening brief that Outcalt and Shaw were conflicted because they were entitled to receive certain payments as a result of the Genesis merger. However, these payments are, for the most part, pursuant to contractual obligations that pre-date the Genesis deal and would be equally required in an acquisition by Omnicare. The exception is a consulting agreement between Genesis and Outcalt that provides for four annual payments of $175,000. The problem with the plaintiffs' theory of conflicting interest is that Outcalt stood to gain an additional $5.1 million from his stockholdings had NCS been acquired by Omnicare even at the price of $3 per share proposed in Omnicare's July 26, 2002 letter. Given Outcalt's large NCS stock ownership position, and the amount he stood to gain or lose by choosing one transaction over another, the record at this stage of the proceeding clearly supports an inference that Outcalt's interests (as well as Shaw's) were aligned with the interest of all NCS stockholders, not at odds with them. See, e.g., IXC, 1999 WL 1009174, at *6. 25 that any of the directors acted disloyally or in bad faith in connection with any of the negotiations or the decision to approve the transaction with Genesis.(20) Instead, the plaintiffs claim that the directors violated their duty of care. Thus, the court must determine if Revlon applies, since, if it does, the duty of care is enhanced and the directors' job was to obtain the highest price reasonably available. If Revlon does not apply, normal business judgment analysis will, and the court will start with a presumption that the directors acted with due care, loyalty and in good faith. The court will then engage in an objective review of the process by which the board reached its decision.(21) But the effect of the presumption is powerful and, unless it is rebutted, the court will not substitute its judgment for that of the board.(22) 1. Revlon Analysis Is Not Required By This Transaction As part of the plaintiffs' overarching duty of care claim, they invoke Revlon and its progeny in claiming that the NCS directors breached their duty to seek a (20) The history of negotiations between NCS and Omnicare negates any suggestion that the NCS directors bore any animus toward Omnicare or had any personal reason to prefer Genesis to Omnicare. In addition, Omnicare was always explicit that, after a transaction, it desired to continue the employment of Outcalt and Shaw should they so wish. (21) See In re RJR Nabisco, Inc. S'holders Litig., 1989 WI. 7036, at *13 (Del. Ch. Jan. 31, 1989). (22) In re J.P. Stevens & Co. S'holders Litig., 542 A.2d 770, 780 (Del. Ch., 1988). 26 transaction that would yield the highest value reasonably available to the stockholders.(23) One circumstance that triggers Revlon is the sale of a company in a transaction that constitutes a change in control (i.e., either an extinguishment of the stockholders' equity for cash or a transaction that results in the creation of a control block).(24) A stock-for-stock merger, pursuant to which the stockholders receive shares of an issuer without a controlling person or group, does not trigger Revlon duties because it does not result in a change in control.(25) The situation presented on this motion does not involve a change of control. On the contrary, this case can be seen as the obverse of a typical Revlon case. Before the transaction with Genesis is completed, NCS remains controlled by the Class B stock ownership of Outcalt and Shaw to the extent they act in concert, and, (23) See Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34,43 (Del. 1994) (hereinafter, QVC). (24) See e.g., id. at 42-43. (25) See, e.g., Arnold v. Society for Sav. Bancorp., 650 A.2d 1270, 1290 (Del. 1994) (no change of control where control remains "in a large, fluid, changeable and changing market") (quoting QVC); Paramount Communications, Inc. v. Time, Inc., 1989 WL 79880, at *23 (Del. Ch. July 14, 1989) (holding that where control remains "in a large, fluid, changeable and changing market," the target board can properly consider strategic advantages to a merger and need not simply obtain the highest price available); see also In re Santa Fe Pac. Corp. S'holders Litig., 669 A.2d 59, 71 (Del. 1995) (concluding Revlon standard did not apply because plaintiff failed to allege facts showing a change in control occurred after a stock-for-stock merger); Krim v. ProNet, Inc., 744 A.2d 523, 525 (Del. Ch. 1999) (holding Revlon inapplicable because it "does not apply to stock-for-stock strategic mergers of publicly traded companies, a majority of the stock of which is dispersed in the market"). 27 possibly, by that of Outcalt alone. The record shows that, as a result of the proposed Genesis merger, NCS public stockholders will become stockholders in a company that has no controlling stockholder or group. Instead, they will be stockholders in a company subject to an open and fluid market for control.