-----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, AsojPsrztaxsOxipyARBbOSzq5KPNNdUlL4EFD9+F42I9HYu42RUQlI61NUvtv8n mdOnnb5tcIFjeDdfjoFpNQ== 0000950117-02-002893.txt : 20021127 0000950117-02-002893.hdr.sgml : 20021127 20021127171929 ACCESSION NUMBER: 0000950117-02-002893 CONFORMED SUBMISSION TYPE: SC TO-T/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20021127 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 TO-T/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-47039 FILM NUMBER: 02844230 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: OMNICARE INC CENTRAL INDEX KEY: 0000353230 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 311001351 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-T/A BUSINESS ADDRESS: STREET 1: 100 E RIVERCENTER BLVD STREET 2: STE 1600 CITY: COVINGTON STATE: KY ZIP: 41101 BUSINESS PHONE: 6063923300 MAIL ADDRESS: STREET 1: 100 E RIVERCENTER BLVD STREET 2: STE 1600 CITY: COVINGTON STATE: KY ZIP: 41101 SC TO-T/A 1 a33852.txt OMNICARE, INC. ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- SCHEDULE TO/A (RULE 14d-100) TENDER OFFER STATEMENT UNDER SECTION 14(d)(1) OR SECTION 13(e)(1) OF THE SECURITIES EXCHANGE ACT OF 1934 AMENDMENT NO. 28 ------------------- NCS HEALTHCARE, INC. (Name of Subject Company (Issuer)) OMNICARE, INC. NCS ACQUISITION CORP. (Names of Filing Persons (Offerors)) CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE (Title of Class of Securities) 62887410 (CUSIP Number of Class A Common Stock) AND CLASS B COMMON STOCK, PAR VALUE $0.01 PER SHARE (Title of Class of Securities) NOT APPLICABLE (CUSIP Number of Class B Common Stock) PETER LATERZA, ESQ. VICE PRESIDENT AND GENERAL COUNSEL OMNICARE, INC. 100 EAST RIVERCENTER BOULEVARD COVINGTON, KENTUCKY 41011 TELEPHONE: (859) 392-3300 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of Filing Persons) COPY TO: MORTON A. PIERCE, ESQ. DEWEY BALLANTINE LLP 1301 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019 TELEPHONE: (212) 259-8000 ------------------- CALCULATION OF FILING FEE Transaction Valuation* Amount of Filing Fee $91,816,869 $18,363.37
* Estimated for purposes of calculating the amount of the filing fee only. This amount assumes the purchase of (i) 18,460,599 shares of the class A common stock, par value $0.01, of NCS HealthCare, Inc. (the 'Company'), representing all of the outstanding shares of such class as of July 28, 2002 (less 1,000 shares of such class owned by Omnicare, Inc.), (ii) 5,255,210 shares of the class B common stock, par value $0.01, of the Company, representing all of the outstanding shares of such class as of July 28, 2002, (iii) 2,422,724 shares reserved for issuance upon the exercise of outstanding options to purchase class A common stock and (iv) 94,858 shares reserved for issuance upon the exercise of outstanding options to purchase class B common stock. The number of outstanding shares and shares reserved for issuance upon the exercise of options is contained in the Current Report on Form 8-K filed by the Company on July 30, 2002. [X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount Previously Paid: $18,363.37 Filing party: Omnicare, Inc. Form or Registration No.: SC TO Date Filed: August 8, 2002 [ ] Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer. Check the appropriate boxes below to designate any transactions to which the statement relates: [x] third-party tender offer subject to Rule 14d-1 [ ] issuer tender offer subject to Rule 13e-4 [ ] going private transaction subject to Rule 13e-3 [ ] amendment to Schedule 13D under Rule 13d-2 Check the following box if the filing is a final amendment reporting the results of the tender offer [ ] ________________________________________________________________________________ This Amendment No. 28 amends and supplements the Tender Offer Statement on Schedule TO filed with the Securities and Exchange Commission (the "Commission") on August 8, 2002 (the "Schedule TO") by Omnicare, Inc., a Delaware corporation ("Omnicare"), and NCS Acquisition Corp., a Delaware corporation ("Purchaser") and a wholly-owned subsidiary of Omnicare. The Schedule TO relates to a tender offer by Purchaser to purchase all of the outstanding shares of class A common stock, par value $0.01 per share, and class B common stock, par value $0.01 per share, of NCS HealthCare, Inc. (the "Company") for a purchase price of $3.50 per share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated August 8, 2002 (the "Offer to Purchase"), and in the related Letter of Transmittal (the "Letter of Transmittal" which, together with the Offer to Purchase, as hereby or hereafter amended or supplemented from time to time, constitute the "Offer"). Copies of the Offer to Purchase and the related Letter of Transmittal are filed with the Schedule TO as Exhibits (a)(1)(A) and (a)(1)(B), respectively. Capitalized terms used and not defined herein shall have the meanings assigned such terms in the Offer to Purchase and the Schedule TO. Item 11. Additional Information. The following is hereby added to the end of Section 18 ("Legal Proceedings") of the Offer to Purchase: The Company, Jon H. Outcalt, Kevin B. Shaw, Boake A. Sells, Richard L. Osborne, Genesis Health Ventures, Inc. and Geneva Sub, Inc. (collectively, the "Appellees") filed with the Supreme Court of the State of Delaware Answering Briefs in opposition to Omnicare's appeal of the Delaware Chancery Court's rulings (1) granting in part the Motions to Dismiss Omnicare's Second Amended Complaint filed by the Company, its Board of Directors and Genesis Health Ventures, Inc. (the "Motions to Dismiss") and (2) denying the Motion for Summary Judgment as to Count I of Omnicare's Second Amended Complaint filed by Omnicare (the "Motion for Summary Judgment") and granting summary judgment in favor of the Company, its Board of Directors, Genesis Health Ventures, Inc. and Geneva Sub, Inc. With respect to Omnicare's appeal of the ruling on the Motions to Dismiss, Appellees oppose Omnicare's argument that the Chancery Court erred in rejecting Omnicare's argument that it has standing to pursue its lawsuit because, among other things, Omnicare has suffered unique individual harm as a potential acquiror and current stockholder. With respect to Omnicare's appeal of the ruling on the Motion for Summary Judgment, Appellees oppose Omnicare's argument that the Chancery Court erred in concluding that the voting agreements entered into by Messrs. Outcalt and Shaw did not violate the Company's amended and restated certificate of incorporation and that their shares of NCS Class B Common Stock (ten votes per share) were not automatically and irrevocably converted into shares of NCS Class A Common Stock (one vote per share) pursuant to the terms of the amended and restated certificate of incorporation. Copies of these Answering Briefs are attached hereto as Exhibits (a)(1)(TT), (a)(1)(UU) and (a)(1)(VV) and are incorporated herein by reference. Item 12. Exhibits. Item 12 is hereby amended and supplemented with the following information: Exhibit (a)(1)(TT) Answering Brief filed by Appellees NCS HealthCare, Inc., Boake A. Sells and Richard L. Osborne in the Supreme Court of the State of Delaware on November 22, 2002. Exhibit (a)(1)(UU) Answering Brief filed by Appellees Jon H. Outcalt and Kevin B. Shaw in the Supreme Court of the State of Delaware on November 22, 2002. Exhibit (a)(1)(VV) Answering Brief filed by Appellees Genesis Health Ventures, Inc. and Geneva Sub, Inc. in the Supreme Court of the State of Delaware on November 22, 2002. 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. Dated: November 27, 2002 OMNICARE, INC. By: /s/ DAVID W. FROESEL, JR. ------------------------------- Name: David W. Froesel, Jr. Title: Senior Vice President and Chief Financial Officer NCS ACQUISITION CORP. By: /s/ DAVID W. FROESEL, JR. ------------------------------ Name: David W. Froesel, Jr. Title: Vice President and Chief Financial Officer EXHIBIT INDEX (a)(1)(A) Offer to Purchase dated August 8, 2002.* (a)(1)(B) Letter of Transmittal.* (a)(1)(C) Notice of Guaranteed Delivery.* (a)(1)(D) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.* (a)(1)(E) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.* (a)(1)(F) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.* (a)(1)(G) Summary Advertisement, published August 8, 2002.* (a)(1)(H) Press Release issued by Omnicare, Inc. on August 8, 2002.* (a)(1)(I) Complaint filed in the Chancery Court, New Castle County, Delaware on August 1, 2002.* (a)(1)(J) Press Release issued by Omnicare, Inc. on August 8, 2002.* (a)(1)(K) First Amended Complaint filed in the Chancery Court, New Castle County, Delaware on August 12, 2002.* (a)(1)(L) Press Release issued by Omnicare, Inc. on August 20, 2002.* (a)(1)(M) First Amended Complaint filed in the United States District Court for the Northern District of Ohio on August 21, 2002.* (a)(1)(N) Press Release issued by Omnicare, Inc. on August 26, 2002.* (a)(1)(O) Press Release issued by Omnicare, Inc. on September 6, 2002.* (a)(1)(P) Selected material from a presentation of Omnicare, Inc. at the Bear Stearns 15th Annual Healthcare Conference on September 17, 2002 at The Waldorf Astoria, New York, New York.* (a)(1)(Q) Press Release issued by Omnicare, Inc. on September 20, 2002.* (a)(1)(R) Motion for Summary Judgment as to Count I of the First Amended Complaint filed in the Chancery Court, New Castle County, Delaware on September 30, 2002.* (a)(1)(S) Motion to Dismiss the First Amended Complaint filed in the United States District Court for the Northern District of Ohio on September 13, 2002.* (a)(1)(T) Opposition to Omnicare's Motion to Dismiss and Motion for Preliminary Injunction filed in the United States District Court for the Northern District of Ohio on September 30, 2002.* (a)(1)(U) Press Release issued by Omnicare, Inc. on October 4, 2002.* (a)(1)(V) Defendant's Motion to Dismiss the Second Amended Complaint filed in the Chancery Court, New Castle County, Delaware on October 3, 2002.* (a)(1)(W) Omnicare's Reply Memorandum of Law in Further Support of the Motion to Dismiss the First Amended Complaint filed in the United States District Court for the Northern District of Ohio on October 15, 2002.* (a)(1)(X) Second Amended Complaint filed in the Chancery Court, New Castle County, Delaware on October 16, 2002.* (a)(1)(Y) Plaintiff's Memorandum of Law in Opposition to the NCS Defendants' Motion to Dismiss Omnicare's Second Amended Complaint filed in the Chancery Court, New Castle County, Delaware on October 17, 2002.* (a)(1)(Z) Omnicare's Memorandum of Law in Opposition to Plaintiff's Motion for Preliminary Injunction filed in the United States District Court for the Northern District of Ohio on October 17, 2002.* (a)(1)(AA) The NCS Defendants' Memorandum of Law in Opposition to Omnicare's and the Class Plaintiffs' Motion for Summary Judgment filed in the Chancery Court, New Castle County, Delaware on October 17, 2002.* (a)(1)(BB) Defendant Jon H. Outcalt's Brief in Opposition to Omnicare's Motion for Summary Judgment on Count I of the First Amended Complaint filed in the Chancery Court, New Castle County, Delaware on October 17, 2002.* (a)(1)(CC) Defendant Kevin B. Shaw's Memorandum of Law in Opposition to Omnicare's Motion for Summary Judgment on Count I of the Second Amended Complaint filed in the Chancery Court, New Castle County, Delaware on October 17, 2002.* (a)(1)(DD) Brief of Defendants Genesis Health Ventures, Inc. and Geneva Sub, Inc. in Opposition to Omnicare's and the Class Plaintiffs' Motions for Summary Judgment on Count I of their Complaints filed in the Chancery Court, New Castle County, Delaware on October 17, 2002.* (a)(1)(EE) Press Release issued by Omnicare, Inc. on October 22, 2002.* (a)(1)(FF) Reply Memorandum of Law in Further Support of Omnicare's Motion for Summary Judgment as to Count I of the Second Amended Complaint filed in the Chancery Court, New Castle County, Delaware on October 22, 2002.* (a)(1)(GG) The NCS Defendants' Reply Memorandum of Law in Support of Their Motion to Dismiss Omnicare's Second Amended Complaint filed in the Chancery Court, New Castle County, Delaware on October 22, 2002.* (a)(1)(HH) Reply Brief of Defendants Genesis Health Ventures, Inc. and Geneva Sub, Inc. in Support of Their Motion to Dismiss the Second Amended Complaint filed in the Chancery Court, New Castle County, Delaware on October 22, 2002.* (a)(1)(II) Omnicare, Inc. v. NCS HealthCare, Inc., et al., C.A. No. 19800 (Del. Ch. October 25, 2002).* (a)(1)(JJ) Press Release issued by Omnicare, Inc. on October 28, 2002.* (a)(1)(KK) Omnicare, Inc. v. NCS HealthCare, Inc., et al., C.A. No. 19800 (Del. Ch. October 29, 2002).* (a)(1)(LL) Press Release issued by Omnicare, Inc. on October 30, 2002.* (a)(1)(MM) Excerpts from the Transcript of Omnicare's Third Quarter 2002 Conference Call, dated October 31, 2002.* (a)(1)(NN) Press Release issued by Omnicare, Inc. on November 5, 2002.* (a)(1)(OO) Selected material from a presentation of Omnicare, Inc. at the CIBC World Markets 13th Annual Health Care Conference on November 5, 2002 at The Plaza Hotel, New York, New York.* (a)(1)(PP) Press Release issued by Omnicare, Inc. on November 19, 2002.* (a)(1)(QQ) Brief filed by Omnicare, Inc. in the Supreme Court of the State of Delaware on November 14, 2002.* (a)(1)(RR) In Re NCS HealthCare, Inc., Shareholders Litigation, Consolidated C.A. No. 19786 (Del. Ch. November 22, 2002).* (a)(1)(SS) Press Release issued by Omnicare, Inc. on November 25, 2002.* (a)(1)(TT) Answering Brief filed by Appellees NCS HealthCare, Inc., Boake A. Sells and Richard L. Osborne in the Supreme Court of the State of Delaware on November 22, 2002. (a)(1)(UU) Answering Brief filed by Appellees Jon H. Outcalt and Kevin B. Shaw in the Supreme Court of the State of Delaware on November 22, 2002. (a)(1)(VV) Answering Brief filed by Appellees Genesis Health Ventures, Inc. and Geneva Sub, Inc. in the Supreme Court of the State of Delaware on November 22, 2002. (a)(5)(A) Form of Agreement and Plan of Merger proposed by Omnicare, Inc.* (a)(5)(B) Agreement and Plan of Merger executed by Omnicare, Inc.* (b)(1) Three-year, $495.0 million Credit Agreement, dated as of March 20, 2001, among Omnicare, Inc., as the Borrower, the Guarantors named therein and the lenders named therein, as the Lenders, Lehman Commercial Paper Inc., as a Syndication Agent, Sun Trust Bank, as a Documentation Agent, Deutsche Banc Alex. Brown, as a Documentation Agent, and Bank One, NA, with its main office in Chicago, Illinois, as the Administrative Agent. (Incorporated by reference to Exhibit 99.3 of Omnicare's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 23, 2001). (c) None. (d)(1) Confidentiality Agreement, dated August 29, 2001, between Omnicare, Inc. and NCS HealthCare, Inc.* (e) None. (f) None. (g) None. (h) None.