(26) The plaintiffs next argue that the process chosen by the NCS board and the Independent Committee to explore alternative transactions requires a different result under Revlon. They suggest that by agreeing to pursue a "stalking horse auction process" the Independent Committee and the NCS board put NCS "up for sale" in a way that imposed Revlon duties on them when they approved the Genesis merger agreement on July 28. The court is unable to agree that the process followed by the Independent Committee (or the board) was such that the law requires Revlon-type review of the decision to proceed with Genesis on July 28. A Revlon analysis is not implicated solely by seeking to conduct an auction that, if successful, might end with a change in control.(27) Arnold illustrates this point. There, Bancorp engaged in a year-long process of exploring alternatives to (26) QVC, 637 A.2d 45 (enhanced scrutiny in sale of control is required when the current stockholders' voting power is diminished and they are unable to ever obtain a premium for giving up control). (27) See Wells Fargo & Co. v. First Interstate Bancorp, 1996 WL 32169, at *4 (Del. Ch. Jan. 18, 1996) (talking to a number of possible transaction partners, without actually undertaking a change of control transaction, did not invoke Revlon duties). 28 enhance stockholder values, including a plan to sell the business in pieces for cash. The board of directors ultimately rejected the resultant proposal on May 28, 1992, and the company announced that it was going to focus on strengthening itself as an independent entity. More or less immediately thereafter, discussions began with Bank of Boston ("BoB"). Those discussions resulted in a proposal for a stock-for-stock merger by August of that year. BoB was widely held, without a controlling stockholder. The Delaware Supreme Court considered whether Revlon duties applied to the decision to authorize the BoB merger because the company had "initiate[d] an active bidding process seeking to sell itself." The Supreme Court answered this issue by drawing a distinction between the company's activities pre- and post-May 28, 1992. Since the post-May 28 negotiations led up to a non-change-of-control transaction, the Supreme Court did not treat them as a mere continuation of the earlier activities for the purpose of applying Revlon. In effect, it allowed the company to take itself off the market: In the instant case, the events transpiring between May 28, 1992 . . . and August 31, 1992 (when the board approved the Merger), and thereafter do not fit the circumstances requiring enhanced scrutiny of board action. Here, it can as easily be said that the events transpiring after NCS agreed to the exclusivity agreement "do not fit the circumstances requiring enhanced scrutiny of board action." This is so because the transaction ultimately approved does not 29 involve a "sale or change of control" within the meaning of Revlon, as "control of both [companies] remain[s] in a large, fluid, changeable and changing market."(28) The plaintiffs' argument finds nominal support in a passage in which the Arnold court, dismissing the argument that, because the company was "seeking to sell itself," Revlon applied, noted that to fall within "that category" of Revlon, the company must have "initiate[d] an active bidding process."(29) Mimicking this language, the plaintiffs argue that Revlon applies because the Independent Committee authorized the "stalking horse auction" process. This argument fails upon analysis. First, there is no evidence that the committee or its advisors, in fact, ever started an active bidding process. Instead, the record shows that, after the inaugural meeting of the Independent Committee on May 14, the committee's efforts were largely devoted to private discussions and negotiations with Genesis. Indeed, it is the very lack of an active auction process that gives rise to the complaint. Moreover, as in Arnold, whatever "active bidding process" may have been authorized in May was abandoned or changed dramatically when it became apparent in June that Genesis would not participate in an open auction process. Certainly, the Independent Committee abandoned the (28) QVC, 637 A.2d at 47. (29) Arnold, 650 A.2d at 1290. 30 "stalking horse" idea by late June or early July, when it agreed to enter into an exclusive negotiating arrangement with Genesis contemplating a non-change-of-control stock-for-stock merger transaction. (30) For all the forgoing reasons, the court concludes that Revlon does not apply and that the decision of the NCS board of directors to approve the Genesis merger will be examined under normal business judgment standards. 2. The Independent Committee And NCS Board Owed Fiduciary Duties To NCS Creditors And Stockholders Before turning to the analysis of the directors' decision-making process, it must be observed that the NCS directors were not operating in wholly normal circumstances. In fulfilling their responsibilities to manage the Company's "business and affairs,"(31) the Director Defendants certainly owe fiduciary duties to NCS and its stockholders. But, as directors of a corporation in the "zone of insolvency," the NCS board members also owe fiduciary duties to the Company's creditors.