- --------------------- * Previously filed. STATEMENT OF DIFFERENCES ------------------------ The section symbol shall be expressed as ................................ 'SS' The paragraph symbol shall be expressed as .............................. [p] EX-99 3 ex-a1tt.txt EXHIBIT (A)(1)(TT) EXHIBIT (a)(1)(TT) ================================================================================ IN THE SUPREME COURT OF THE STATE OF DELAWARE OMNICARE, INC. No. 605, 2002 Plaintiff Below/ Appellant, v. NCS HEALTHCARE, INC. JON H. Appeal From Memorandum Opinions OUTCALT, KEVIN B. SHAW, and Orders Dated October 25 & 29, BOAKE A. SELLS, RICHARD L. 2002 Of The Court of Chancery Of OSBORNE, GENESIS HEALTH The State Of Delaware In And For VENTURES, INC., and GENEVA New Castle County In Civil Action SUB, INC. No. 19800 Defendants-Below/ Appellees. ================================================================================ APPELLEES NCS HEALTHCARE, INC., BOAKE A. SELLS AND RICHARD L. OSBORNE'S ANSWERING BRIEF ================================================================================ SKADDEN, ARPS, SLATE, Of Counsel: MEAGHER & FLOM LLP Edward P. Welch (#671) BENESCH, FRIEDLANDER, Edward B. Micheletti (#3794) COPLAN & ARONOFF LLP Katherine J. Neikirk (#4129) Mark A. Phillips James A. Whitney (#4161) 2300 BP Tower, 200 Public One Rodney Square Square P.O. Box 636 Cleveland, Ohio 44114-2378 Wilmington, Delaware 19899 (216) 363-4500 (302) 651-3000 Attorneys for Defendants-Below Appellees NCS HealthCare, Inc. November 22, 2002 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 CON- STITUTE A "TRANSFER" RESULTING IN "CONVERSION" UN- DER 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 Corms. 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 Onmicare, 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. 'SS''SS' 8-104, 8-301 ......................................... 31 8 Del. C. 'SS' 141(a) ................................................... 13 Del. Supr. Ct. R. 8 .............................................. 20, 21, 30 Del. Ch. C. R. 56(c) .................................................... 22 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 [p][p] 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. 'SS' 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 grant of 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, [p] 15) Shaw has been President of NCS since 1986, and Chief Executive Officer since 1995. (A416, [p] 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, [p][p] 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 'SS' 2(a)), and each outstanding share of Class B stock entitles the record holder to exercise ten votes per share. (A24 'SS' 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. (A 144) To address these financial difficulties, the NCS Board painstakingly investigated numerous restructuring alternatives for over two years. (AI44-48) 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. (AI46) 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 consideration 6 was lower than the face value of NCS's outstanding obligations and provided no recovery to shareholders. C. Unlike Oninicare, 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. (A 147) 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 'SS' 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 'SS' 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 'SS' 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)(5) 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 Ornnicare'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 'SS' 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 'SS' 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 'SS' 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 'SS' 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 Conununications 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. 'SS' 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. 8., 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 VVL 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 WWL 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 WWL 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 [p] 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 longstanding "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)) Onmicare 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. 'SS' 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. 'SS' 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. 'SS' 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. 'SS' 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 certifcate, "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. Wolfs 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 'SS' 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." (S1 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 'SS' 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 crossreference 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. Wolfs 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 'SS' 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 [p] 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 'SS' 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 'SS' 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 'SS' 7(a) (prohibiting "transfer of, such shares of Class B Common Stock or any interest therein"); A31 'SS' 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 'SS' 2b; A130 'SS' 2(b)) affirmed. 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. 'SS''SS' 8-104, 8-301. Here, Onmicare 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, 2002,1 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 4 ex-a1uu.txt EXHIBIT (A)(1)(UU) Exhibit (a)(1)(UU) IN THE SUPREME COURT OF THE STATE OF DELAWARE OMNICARE, INC. ) ) Appellant ) ) v. ) No. 605, 2002 ) NCS HEALTHCARE, INC., JON H. ) On Appealfrom the Court of OUTCALT, KEVIN B. SHAW, ) Chancery of the State of BOAKE A.SELLS, RICHARD L. ) Delaware, in and for New OSBORNE, GENESIS HEALTH ) Castle County, C.A. No. VENTURES, INC., and GENEVA ) 19800 SUB, INC. ) ) Appellees JOINT ANSWERING BRIEF OF APPELLEES JON H. OUTCALT AND KEVIN B. SHAW SQUIRE, SANDERS & SPIETH, BELL, McCURDY DEMPSEY L.L.P. & NEWELL CO, L.P.A. Frances Floriano Goins James R. Bright Thomas G. Kovach Timothy G. Warner 4900 Key Tower 2000 Huntington Building 127 Public Square Cleveland, OH 44115 Cleveland, OH 44114 (216) 696-4700 (216) 479-8500 MORRIS, NICHOLS, ARSHT MORRIS, JAMES, HITCHENS & tunnell & WILLIAMS L.L.P. Jon E. Abramczyk Edward M. McNally 1201 North Market Street Michael A. Weidinger Wilmington,DE 19899 Elizabeth A. Brown (302) 658-9200 222 Delaware Avewnue, 10th Floor Post Office Box 2306 Attorneys for Defendant Wilmington, DE 19899 Jon H.Outcalt (302) 888-6800 Attorneys for Defendant Kevin B. Shaw November 22, 2002 i TABLE OF CONTENTS
Page ---- NATURE OF THE PROCEEDINGS 1 SUMMARY OF ARGUMENT 4 STATEMENT OF FACTS 5 ARGUMENT 8 I. THE COURT OF CHANCERY CORRECTLY APPLIED DELAWARE LAW IN DETERMINING THAT OMNICARE HAS NO STANDING 8 A. The Applicable Standard Of Review. 8 B. Delaware Law Abhors Purchasing A Law Suit. 9 1. Omnicare Owned No NCS Stock At The Time Of The Challenged Transaction. 9 2. Omnicare's Argument That The Directors Have Engaged In A "Continuous" Breach Of Fiduciary Duties Is A Red Herring. 11 3. The Court Of Chancery Clearly Enunciated And Relied On Appropriate Delaware Precedent Requiring Contemporaneous Stock Ownership To Support A Breach Of Fiduciary Duty Claim. 13
ii C. Omnicare's Arguments Respecting Its Purported Individual Claims Are Without Merit. 15 1. Omnicare's Claims All Derive From Alleged Breaches Of Fiduciary Duty. 15 2. Omnicare Has Not Made A Valid Policy Argument For Changing Delaware Law. 17 II. DEFENDANTS ARE ENTITLED TO JUDGMENT AS A MATTER OF LAW ON THE VOTING AGREEMENTS BECAUSE THERE WAS NO "TRANSFER" OF INTEREST IN THE CLASS B SHARES AND, CONSEQUENTLY, NO CONVERSION OF THE CLASS B SHARES INTO CLASS A SHARES. 19 A. The Applicable Standard Of Review. 19 B. The Voting Agreements Are Enforceable And The Class B Shares To Which They Relate Have Not Been Converted Into Class A Shares. 19 1. Certificates Of Incorporation Must Be Interpreted According To General Rules Of Contract Interpretation. 19 2. The Voting Agreements Are Permissible Under Section 7(a) Of The NCS Charter And Are Enforceable. 20
iii 3. The Court Of Chancery Correctly Determined That Neither Messrs. Outcalt Nor Shaw Transferred An "Interest" In Their Shares Of Class B Common Stock Under Section 7(d) Of The NCS Charter When They Executed The Voting Agreements. 22 4. Section 7(c)(5) Confirms The Voting Agreements Did Not Convey An "Interest" 1n The Class B Shares Because The Voting Agreements Were Executed In Connection With A Proxy Solicitation. 26 CONCLUSION 30
iv TABLE OF CITATIONS
Page(s) ------- Cases Alabama By: Products Corp. v. Cede & Co., - ----------------------------------------- 657 A.2d 254 (Del. 1995) 15, 16 Arden Farms v. State. - -------------------- N.Y. App. Div., 60 N.Y.S.2d 47, 51 (1946) aff'd N.Y., 71 N.E.2d 469 (1947) 24 Arnold v. Society for Savings Bancorp. Inc., - ------------------------------------------- 650 A.2d 1270 (Del. 1994) 19 Avacus Partners. L.P. v. Brian. - ------------------------------- 1990 WL 161909 (Del. Ch.) 8, 13 Brady v. Mexican Gulf Sulphur Co., - ---------------------------------- 88 A.2d 300 (Del. Ch. 1952) 24 Brown v. Automated Marketing Sys., Inc. - -------------------------------------- 1982 WL 8782 (Del. Ch.) 9, 10, 14 Celotex Corp. v. Catrett. - ------------------------- 477 U.S. 317 (1986) 19 Centaur Partners IV v. National Intergroup, Inc., - ------------------------------------------------ 1990 WL 96248 (Del. Ch.) 29 Committee of Merchants and Citizens Against the - ---------------------------------------------- Proposed Annexation, Inc. v. Longo, ----------------------------------- 669 A.2d 41 (Del. 1995) 17 Delaware State Troopers Lodge v. Roarke, - ---------------------------------------- 403 A.2d 1109 (Del. Ch. 1979) 8 Eliason v. Englehart, - --------------------- 733 A.2d 944 (Del. 1999) 24
v Ellingwood v. Wolf's Head Oil Refining Co., - ------------------------------------------- 38 A.2d 743 (Del. 1944) 20 Emerald Partners v. Berlin, - --------------------------- 726 A.2d 1215 (Del. 1999) 19 Garrett v. Brown, 1986 WL 6708 (Del. Ch.) aff'd, - ------------------------------------------------ 511 A.2d 1044 (Del. 1986) 23 Geyer v. Ingersoll Publications Co., - ------------------------------------ 621 A.2d 784 (Del. Ch. 1992) 10 Gulf Corp. v. Mesa Petroleum Co., - --------------------------------- 582 F. Supp. 1110 (D. Del. 1984) 29 Haft v. Haft, - ------------- 671 A.2d 413 (Del. Ch. 1995) 24 Harrah's Entertainment, Inc. v. JCC Holding Co., - ----------------------------------------------- 802 A.2d 294 (Del. Ch. 2002) 20 In re Chilson, - -------------- 168 A. 82 (Del. Ch. 1933) 24 In re Frederick's of Hollywood, Inc. S'holders Litig., - ------------------------------------------------------- 1998 Del. Ch. LEXIS 111 (Del. Ch.) 12, 13 In re Gaylord Container Corp. S'holders Litig., - ----------------------------------------------- 747 A.2d 71 (Del. Ch. 1999) 10 In re Tri-Star Pictures, Inc. Litig, - ----------------------------------- 634 A.2d 319 (Del. 1993) 8 Kaiser Aluminum Corp. v. Matheson - --------------------------------- 681 A.2d 392 (Del. 1996) 20 Kramer v. Western Pacific Industries, - ------------------------------------- 546 A.2d 348 (Del. 1988) 16
vi Long Island Lighting Co. v. Barbash, - ----------------------------------- 779 F.2d 793 (2d. Cir. 1985) 29 Loudon v. Archer-Daniels-Midland Co., - ------------------------------------ 700 A.2d 135 (Del. 1997) 8 MacAndrews & Forbes Holdings, - ----------------------------- 1985 WL 21129 (Del. Ch.) 17 Malone v. Brincat, - ----------------- 722 A.2d 5 (Del. 1998) 12 Manhattan Casualty Co. v. Bankers Life and Casualty Co., - --------------------------------------------------------- 404 U.S. 6 (1971) 27 McIlquham v. Feste, ..------------------ 2002 WL 244859 (Del. Ch.) 20 McKeague v. United States, - -------------------------- 12 Cl. Ct. 671 (1987) 24 Quickturn Design Systems v. Shapiro, - ------------------------------------ 721 A.2d 1281 (Del. 1998) 12 Rosenthal v. Burry Biscuit Corp., - -------------------------------- 60 A.2d 106 (Del. Ch. 1948) 14 Saito v. McKesson HBOC. Inc., - ----------------------------- 806 A. 2d 113 (Del. 2002) 15, 16 Sanders v. Devine, - ----------------- 1997 WL 599539 (Del. Ch.) 10, 17 Solomon v. Pathe Communications Corp., - -------------------------------------- 672 A.2d 35 (Del. 1996) 8 Stuart Kingston. Inc. v. Robinson, - ---------------------------------- 596 A.2d 1378 (Del. 1991) 17
vii Superwire.Com, Inc. v. Hampton, - ------------------------------- 805 A.2d 904 (Del. 2002) 20 Tate & Lyle PLC v. Staley Cont'l. Inc., - --------------------------------------- 1988 WL 46064 (Del. Ch.) 17 Thorpe v. CERBCO, Inc., - ----------------------- 1993 WL 35967 (Del. Ch.) 12 Trans World Corp. v. Odyssey Partners, - -------------------------------------- 561 F. Supp. 1315 (S.D.N.Y. 1983) 29 U-H Acquisition Co. v. Barbo, - ----------------------------- 1994 WL 34688 (Del. Ch.) 8, 9, 10, 16 Waggoner v. Laster, - ------------------- 581 A.2d 1127 (Del. 1990) 19 Weiss v. Leewards Creative Crafts. Inc., - ---------------------------------------- 1993 WL 155493 (Del. Ch.) 10
1. NATURE OF THE PROCEEDINGS This appeal presents the unique situation of an insolvent company, whose stock has a negative book value, which, having finally found a merger partner to pay full value to all stakeholders, has now become the coveted acquisition target of its largest rival. Appellant and plaintiff below Omnicare, Inc. ("Omnicare" or "Plaintiff") attempts by means of this appeal to upset the valid contracts entered into by Appellee and defendant below NCS Healthcare, Inc. ("NCS" or "the Company") to avoid the bankruptcy that Omnicare and NCS' creditors had charted for the Company. Those creditors, who eighteen months ago were under water by over $200 million dollars, will now get every penny of their principal and interest, plus a premium for early redemption. In addition, and almost miraculously, the contracts Omnicare seeks to overturn will provide a fair return to the stockholders of NCS. The first question before this Court is whether or not an entity that finds any conduct on the part of a corporate board objectionable may, upon discovering the conduct, purchase stock of the corporation and sue the corporation and its directors alleging breaches of fiduciary duty -- thereby buying a lawsuit. That is precisely what Omnicare has sought to do, but what Delaware courts have consistently refused to permit. Omnicare was unsuccessful in its attempts to purchase defendant NCS because Omnicare refused to make an unconditional offer for NCS that provided value to the NCS stockholders. Upon discovering NCS had entered a merger agreement on July 28, 2002 (the "Merger Agreement") with defendant Genesis Health Ventures, Inc. ("Genesis"), Omnicare bought 1000 shares of stock on July 30, 2002 and promptly sued NCS for alleged breaches of fiduciary duty on August 1, 2002. Genesis and NCS moved to dismiss Omnicare's claims for lack of standing on August 23, 2002 and October 3, 2002 respectively. In the Court of Chancery's opinion of October 25, 2002, in Case No. C.A. 19800 ("Dismissal Op.") (attached as Exhibit A to Appellant's Opening Brief), the Vice Chancellor determined that Omnicare had no standing to bring its action for purported breaches of fiduciary duty against NCS or its directors, including Appellees and defendants below Chairman of the Board Jon H. Outcalt, and President 2. and Chief Executive Officer Kevin B. Shaw, because at the time of the actions complained of, the Board of Directors of NCS owed Omnicare no fiduciary duty.(1) Accordingly, the Court of Chancery dismissed Omnicare's claims based on breach of fiduciary duty, finding that Delaware law on the standing question is soundly founded upon the "legal or equitable notion that limits to those having a relationship with the corporation the right to sue over its internal affairs." Dismissal Op. at 18. The second question before the Court is whether or not the execution of voting agreements by both Messrs. Outcalt and Shaw, the majority stockholders of NCS, in connection with the Merger Agreement between NCS and Genesis (the "Voting Agreements"), constitutes a transfer of Messrs. Outcalt's and Shaw's Class B stock to Genesis, resulting in the conversion of their Class B stock (having 10 votes per share) to Class A stock (having only one vote per share). Messrs. Outcalt and Shaw each own both Class A and Class B stock and collectively own approximately 65% of the total voting power of NCS, enough to assure ratification of the Merger Agreement. If their Class B shares are converted into Class A shares, they will no longer own a majority of the total voting power of NCS. Count I of Omnicare's Second Amended Complaint, filed August 12, 2002, seeks a declaratory judgment as to the effect of the Voting Agreements executed by Messrs. Outcalt and Shaw. In the Court of Chancery's Opinion of October 29, 2002, in Case No. C.A. 19800 ("SJ Op.")(attached as Exhibit B to the Appellant's Opening Brief), the Court of Chancery granted summary judgment in favor of defendants on Genesis' cross-motion respecting the effect of the Voting Agreements. The Vice Chancellor correctly determined that the Voting Agreements did not "transfer" Messrs. Outcalt's and Shaw's Class B shares, and hence did not convert those shares to Class A Shares. That ruling is in accordance with Delaware law and reflects a sound reading of the Company's - ------------------------- (1) Mr. Outcalt and Mr. Shaw, together with defendants Richard Osborne and Boake A. Sells, comprise the Board of Directors of NCS (the "Board" or the "Directors"). 3. Certificate of Incorporation (the "Certificate" or "Charter") and the Voting Agreements. 4. SUMMARY OF ARGUMENT 1. Messrs. Outcalt and Shaw DENY that the Court of Chancery erred in dismissing Counts II through V of the Second Amended Complaint. The Court of Chancery applied Delaware law correctly in determining that Omnicare had no standing to bring fiduciary duty claims concerning the Directors' conduct. The Court of Chancery rightly held that because Omnicare was not a stockholder at the time of the challenged transaction, the NCS Directors did not owe it a fiduciary duty with respect to the actions Omnicare alleges demonstrate breaches of such duty to the NCS stockholders. Omnicare's arguments regarding its standing to bring "individual" claims for breach of fiduciary duty are likewise unpersuasive. Delaware courts have never endorsed standing based on an after-the-fact share purchase. Accordingly, the Court of Chancery properly held that Omnicare's Second Amended Complaint failed to state a claim for which relief can be granted. 