(32) There is no doubt that NCS was insolvent at all relevant times, as it was in default on and unable to repay approximately $350 million in debt.(33) (30) See Osborne Dep. at 107-08; Pollack Dep. at 166; Hager Dep. at 24; LaNasa Dep. at 37. (31) See 8 Del. C. Section 141(a); Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140, 1142 (Del. 1990). (32) See, e.g., Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., 1991 WL 277613, at *34 (Del. Ch. Dec. 30, 1991) (finding directors did not breach their fiduciary duties when they considered the interests of the entire corporate enterprise as well as the interests of a 98% stockholder when the corporation was in bankruptcy); Geyer v. Ingersoll Publ'n Co., 621 A.2d 784, 789 (Del. Ch. 1992) ("The existence of fiduciary duties at the moment of insolvency may cause directors to choose a course of action that best serves the entire corporate enterprise rather than any single group"). (33) See Pollack Dep. at 241 (stating that NCS was insolvent or in the zone of insolvency during his entire representation of NCS). 31 Thus, when choosing a course of action to pursue, the directors were not entitled to consider only the interests of the stockholders, but instead had a fiduciary duty to take into account the interests of all of the effected corporate constituencies. This continued to be true on July 28,2002, notwithstanding the fact that, if the proposed merger became effective, the Company's senior and subordinated debt would be paid in full. This is so because, unless and until such transaction was accomplished, NCS remained insolvent and in default on all its debt. Thus, in weighing NCS's response to the Genesis deadline and Omnicare's conditional letter proposal, the directors were obligated to give due consideration to the fact that any effort to achieve better terms for NCS's stockholders might have risked losing a highly desirable deal for its creditors. 3. The Decisions Of The NCS Directors Are Entitled To The Presumptions Of The Business Judgment Rule Under A Traditional Duty Of Care Analysis The duty of care relates to the process by which a board of directors makes a decision.(34) The applicable standard of conduct when deciding whether directors (34) See Brehm v. Eisner, 746 A.2d 244, 264 (Del. 2000) ("Due care in the decisionmaking context is process due care only") (emphasis in original). 32 have properly exercised their duty of care is whether they acted with "gross negligence," and whether they were adequately informed at the time they made their decision.(35) This is the business judgment standard of review. In the context of mergers and acquisitions (no less than elsewhere), the business judgment rule operates as a procedural presumption that directors of a Delaware corporation act in good faith, with the requisite care and without any conflict of interest.(36) Under the business judgment rule, "[c]ourts do not measure, weigh or quantify directors' judgments," rather they merely look to see if the process employed by the board was reasonable, with "irrationality" functioning as "the outer limit of the business judgment rule."(37) "Where judgment is inescapably required, all that the law may sensibly ask of corporate directors is that they exercise independent, good faith and attentive judgment, both with respect to the quantum of information necessary or appropriate in the circumstances and with respect to the substantive decision to be made."(38) With this legal backdrop in mind, the plaintiffs make essentially two arguments in attacking the NCS directors' exercise of due care. First, they argue that there was an actionable failure to include Omnicare in negotiations over a (35) Van Gorkom, 488 A.2d at 873; Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). (36) See McMuzzin v. Beran, 765 A.2d 910, 916-17 (Del. 2000). (37) Brehm, 746 A.2d at 264. (38) Equity-Linked Investors, L.P. v. Adams, 705 A.2d 1040, 1058 (Del. Ch. 1997). 33 possible transaction from as early as May 14, when the Independent Committee first met to consider its options. Second, the NCS stockholders allege it was a breach of the directors' duty of care to fail to contact Omnicare after its July 26 conditional proposal arrived. a. The NCS Directors Did Not Breach Their Duty Of Care By Failing To Contact Omnicare After May 14 With respect to the first argument, the history of relations between Omnicare and NCS demonstrate that NCS made a significant effort to solicit Omnicare's interest in a suitable transaction for more than a year. These attempts failed because Omnicare was only interested in pursuing an asset sale in bankruptcy. In fact, all three offers Omnicare made before July 26,2002, involved a Section 363 asset sale in bankruptcy. Such a transaction would have resulted in the Noteholders being paid less than the face value of their Notes, NCS stockholders receiving nothing for their shares, and NCS's trade and other creditors being left to fight over the remains of the corporation. Such an