2. Messrs. Outcalt and Shaw DENY Omnicare's assertion that the Court of Chancery erred in holding that the Voting Agreements violated Section 7(a) of the NCS Charter. The NCS Charter permits Messrs. Outcalt and Shaw to enter into the Voting Agreements. Messrs. Outcalt and Shaw executed the Voting Agreements in connection with a solicitation of proxies. The Voting Agreements did not result in a "transfer" of Messrs. Outcalt's and Shaw's shares, and hence there was no conversion of the Class B shares to Class A shares. The Court of Chancery correctly determined that Omnicare was not entitled to judgment as a matter of law. Moreover, the Court of Chancery properly decided that there were no genuine issues of material fact, and that the defendants, not Omnicare, were entitled to judgment as a matter of law on Genesis' crossmotion for summary judgment. Accordingly, the Court of Chancery's decision denying Omnicare's Motion for Summary Judgment and, instead, granting summary judgment in favor of defendants should be affirmed. 5. STATEMENT OF FACTS This matter concerns attempts by NCS, a provider of pharmacy and related services to acute care and long-term nursing and medical facilities, to reach a strategically advantageous resolution of its pressing financial concerns, while remaining a viable business in this difficult health care market. The NCS Directors succeeded in this seemingly impossible goal when they signed a merger agreement with Genesis on July 28, 2002. Throughout NCS' two-and-a-half year search for solutions, its rival Omnicare sought to pressure NCS, which had defaulted on its debts, into an asset sale under Section 363 of the Bankruptcy Code. Such a transaction would have returned nothing to NCS' equity holders and less than full value to its debtholders, while decimating NCS' business. The companies and their representatives negotiated regarding Omnicare's proposals, and Omnicare conducted abbreviated due diligence, limited by Omnicare's refusal to enter into a confidentiality agreement protecting NCS' competitive information. (A201).(2) Although NCS made it clear that it was not interested in a bankruptcy transaction, Omnicare refused to consider any other transaction structure. (A203). Omnicare then chose to negotiate only with NCS' creditors. Id. Thereafter, NCS received an offer to merge with Genesis, and began negotiating that transaction. On July 26, 2002, however, Omnicare unsuccessfully sought to disrupt the exclusive negotiations between NCS and Genesis at the last minute by sending NCS a highly conditional expression of interest in acquiring NCS at $3.00 per share. The NCS Directors determined, in light of (1) Omnicare's refusal to consider a non bankruptcy transaction in the past; (2) the potential imminent loss of the Genesis offer; and most importantly, (3) the conditional nature of Omnicare's proposal to negotiate, to proceed with - -------------------- (2) Messrs. Outcalt and Shaw cite to Appellants' Appendix as "A__" and the Appendix filed herewith by Appellees Jon H. Outcalt and Kevin B. Shaw as "B__" 6. the firm Genesis offer and enter into the Genesis Merger Agreement. (A208-09). Following, as it did, a two-and-a-half-year quest to rehabilitate the Company, the Directors' decision to take the Genesis offer, rather than risk losing it to begin negotiating once again with Omnicare, was a reasoned exercise of business judgment. The Genesis transaction entered into on July 28, 2002 was valued at $1.60 per share and returned full value, plus an early redemption premium, to NCS' creditors. It was also distinguished by being the only firm offer NCS had ever received that would return value to all of NCS' stockholders. Omnicare grievously mischaracterizes the events leading up the negotiation of the Merger Agreement, seeking to re-cast in hindsight the actions of the parties to support its own circular reasoning. Reading the Plaintiff's Opening Brief, the Court might suppose that NCS had been inundated with valuable purchase offers. In fact, nothing could be further from the truth. NCS had not been successful in opening meaningful discussions with any party interested in either a refinancing or merger transaction prior to the Genesis offer. Omnicare's offers in 2001 and early 2002 cited at page 5 of its Opening Brief provided nothing to NCS stockholders, and so could not be considered as comparable to the Genesis offer. (A201-03). NCS and Genesis executed the Merger Agreement on July 28, 2002. Later that day, Messrs. Outcalt and Shaw each executed separate Voting Agreements with Genesis and NCS. (A128-39). Pursuant to Sections 2(b) and 2(c) of the Voting Agreements, Messrs. Outcalt and Shaw each agreed to vote all of their Class A and Class B shares in favor of the Genesis Merger Agreement and against any other competing proposals, and granted an irrevocable proxy to Genesis to vote the shares in favor of the Genesis merger and against certain competing transactions. (A130, A135-36). On July 30, 2002, Omnicare purchased 1000 shares in NCS. Opening Brief at 4. On August 8, Omnicare commenced a tender offer for outstanding NCS stock at $3.00 per share. The Directors refused to recommend the tender offer to the shareholders, as it, like Omnicare's July 26 expression of interest, was subject to conditions that made it inferior to the Merger Agreement with Genesis. 7. On October 6, 2002, months after the decision-making process Omnicare complains of, and also months after Omnicare bought NCS stock and filed suit, Onmicare finally made a merger proposal to the NCS Board that could be accepted immediately, without conditions, in the amount of $3.50 per share. (B2-3). At that point, because the new offer was indeed more valuable than the Genesis Merger Agreement, the Directors properly withdrew their recommendation of the Merger Agreement, as noted in the Plaintiff's Opening Brief. Because of the preexisting contracts with Genesis, however, NCS was not able to undo the Genesis Merger Agreement. Nonetheless, the Directors had succeeded in their goal of preserving the Company in the face of a seemingly imminent bankruptcy (a bankruptcy Omnicare had affirmatively encouraged) that would have left the stockholders with nothing. 8. ARGUMENT I. THE COURT OF CHANCERY CORRECTLY APPLIED DELAWARE LAW IN DETERMINlNG THAT OMNICARE HAS NO STANDING A. The Applicable Standard Of Review. This Court reviews the granting of a motion to dismiss for failure to state a claim de novo. Solomon v. Pathe Communications Corp., 672 A.2d 35, 38 (Del. 1996). Rule 12(b)(6) requires dismissal when it appears from the allegations of the complaint that plaintiff would not be entitled to relief under any set of facts that could be proven to support the action. See Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 140 (Del. 1997). "[I]t is well established, however, that conclusions... [contained in the complaint] will not be accepted as true without specific allegations of fact to support them." Id. (quoting In re Tri-Star Pictures, Inc. Litig., 634 A.2d 319, 326 (Del. 1993)). Dismissal for lack of standing is a dismissal under Rule 12(b)(6). See, e.g., Avacus Partners. L.P. v. Brian. 1990 WL 161909 at *5 (Del. Ch.), citing Delaware State Troopers Lodge v. Roarke, 403 A.2d 1109 (Del. Ch. 1979); U-H Acquisition Co. v. Barbo, ("U-Haul"), 1994 WL 34688 at *3 (Del. Ch.). A party's right to bring a suit in the first place goes to the question of whether, under any "state of facts reasonably foreseeable under the well-pleaded allegations of the complaint," the plaintiff would be entitled to relief. Avacus, 1990 WL 161909 at *5. 9. B. Delaware Law Abhors Purchasing A Law Suit. 1. Omnicare Owned No NCS Stock At The Time Of The Challenged Transaction. Omnicare concedes it never acquired stock in NCS until July 30, 2002. Although Omnicare tries to construct a "continuing course of conduct" in its brief, it is clear that the core of Omnicare's argument concerns the Directors' actions taken on or before July 28, 2002. As explained further below, Omnicare lacks standing to bring claims for any conduct occurring prior to July 30, 2002. See, e.g., U-Haul 1994 WL 34688 at *5 (holding that arms-length tender offeror who was not a unit holder lacked standing to bring fiduciary duty claims against general partner); Brown v. Automated Marketing Sys., Inc., 1982 WL 8782, at *2 (Del. Ch.)(holding that purchaser of stock lacked standing to pursue individual claims based on pre-purchase breaches of fiduciary duty in approving a merger agreement). Omnicare cannot challenge the established body of Delaware case law cited by the Court of Chancery holding a stockholder may only sue if that stockholder owned stock at the time of the alleged breaches of fiduciary duty. Thus, the only question before the Court is whether Omnicare may buy stock in NCS, having full knowledge of the events it finds objectionable, and immediately sue for breach of fiduciary duty. Given that scarcely two days elapsed between Omnicare's purchase of stock and its filing of this lawsuit, it is clear that Omnicare only bought NCS stock for the purpose of filing suit. Omnicare's arguments relating to the Directors' conduct after the Merger Agreement was signed are mere after-the-fact justification. Omnicare's suit predates the conduct it now claims enables it to survive the contemporaneous ownership requirement. This Court has never previously recognized standing in such circumstances and should not do so here. Standing to bring a breach of fiduciary duty claim depends on a plaintiff's ability to establish "that at the time [of the alleged breach] he was a person to whom a fiduciary duty was owed," Sanders v. Devine, 10. 1997 WL 599539 at *5 (Del. Ch.). Directors of a corporation owe no fiduciary duties to prospective shareholders. See, e. g., Weiss v. Leewards Creative Crafts, Inc., 1993 WL 155493, at *3 (Del. Ch.). Under Delaware law, a director's statutory authority and fiduciary duties extend only to contemporaneous stockholders,(3) thus only contemporaneous stockholders have standing to bring claims for breach of those duties. See U-Haul 1994 WL 34688, at *5, ("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 duties by the general partner."). Similarly, in Brown, 1982 WL 8782 at *2, the court dismissed a plaintiff's breach of fiduciary duty claim because the plaintiff did not purchase stock in the corporation until after the board had announced a plan of merger. The timing of the plaintiff's purchase of stock was thus fatal to her claim, as Omnicare's belated purchase of NCS stock is here. In Brown, the court determined that a plaintiff asserting an individual (as opposed to a derivative) claim still had to meet the contemporaneous ownership requirement. Although unable to provide any authority to the court below supporting its novel argument that it be accorded "bidder standing" absent contemporaneous stock ownership, Omnicare resurrects its bidder standing argument at page 13 of its Opening Brief, once again relying on In re Gaylord Container Corp. S'holders Litig., 747 A.2d 71 (Del. Ch. 1999). While the Gaylord decision did set forth reasons why it is reasonable to accord bidders standing to sue, the court explicitly noted that Delaware law requires bidder standing to be tied to stockholder status. Id. at 77 n.7. The Gaylord court confirmed the bar against suits by those who "buy stock and challenge the earlier adoption of properly disclosed defensive measures." Id. at 82 n.15. - ------------------- (3) Where a corporation is insolvent, corporate directors also owe a duty to creditors. See. e.g., Geyer v. Ingersoll Publications Co., 621 A.2d 784, 787 (Del. Ch. 1992). The Court of Chancery noted that the NCS Directors owed such duties to their creditors during the period at issue. Dismissal Op. at 18. 11. 2. Omnicare's Argument That The Directors Have Engaged In A "Continuous" Breach Of Fiduciary Duties Is A Red Herring. Omnicare's case relies on drawing the Court's attention to acts of the NCS Directors prior to Omnicare's purchase of stock and conflating those acts with activity occurring after Omnicare's purchase, and even after Omnicare instituted its suit. For example, Omnicare's insistence that it made more valuable proposals for the Company is flatly untrue, except for Omnicare's October 6, 2002 offer.(4) This date was well after the activities Omnicare alleges related to the Directors' purported failure to obtain the best price for the Company. Omnicare would have the Court believe the Directors' decision to accept the only viable bid available on July 28, 2002 is somehow tainted by Omnicare's "counterproposal" made over two months later. The law is clear that such an argument cannot stand. The logical outcome of Omnicare's argument is that merger agreements and other contracts could never be final, but would always be subject to indefinite second-guessing by disgruntled stockholders and latent bidders. The only conduct truly at issue here is the Directors' decisions respecting the negotiation and execution of the Merger - ------------------- (4) For example, Omnicare's proposals described on page 5 of the Opening Brief were asset purchases that offered no value to shareholders; the purported "substantially higher, all-cash offer" described on page 6 of the Opening Brief was merely a conditional offer to negotiate; and the "superior consideration" described on page 13 of the Opening Brief refers to the tender offer made after the execution of the Merger Agreement. To advance an invidious comparison between the Genesis offer on July 28, 2002 and a wide variety of dissimilar proposals and indications of interest covering the period from July 2001 through October 2002 goes beyond comparing apples and oranges to being outright disingenuous. 12. Agreement. That Agreement, however, was a final contract before Omnicare acquired standing to look over the Directors' shoulders: Delaware courts have faced this argument before and rejected it. For instance, in Thorpe v. CERBCO., Inc. 1993 WL 35967 at *3 (Del. Ch.), the court rejected the plaintiffs' argument that conduct predating the plaintiffs' acquisition of stock constituted a continuing wrong, holding: "But to admit that those acts might have evidentiary value with respect to a derivative claim is quite different from saying that those 1982 acts can themselves be a source of liability to plaintiffs." Id. at *3. Omnicare's invocation of the general proposition that directors of Delaware corporations have fiduciary duties to the stockholders is likewise inapposite. For example, Omnicare cites language in Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998), stating that the Directors' duties are "unremitting." This Court in Malone actually stated: "Although the fiduciary duty of a Delaware director is unremitting, the exact course of conduct that must be charted to properly discharge that responsibility will change in the specific context of the action the director is taking with regard to either the corporation or its shareholders." Id. That case dealt specifically with directors' duties to disclose material information respecting the value of the corporation's stock. Nowhere does the Malone decision provide a basis for Omnicare's implication that an "unremitting fiduciary duty" allows a plaintiff to reach back in time and base a claim on conduct occurring before it was owed a fiduciary duty. Omnicare's citation of Quickturn Design Systems v. Shapiro, 721 A.2d 1281, 1292 (Del. 1998), likewise fails to support its standing argument. In that case, a post-trial appeal determining the validity of measures enacted in response to a tender offer, standing was not even at issue. Omnicare's arguments regarding the "continuous" nature of the Directors' purported breaches of fiduciary duty betrays its fundamental misapprehension regarding the voting structure of NCS. Messrs. Outcalt and Shaw, as majority stockholders for voting purposes, were entitled to determine when and how to vote their shares, as they did here. See. e.g., In re Frederick's of Hollywood, Inc. Shareholders Litigation, 1998 Del. Ch. LEXIS 111 at *20 n.19 (Del. Ch.) (noting that "under Delaware Law, a majority shareholder is not obligated to vote its shares in favor of a transaction that it opposes."). Accordingly, Omnicare's assertion that the 13. NCS Directors "continue to deprive Omnicare and the other NCS stockholders of their ability to vote down the Genesis merger" is ludicrous. (Opening Brief at 21.) Messrs. Outcalt and Shaw, as stockholders, could vote for the Genesis Merger Agreement at any time, regardless of the price and independent of any subsequent proposal by Omnicare. As in Frederick's, the remaining stockholders, who have always been a voting minority, have no right to deny the majority shareholders' right to vote as they wish. In this instance Messrs. Outcalt and Shaw agreed to exercise their right to vote before Omnicare acquired any shares. Thus, even if Omnicare had a basis to object to the exercise of their voting rights, the contemporaneous ownership requirement eliminates Omnicare's standing to object. 3. The Court Of Chancery Clearly Enunciated And Relied On Appropriate Delaware Precedent Requiring Contemporaneous Stock Ownership To Support A Breach Of Fiduciary Duty Claim. Omnicare's tactics are a classic example of buying a lawsuit. The Court of Chancery clearly relied upon the established law in Delaware that such a gambit is not permitted. The court below explained, "Delaware's policy against allowing plaintiffs to purchase stock and then challenge transactions agreed upon before the purchase `might easily be frustrated if individuals could place orders to purchase stock on the same day the challenged transaction occurred.' Delaware courts enforce this policy by denying standing to after-the-fact purchasers and dismissing their complaints." Dismissal Op. at 12, quoting Avacus, 1990 WL 161909 at *6. While the Avacus decision arose in the context of a derivative action, it confirms the underlying policy focus of the objection to "purchasing stock solely to institute litigation." This principle contradicts Omnicare's theory that any plaintiff can bring suit and make claims for action occurring before standing obtained. The Court of Chancery correctly set forth Delaware law that the policy against permitting persons complaining about the internal 14. affairs of corporations to buy the right to sue the corporation "is derived from 'general equitable principles' and has been applied to preclude stockholders who later acquire their shares from prosecuting direct claims as well." Dismissal Op. at 12; see also Rosenthal v. Burry Biscuit Corp., 60 A.2d 106, 111 (Del. Ch. 1948); Brown v. Automated Marketing Sys., Inc., 1982 WL 8782, at *2 (Del. Ch.)