offer was unacceptable to the NCS directors who felt, at a minimum, they should strive to recover full payment for NCS's Noteholders, at least partial recovery for other creditors, and some recovery for the NCS stockholders. In a desire to achieve this type of transaction, Pollack met with Omnicare's representative in October 2001 and requested a merger or some other form of transaction outside of the bankruptcy context. Omnicare refused and informed NCS it would only consider a deal structured as a 34 bankruptcy sale. Omnicare then chose to begin negotiating exclusively and secretly with the Ad Hoc Committee of Noteholders. Even those negotiations failed when Omnicare and the Ad Hoc Committee could not reduce a verbal agreement to writing. In sum, the record does not support an inference that the Independent Committee or the NCS board of directors breached their duty of care by pursuing a transaction with Genesis by a process that did not include additional contact with Omnicare. On the contrary, the record fully supports a conclusion that Omnicare would have continued to press for a bankruptcy transaction in which the Noteholders recovered less than face value for their Notes and the NCS stockholders recovered nothing.(39) The post-May discussions focused on Genesis because (unlike earlier discussions with Omnicare) they quickly moved in a very positive direction. By June 2002, Genesis proposed a transaction outside of bankruptcy (though the transaction still did not provide complete recovery for NCS's outstanding debt) and, for the first time since NCS began its search for restructuring alternatives, provided a recovery for NCS stockholders.(40) By July 3, when the exclusivity (39) See Hodges Dep. at 252-53 (Cheryl Hodges, a director at Omnicare, stated that Omnicare made its July 26 proposal only because it learned that a competitor was close to making a deal with NCS and that it included a payment for NCS stock). (40) See Whitney Aff. Ex. 17. 35 agreement was signed, Genesis had improved its offer significantly. NCS's Noteholders would receive par value for their Notes, paid with a combination of Genesis stock and cash, and NCS's stockholders would receive $24 million in Genesis stock.(41) Also, the proposal was structured as a merger and was expected to include a full recovery for NCS trade creditors and other accounts payable.(42) Genesis, however, refused to go any further in negotiations without an exclusive dealing arrangement. It was because this last proposal was so superior to the ones Omnicare had made, or to the deal Omnicare was trying, unsuccessfully, to strike with the Ad Hoc Committee, that the Independent Committee agreed to a short period of exclusive dealing with Genesis.(43) At oral argument, the plaintiffs' counsel contended that, by entering into the exclusivity agreement with Genesis, the NCS board breached its duty of care. This argument is unpersuasive. The Independent Committee purposely understood that entering into an exclusivity agreement was the only way to see if a firm deal could be negotiated between NCS and Genesis. And, there was very little reason to believe that, without a competing deal from Genesis, Omnicare would have ever offered a deal other than a Section 363 asset sale in bankruptcy. The record shows that the directors considered these factors and made a rational (and, indeed, (41) See Whitney Aff. Ex. 18. (42) See id. (43) See Osborne Dep. at 107-08. 36 reasonable) decision to pursue a transaction with Genesis.(44) Certainly, the record does not reveal any important information that they overlooked in reaching the conclusion they did. (44) The following question was asked and answered at Osborne's deposition: Q. [By plaintiffs' attorney] In your role as a member of the special committee, did you think it was appropriate for NCS to enter into an exclusivity agreement with Genesis? A. [By NCS Director Osborne] We were in a situation where a promising opportunity was developing with Genesis. One that had the promise of substantial recovery for -- for creditors . . . , and also the chance of a significant value for shareholders. The company continued to be circling insolvency. We had talked to 50-plus companies and none had resulted in a deal. We had OmniCare, who had repeatedly offered only bankruptcy and no recovery for shareholders. We were very mindful of our responsibility to all the stakeholders, but particularly given our perilous condition to the noteholders and senior debt. And of course in this case, because of the chance of recovery for shareholders, it was very clear to me that we should be extremely careful to nurture and preserve this opportunity given the circumstances. We had been given analyses that showed negative value, looking at it every possible way for the equity, and here we were going to have -- at NCS we were going to have a recovery. So I was very clear that signing that agreement in order --and of course, they made it -- they were adamant that that would be required to move forward. It was very clear to me that I was doing my duty when we -- when I agreed to sign that agreement, [I was] crystal clear [it] was the right decision to make on behalf of the stakeholders. Osborne Dep. at 107-08. 37 b. The NCS Directors Did Not Breach Their Duty Of Care For Failing To Contact Omnicare After July 26 Viewing the actions of the NCS directors during the period of July 26 (when Omnicare's conditional proposal was received) through July 28 (when NCS executed the merger agreement with Genesis) under the business judgment rule, the court easily concludes that the NCS directors acted with adequate knowledge of all material facts and made a rational judgment as to the risks and rewards of agreeing to the Genesis offer. Indeed, even if the court were applying the Revlon standard of enhanced scrutiny, the directors' actions and decisions would pass muster. The NCS directors realized that the various conditions to the Omnicare proposal, including the due diligence "out," would create real risk if the directors tried to explore that proposal.(45) To begin with, the exclusivity agreement did not permit the NCS directors to discuss or negotiate the July 26 letter with Omnicare. Moreover, Independent Committee member Osborne testified that, even apart from the exclusivity agreement, he would not have considered it wise to risk losing a definitive deal with Genesis for the sake of pursuing Omnicare's "highly (45) In addition, as was later disclosed by the CFO of Omnicare, Omnicare did not have the requisite consents from its banks to draw upon the revolving credit facility funds it intended to use to purchase NCS. See Froesel Dep. at 261-65. 38 conditional expression of interest."(46) According to Osborne, this was a very clear decision.(47) Similarly, in discussing the risk of losing the Genesis bid, director and Independent Committee member Sells noted that, given NCS's past negotiations with Omnicare that had led only to Section 363 bankruptcy proposals, NCS simply could not assume that Omnicare's conditional proposal would be likely to result in an agreement superior to the Genesis offer.(48) Mencher, the Noteholders' representative on the Ad Hoc Committee, also was skeptical about negotiating further with Omnicare and was concerned about the risks it would pose to the pending Genesis deal. She stated, Omnicare already had shown themselves as being unable to complete a transaction that people had agreed to; hence, I thought there was a huge amount of risk going back to Omnicare, because I was afraid it would chase Genesis away, and a bird in the hand is always worth more than two in the bush.(49) (46) Osborne Dep. at 128. The overall quality of testimony given by the NCS directors is among the strongest this court has ever seen. All four NCS directors were deposed, and each deposition makes manifest the care and attention given to this project by every member of the board. (47) Id. at 128-29. (48) See Sells Dep., Ex. 2 at Tab 22 (Minutes of NCS board meeting on July 28, 2002 stated, "Mr. Sells . . . emphasized that reliance on Omnicare's July 26 letter would not be reasonable in light of Omnicare's historic conduct in negotiations with [NCS]. After further discussion, the Board concluded that balancing the potential loss of the Genesis deal against the uncertainty of Omnicare's letter, results in the conclusion that the only reasonable alternative for the Board of Directors is to approve the Genesis transaction"). (49) Mencher Dep. at 194. 39 Finally, even Gemunder (Omnicare's own CEO) understood that the conditional nature of his proposal made it problematic for NCS to respond. Mencher told him that he could not succeed unless he removed the due diligence "out." But Gemunder refused to do so because Omnicare was not prepared to accept the risk of having to proceed with a transaction without additional due diligence. Although hesitant to approach Omnicare, the Independent Committee members put Omnicare's conditional proposal to good use by sending Pollack back to negotiate with Genesis for better terms. This gambit succeeded in extracting a substantial increase in the consideration offered to both Noteholders and stockholders. This increased offer from Genesis, however, did not come without a cost. Genesis made clear that its new offer was a "take it or leave it" proposition. If the revised proposal was not accepted and the requisite agreements executed by the end of the day on July 28, Genesis would withdraw its offer and terminate negotiations. It is true that in some cases courts have expressed skepticism over threats of this nature."(50) But, the record here is convincing that Genesis would have withdrawn its offer and walked away from the deal if NCS violated the exclusivity agreement or allowed Genesis's deadline to pass. (50) See, e.g., RJR, 1989 WL 7036, at *17. 