(applying the "equitable principles" of Section 327(5) to dismiss an individual action brought by a stockholder who acquired shares only after the actions of which she complained). Section 327 of the Delaware General Corporation Law embodies this policy, but the policy is not limited to derivative actions. Id. Omnicare's decision to purchase NCS stock and file suit after learning that NCS had executed the Merger Agreement is a direct affront to this policy rationale. Like the plaintiff in Brown, Omnicare acquired its shares "with full knowledge, or at least [was] charged with knowledge" of the terms of the Merger Agreement, and thus has and as a matter of policy should have no standing to complain about its terms.(6) (5) 8 Del. Code. 'SS' 327. All Delaware Code Sections cited hereafter as "Section __". Section 327 states: In any derivative suit instituted by a stockholder of a corporation, it shall be averred in the complaint that the plaintiff was a stockholder of the corporation at the time of the transaction of which such stockholder complains or that such stockholder's stock thereafter devolved upon such stockholder by operation of law. (6) The Brown court 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 (continued...) 15. C. Omnicare's Arguments Respecting Its Purported Individual Claims Are Without Merit. 1. Omnicare's Claims All Derive From Alleged Breaches Of Fiduciary Duty. Omnicare ranges far afield in search of authority to support its expansive reading of standing. Neither Saito v. McKesson HBOC, Inc., 806 A.2d 113 (Del. 2002), nor Alabama By-Products Corp. v. Cede & Co., 657 A.2d 254 (Del. 1995), is apposite to the case at hand. In Saito, this Court addressed the scope of a stockholder's inspection rights under Section 220 of the Delaware Code. However, this Court specifically distinguished standing to sue from the right to inspect records, and did not question the Court of Chancery's application of the principle embodied in Section 327 barring suit for a transaction prior to the stockholder's ownership. This Court merely found that the Section 327 limitation did not apply to inspections pursuant to Section 220 because a stockholder could have a legitimate purpose for inspecting corporate records other than suing the corporation. Saito, 806 A.2d at 117. A careful reading of this Court's ruling in the Alabama By-Products case reveals even less support for Omnicare's position than Saito. In that case the Court determined a stockholder which had perfected its right to appraisal retained the right to the appraisal remedy - ------------------- (...continued) 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. 1982 WL 8782, at *2 (quoting Home Fire Ins. Co. v. Barber, 93 N.W. 1024, 1029 (Neb. 1903)). 16. even though its agent had inadvertently surrendered the shares. As in Saito, this Court clearly articulated the policy basis for requiring stockholdings at the time of the challenged transaction, stating: "The long-recognized policy behind Section 327 is to prevent strike suits whereby an individual purchases stock in a corporation with purely litigious motives, i.e., for the sole purpose of prosecuting a derivative action to attack transactions which occurred prior to the purchase of stock." Alabama By-Products, 657 A.2d at 264 n.12. This Court recognized that such suits "inherently impinge upon the board's authority to manage the business and affairs of the corporation," id. at 265, but explained that a "shareholder is permitted to intrude upon the authority of the board by means of a derivative suit only because his status as a shareholder provides an interest and incentive to obtain legal redress for the benefit of the corporation." Id. This Court went on to distinguish appraisal actions, in which the stockholder "relinquishes his status as shareholder and assumes the role of a quasi-creditor with a purely monetary claim against the corporation." Id. at 266. Omnicare cannot be arguing that its situation is more akin to a creditor of the corporation, as is the position of the stockholder seeking appraisal, or that in suing the Company for purported breaches of fiduciary duty its conduct is more like the plaintiff in Saito, encouraged by the Court to inspect the books and records of the defendant. In this case, Omnicare can only assert a claim as a stockholder. This Court's determination that the limits of Section 327 do not apply to actions under Section 220 and Section 262 has no bearing here, where Omnicare seeks to do exactly what a plaintiff in any derivative action does, regardless of how Omnicare may denominate its claim. How Omnicare characterizes its claims is obviously less important than their actual substance. "In determining the nature of the wrong alleged, a Court must look to the body of the complaint, not the plaintiff's designation or stated intention." U-Haul 1994 WL 34688 at *4, quoting Kramer v. Western Pacific Industries, 546 A.2d 348 (Del. 1988). 17. 2. Omnicare Has Not Made A Valid Policy Argument For Changing Delaware Law. Omnicare further suggests that this Court stretch the bounds of Delaware law to permit its suit on policy grounds. However, the Court should reject Omnicare's arguments both as lacking in case support and as inapplicable to the facts of this case. Regardless of whether Omnicare's claims are properly derivative or individual, the Delaware courts have already clearly established a policy direction. Section 327 reflects Delaware's policy choice regarding standing, not a limited prohibition as Omnicare suggests. Omnicare's assertion that the Court of Chancery "impermissibly engrafted" the standing requirement of Section 327 onto Omnicare's claims is entirely unfounded. As the Court of Chancery noted, "Omnicare's argument finds little or no support in our law and is inconsistent with established principles that limit standing in fiduciary duty cases to those to whom a duty was owed at the time of the breach." Dismissal Op. at 14, citing Sanders v. Devine, 1997 WL 599539 at *5. The cases Omnicare cites hold that only stockholders which owned shares at the time of an alleged breach of fiduciary duty by the target board have standing to sue. See Tate & Lyle PLC v. Stalev Cont'l, Inc., 1988 WL 46064 at *4 (Del. Ch.), and MacAndrews & Forbes Holdings, 1985 WL 21129 at *1 (Del. Ch.). Although Omnicare recognizes the essential issue determined in a standing analysis by this Court, i.e., degree of interest in the outcome, as articulated in Stuart Kingston, Inc. v. Robinson, 596 A.2d 1378, 1382 (Del. 1991), and Committee of Merchants and Citizens Against the Proposed Annexation, Inc. v. Longo, 669 A.2d 41, 44 (Del. 1995), it does not make a persuasive argument as to why the rule in this case should be different from all previous stockholder cases before Delaware courts. Delaware law has explicitly linked stockholder standing to contemporaneous stock ownership. The question of whether Omnicare's interest in the affairs of NCS is "distinguishable from the interest shared by other members of . . .the public" or whether Omnicare is a "mere intermeddler" with respect to the Directors' approval of the Genesis merger has a clear answer: until July 30, 2002, Omnicare was an 18. intermeddler. Whether or not acts of the NCS Directors before that date continue to have effect is irrelevant to the question of Omnicare's standing. Accordingly, this Court should uphold the Court of Chancery's determination that Omnicare has no standing to bring its suit. 19. II. DEFENDANTS ARE ENTITLED TO JUDGMENT AS A MATTER OF LAW ON THE VOTING AGREEMENTS BECAUSE THERE WAS NO "TRANSFER" OF INTEREST IN THE CLASS B SHARES AND, CONSEQUENTLY, NO CONVERSION OF THE CLASS B SHARES INTO CLASS A SHARES. A. The Applicable Standard Of Review. The Court of Chancery's decision to grant summary judgment in favor of all defendants on the question of the effect of the Voting Agreements is subject to de novo review. Emerald Partners v. Berlin. 726 A.2d 1215, 1219 (Del. 1999) (citing Arnold v. Society for Savings Bancorp, Inc., 650 A.2d 1270, 1276 (Del. 1994)). This Court should affirm the decision because the record demonstrates that there are no genuine issues of material fact and the defendants are entitled to judgment as a matter of law. Id.; Del. Ct. Ch. R. 56(c). Judgment as a matter of law is required where, as here, Omnicare has the burden of proof and the fails to establish the existence of an element essential to its case. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). B. The Voting Agreements Are Enforceable And The Class B Shares To Which They Relate Have Not Been Converted Into Class A Shares. 