40 Given the dynamic existing on July 28, the record before the court does not support even a preliminary finding that the NCS directors failed to fulfill their fiduciary duties when they "shopped" Omnicare's proposal to Genesis, obtained a substantial improvement in the terms of that offer and then approved the transaction without contacting Omnicare. The process they followed was certainly a rational one, given the circumstances they then confronted. Beyond that, the record supports a finding that, even applying the more exacting Revlon standard, the directors acted in conformity with their fiduciary duties in seeking to achieve the highest and best transaction that was reasonably available to them. After looking for more than two years for a transaction that offered fair value to all NCS stakeholders, the board acted appropriately in approving the Genesis merger proposal, including the "deal protection" devices demanded by Genesis. 4. The "Deal Protection" Devices In The Merger Agreement Satisfy the Unocal Reasonableness Standard The plaintiffs argue that the Outcalt and Shaw voting agreements when coupled with the provision in the Genesis merger agreement requiring that it be presented to the stockholders for a vote pursuant to 8 Del. C. Section 251(c) constitute "defensive reactions" within the meaning of Unocal Corp. v. Mesa Petroleum 41 Co.,(51) and that these defensive devices were impermissibly preclusive, coercive and unreasonable.(52) The court agrees that these aspects of the Genesis merger agreement require special scrutiny. Nevertheless, the plaintiffs have not succeeded in showing that the NCS board of directors acted unreasonably at the time it agreed to these provisions or that these provisions were improperly preclusive or coercive of stockholder action. The Unocal doctrine is applied by Delaware courts to subject to an intermediate level of reasonableness scrutiny the actions taken by directors that are defensive in nature and have the effect of either coercing involuntary stockholder action or precluding voluntary stockholder action.(53) The reasonableness standard of Unocal and related cases(54) is designed, to address and reconcile potential conflicts that arise in merger or acquisition transactions between the directors' power to manage the affairs of the corporation and the stockholders' power to sell (51) 493 A.2d 946 (Del. 1985). See also Unitrin, Inc. v. American Gen. Corp., 651 A.2d 1361, 1386-89 (Del. 1995). (52) See, e.g., Williams v. Geier, 671 A.2d 1368, 1377 (Del. 1996) ("A Unocal analysis should be used only when a board unilaterally . . . adopts defensive measures in reaction to a perceived threat"). (53) Id. (54) See Brazen v. Bell Atlantic Corp., 695 A.2d 43, 48 (Del. 1997) (applying reasonableness standard to review $550 million termination fee in merger agreement.) 42 or vote their shares.(55) Our courts have applied this standard to examine deal protection devices, even in non-Revlon situations.(56) The plaintiffs point out that the combined effect of the "force the vote" provision in the merger agreement, authorized by Section 251(c) of the DGCL,(57) and the Outcalt and Shaw voting agreements virtually guarantees that the Genesis merger will be accomplished. The plaintiffs argue that these provisions cannot survive a reasonableness analysis because they were not adopted in response to any legitimate threat to corporate control or effectiveness and because they are preclusive of the stockholders' ability to accept the Omnicare offer.(58) (55) See Leo E. Strine, Jr., Categorical Confusion: Deal Protection Measures in Stock-for-Stock Merger Agreements, 56 Bus. Law. 919, 934 n.44 (2001) ("A closer reading of the cases suggests that the `unilateral' question turns solely on whether the defensive measures were adopted without involvement by the stockholders," citing Williams v. Geier). (56) Ace Limited v. Capital Re Corp., 747 A.2d 95 (Del. Ch. 1999); Phelps Dodge Corp. v. Cyprus Amax Minerals Co., 1999 WL 1054255 (Del. Ch. Sept. 27, 1999); but see IXC, 1999 WL 1009174 (according "business judgment" deference to defensive provisions in merger agreement, after careful and thorough review of reasonableness of entire board process leading to adoption of merger agreement). (57) Section 251(c) was amended in 1998 to allow for the inclusion in a merger agreement of a term requiring that the agreement be put to a vote of stockholders whether or not their directors continue to recommend the transaction. Before this amendment, Section 251(c) was interpreted as precluding a stockholder vote if the board of directors, after approving the merger agreement but before the stockholder vote, decided no longer to recommend it. See Van Gorkom, 488 A.2d at 887-88. In this case, NCS is obliged to convene a meeting of its stockholders to vote on the Genesis merger agreement even though the NCS board of directors has withdrawn its recommendation in favor of that agreement. (58) The plaintiffs also argue that the $6 million termination fee and the no-talk provisions in the merger agreement subject this transaction to a Unocal analysis. These were not devices that served to ultimately "lock up" the NCS/Genesis merger. Rather the acts that served to lock up this transaction were only the Section 251(c) provision in the merger agreement and the execution of voting agreements by Outcalt and Shaw. 43 This court is always solicitous of the rights of stockholders of Delaware corporations, and it will act to enjoin the operation of terms of merger agreements that unreasonably coerce or preclude stockholders from deciding whether or not to approve or ratify a merger agreement. In the circumstances of this case, however, it cannot be said that director approval of the voting agreements, even in conjunction with the Section 251(c) provision in the merger agreement, acted as an unreasonable "lock-up" of the Genesis transaction. On the contrary, the perceived threat NCS faced was the potential loss of the Genesis deal followed by a In any event, the termination fee represents 2% of the total transaction value, which is by no means coercive or preclusive. Because the NCS board owed fiduciary duties to both stockholders and creditors, the debt portion of the transaction value should be taken into account when evaluating reasonableness. See Kysor Indus. V. Margaux, Inc., 674 A.2d 889, 897-98 (Del. Super. 1996) (approving a termination fee by considering value of merger price plus assumption of liabilities). As far as the limited "no-talk" provision, such provisions "are common in merger agreements and do not imply some automatic breach of fiduciary duty." IXC, 1999 WL 1009174, at *1. This court has questioned the validity of limited no-talk provisions only where a board of directors has not informed itself or "completely foreclosed the opportunity" to negotiate with a third party. Phelps Dodge Corp v. Cyprus Amax Minerals Co., 1999 WL 1054255, at *2 (Del. Ch. Sept. 27, 1999). Here, as previously explained, the NCS board was well-informed before agreeing to this no-talk provision. Further, NCS did not foreclose itself from negotiating with Omnicare, as evidenced by the fact that it was able to enter into discussions with Omnicare. This no-talk provision is also dissimilar to the no-talk provision in Ace Ltd. v. Capital Re Corp., 747 A.2d 95 (Del. Ch. 1999), under which the board could not speak to another offeror without first obtaining counsel's written opinion that such discussions were necessary for the board to comply with its fiduciary duties (which would never have happened because the company was not in "Revlon-land"). Id. at 106. The no-talk provision in this dispute, unlike the one at issue in Ace, does not require the NCS directors to receive counsel's written opinion before negotiating with a third party. Instead, NCS was merely obligated to consult with their financial and legal advisors before talking. 44 downward spiral in the price offered for NCS. The record shows that the directors questioned the need for these provisions and agreed to them only because Genesis was unwilling to commit itself to the transaction without them. Moreover, the board was aware that Outcalt and Shaw had expressed a willingness to enter into the voting agreements only as a means of achieving the Genesis transaction and without material conflicting interests. There is also no suggestion in this record that the directors authorized these terms or agreements in order to preclude what they knew or should have known was a superior transaction. On the contrary, at the time the directors acted to meet the Genesis deadline, the only proposal reasonably available to them was the one they adopted. Finally, Omnicare certainly is not precluded from making a bid for the combined NCS/Genesis entity, as Gemunder admitted in his testimony.(59) Indeed, Omnicare's financial advisors have already begun to analyze such a transaction.(60) 5. Plaintiffs Cannot Demonstrate That It Is Reasonable They Will Prevail On The Merits Of Their Claim That Genesis Aided And Abetted A Breach Of Fiduciary Duty The Delaware Supreme Court, in Malpiede v. Townson,(61) set forth the following requirements for imposing aiding and abetting liability: (1) existence of (59) Gemunder Dep. at 309. (60) See Whitney Aff. Ex. 33. (61) 780 A.2d 1075 (Del. 2001). 45 a fiduciary relationship; (2) breach of a fiduciary duty; (3) knowing participation in the breach by the defendants; and (4) damages proximately caused by the breach.(62) The plaintiffs have failed to satisfy these requirements. As the court explained in Cantor Fitzgerald, "[a] common basis for disposing of accomplice liability theories is that [the p]laintiff has not proved the underling claim for principal liability."(63) As discussed in the preceding sections, the plaintiffs have not established a reasonable probability of success on the merits that any breaches of fiduciary duty occurred. Since the plaintiffs have failed to show the underlying breaches of fiduciary duty, they cannot possibly establish third-party liability under Malpiede. B. The Existence Of Immediate Irreparable Harm Because the plaintiffs have failed to prove a probability of success on the merits of their application, the court will not reach the issue of irreparable harm. C. The Balance Of Equities Because the plaintiffs have failed to prove a probability of success on the merits of their application, the court will not reach the issue of balancing equities. (62) Id. at 1096. (63) 724 A.2d at 584. 46 V. For the foregoing reasons, plaintiffs' application for a preliminary injunction is DENIED. IT IS SO ORDERED. /s/ Stephen P. Lamb ----------------------------------- Vice Chancellor 47 EX-99.17 5 w66145exv99w17.txt PRESS RELEASE ISSUED BY COMPANY Exhibit 99.17 FOR IMMEDIATE RELEASE Contact: Gerald D. Stethem Senior Vice President & Chief Financial Officer NCS HealthCare, Inc. 216-378-6808 DELAWARE CHANCERY COURT RULES IN FAVOR OF NCS/GENESIS MERGER Beachwood, Ohio - (November 25, 2002) NCS HealthCare, Inc. (NCSS.OB) announced today that the Delaware Court of Chancery ruled in favor of NCS's proposed merger with Genesis Health Ventures, Inc. (NASDAQ:GHVI) by denying a request for a preliminary injunction that would have delayed or possibly prevented that transaction. The Court also rejected plaintiffs' claims that the NCS Board of Directors breached its fiduciary duties by approving the merger agreement with Genesis and certain related voting agreements. In its opinion, the Delaware Chancery Court noted that the "record suggests that [the NCS] directors pursued a rational process, in good faith and without self-interest, and were adequately apprised of all material information reasonably necessary to their decision." In response to the Court's ruling, NCS Chairman, Jon Outcalt, said "we are extremely pleased by this outcome. The Delaware Chancery Court's opinion confirms what we have known all along: that the NCS Board at all times acted in the best interests of NCS's stakeholders and in strict compliance with our fiduciary duties. With this litigation behind us, we can now refocus our efforts on completing the Genesis merger - a transaction that we believe represents an excellent opportunity for NCS and its stakeholders." Kevin Shaw, NCS President and CEO, said that he was gratified by the strong opinion issued by the Delaware Chancery Court - the premier court in the world for adjudicating corporate controversies - upholding the actions of the NCS Board. The Court noted that "the overall quality of testimony given by the NCS directors is among the strongest this court has ever seen" and that the depositions of the NCS directors "make manifest the care and attention given this project by every member of the board." NCS stockholders are scheduled to vote on the Genesis merger at a special meeting to be held on December 5, 2002. Due to the voting agreements entered into by Messrs. Outcalt and Shaw, who collectively own approximately 64% of NCS's total voting power, stockholder approval of the merger is assured. The Genesis merger is now expected to be completed on or about December 12, 2002. NCS noted that an earlier ruling of the Delaware Chancery Court holding that Omnicare, Inc. did not have standing to assert certain claims against the NCS directors and that the voting agreements entered into by Messrs. Outcalt and Shaw did not cause the conversion of the high vote Class B shares into low vote Class A shares has been appealed by Omnicare to the Delaware Supreme Court and that the appeal is scheduled to be heard on December 3, 2002. NCS is represented by special outside legal counsel Benesch, Friedlander, Coplan & Aronoff LLP and Skadden, Arps, Slate, Meagher & Flom LLP and financial advisor Candlewood Partners LLC. * * * * * NCS HealthCare, Inc. is a leading provider of pharmaceutical and related services to long-term care facilities, including skilled nursing centers, assisted living facilities and hospitals. NCS serves approximately 200,000 residents of long-term care facilities in 33 states and manages hospital pharmacies in 10 states. In connection with the special meeting of stockholders relating to NCS's proposed merger with Genesis Health Ventures, Inc. and a pending tender offer from Omnicare, Inc., NCS HealthCare, Inc. has filed certain materials with the Securities and Exchange Commission, including a definitive proxy statement and a Solicitation/Recommendation Statement on Schedule 14D-9. SECURITY HOLDERS ARE URGED TO READ THESE MATERIALS BECAUSE THEY CONTAIN IMPORTANT INFORMATION. Investors and security holders may obtain a free copy of these materials, as well as other materials filed with the Securities and Exchange Commission concerning NCS HealthCare, Inc., at the Securities and Exchange Commission's website at http://www.sec.gov. In addition, these materials and other documents may be obtained for free from NCS HealthCare, Inc. by directing a request to NCS HealthCare, Inc. at 3201 Enterprise Parkway, Suite 220, Beachwood, Ohio 44122; Attn: Investor Relations. NCS HealthCare, Inc. and its directors and executive officers may be deemed to be participants in the solicitation of proxies from the Company's stockholders with respect to the special meeting described above. Information concerning such participants is contained in NCS HealthCare's proxy statement relating to the proposed merger with Genesis Health Ventures, Inc. -----END PRIVACY-ENHANCED MESSAGE-----