1. Certificates Of Incorporation Must Be Interpreted According To General Rules Of Contract Interpretation. Delaware law provides that certificates of incorporation are interpreted according to the general rules of contract interpretation. (SJ Op. at 9-10; see, e.g., Waggoner v. Laster, 581 A.2d 1127, 1134 (Del. 1990) ("A certificate of incorporation is viewed as a contract among shareholders, and general rules of contract interpretation apply to its terms"); Harrah's Entertainment, Inc. v. JCC Holding Co., 802 A.2d 294, 20. 309 (Del. Ch. 2002) ("In general terms, corporate instruments such as charters or bylaws are interpreted in the same manner as other contracts.")). The provisions of the NCS Charter should be "interpreted using standard rules of contract interpretation which require a court to determine from the language of the contract the intent of the parties. In discerning the intent of the parties, the [Charter] should be read as a whole and, if possible, interpreted to reconcile all of the provisions of the document." Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 395 (Del. 1996). Thus, 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. 2002) (quoting Ellingwood v. Wolf's Head Oil Refining Co., 38 A.2d 743, 747 (Del. 1944)). Where, as here, the language of a corporate instrument is plain and clear, "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, 2002 WL 244859, at *5 (Del. Ch.).(7) 2. The Voting Agreements Are Permissible Under Section 7(a) Of The NCS Charter And Are Enforceable. The foundation for Omnicare's argument is Section 7(a) of the NCS Charter, which states that "no person holding any shares of Class - ------------------- (7) Omnicare's claim that purported ambiguities in the NCS Charter should be "resolved against the Drafters - i.e., Messrs. Outcalt and Shaw" finds no support in the record or the law. (Opening Brief at 31). There is absolutely no evidence of what, if any, role Messrs. Outcalt and Shaw played in drafting the Charter. Nothing in the cases Omnicare cites supports the proposition that the Charter can or should be construed against Messrs. Outcalt and Shaw as shareholders even if Omnicare could support its conclusory statement that Messrs. "Outcalt and Shaw, as 'founders' of NCS, were in fact the 'drafters'" of the Charter. Id. 21. B Common Stock may transfer . . . 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' of such person." (A28 (emphasis added)). Omnicare also relies on Section 7(d) of the Charter for the proposition that any purported transfer of Class B shares other than to a Permitted Transferee will automatically result in the conversion of such Class B shares into shares of Class A Common Stock. (A31 (emphasis added)). Relying on these provisions, Omnicare contends that, because Genesis is not a "Permitted Transferee," the Voting Agreements were "illegal" transfers which automatically converted Messrs. Outcalt's and Shaw's Class B shares (having 10 votes per share) into Class A shares (having only one vote per share). The question for this Court is whether the Voting Agreements constituted a prohibited "transfer" under the NCS Charter. Omnicare seemingly opens the door for the Court to determine that the Voting Agreements violated Section 7(a), although they may not have triggered Section 7(d)'s conversion provision. Following Omnicare's argument to its logical conclusion would mean that any irrevocable proxy given for Class B shares - even proxies given to vote at regular annual meetings (since to be valid such proxies must be coupled with an "interest") - would constitute impermissible "transfers" of interests in such shares and would violate Section 7(a) of the NCS Charter. The logical result of this argument is that no irrevocable proxies could ever be given for Class B shares. Obviously, this cannot be the meaning of these sections. 22. 3. The Court Of Chancery Correctly Determined That Neither Messrs. Outcalt Nor Shaw Transferred An "Interest" In Their Shares Of Class B Common Stock Under Section 7(d) Of The NCS Charter When They Executed The Voting Agreements. In analyzing Omnicare's argument, it is necessary to compare the language of Sections 7(a) and 7(d) of the NCS Charter. Section 7(a) prohibits holders of Class B shares from transferring those shares "or any interest therein" to persons who are not "Permitted Transferees." (SJ Op. at 10; A28). By contrast, Section 7(d) does not mention "interests" in shares and, instead, only refers to any "purported transfer of [the] shares" themselves. (SJ Op. at 10; A31). Thus, a reasonable reading of the Charter would lead to the conclusion that there is no voting penalty attached to providing a proxy to vote Class B shares, since a proxy is clearly not a "transfer" of the shares themselves. Indeed, the Voting Agreements specifically provide that Messrs. Outcalt and Shaw may not "transfer" the shares in question prior to the meeting and vote on the Genesis Merger Agreement. (A135, A129). The question then remains whether the giving of these proxies transfers even an "interest" in the shares such as would violate Section 7(a) of the Charter. Because the standard rules of contract interpretation require the court to give effect to all provisions of the NCS Charter where possible, the Court of Chancery reasoned that Section 7(d)'s reference to a "transfer of shares" is broad enough to encompass actual share transfers as well as transfers of some ownership interest in those shares, although less than full legal or equitable ownership thereof. (SJ Op. at 10-11.) The Court of Chancery stressed, however, that "to fall within the ambit of Section 7(d), the interest transferred must represent a substantial part of the total ownership interests associated with the shares in question." (Id. at 11 (emphasis added)). The Court of Chancery ruled that "the mere promise to vote the shares found in Section 2(b) of the Voting Agreements [does not] amount[] to a transfer of any part of 23. Outcalt's or Shaw's ownership interest in the shares" (id. at 13; Opening Brief at 26-27), but only that portion of their voting power specifically related to approval of the Genesis Merger Agreement was given by proxy. Omnicare argues, incorrectly however, that Messrs. Outcalt and Shaw transferred nearly all of their voting power in the Class B shares to Genesis in the Voting Agreements. In Garrett v. Brown, the Court of Chancery reviewed a stockholders agreement containing transfer restrictions very similar to the transfer restrictions of Section 7(a) of the NCS Charter. 1986 WL 6708, at *2 (Del. Ch.), aff'd, 511 A.2d 1044 (Del. 1986). As in the NCS Charter, the transfer restrictions at issue in Garrett prohibited the transfer of "interests" in the shares. Id. The court in Garrett considered whether a letter agreement among a group of stockholders and the group's financiers that transferred a portion of the stockholders' voting power to the financiers constituted a prohibited transfer of the shares under the stockholders agreement. Id. at *9-10. The court concluded that a prohibited transfer did not occur, id. at *10-11, stating: Other provisions as to the manner in which La Cadena will vote its stock cannot reasonably be construed to constitute a transfer under the Stockholders' Agreement. As noted earlier, 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 *10. Thus, based on the Court of Chancery's ruling in Garrett, neither Messrs. Outcalt nor Shaw transferred their ownership interests in their Class B Shares by executing the Voting Agreements. Other Delaware cases also support the same conclusion. Agreeing to vote one's shares in a particular manner pursuant to a contract, or allowing another party to vote one's shares by proxy or otherwise, does not transfer one's interest in the shares to the other party to the contract. Rather, such agreements simply impose an obligation on 24. the stockholder to vote his shares in the agreed manner or on the other party to cast the stockholder's vote on his behalf and according to his instructions. See, e.g., Haft v. Haft, 671 A.2d 413, 421 (Del. Ch. 1995) ("A proxy is, of course, a means temporarily to split the power to vote from the residual ownership claim of the stockholder."); Eliason v. Engelhart, 733 A.2d 944, 946 (Del. 1999) ("A proxy is evidence of an agent's authority to vote shares owned by another.") (emphasis added); In re Chilson, 168 A. 82 , 86 (Del. Ch. 1933) ("interest" in shares means not "an interest in the bare voting power or the results to be accomplished by the use of it," but rather a "recognizable property or financial interest in the stock in respect of which the voting power is to be exercised") (emphasis added), cited in Brady v. Mexican Gulf Sulphur Co., 88 A.2d 300, 303 (Del. Ch. 1952) (trustee could not confer an "interest" because trustee had "nothing but the voting rights" relating to the shares in question). Courts in jurisdictions other than Delaware have similarly held that transactions relating solely to voting rights do not constitute transfers of property interests in the shares. See, e.g., McKeague v. United States, 12 Cl. Ct. 671, 676 (1987) (proxies "involve the transfer of a voting right, and do not constitute a constructive or actual loss of stock ownership"), aff'd, 2d Cir., 852 F.2d 1294 (1988); Arden Farms v. State, N.Y. App. Div., 60 N.Y.S.2d 47, 51 (1946) (establishment of voting trust "does not constitute a transfer of the shares", aff'd, N.Y., 71 N.E.2d 469 (1947). Omnicare stretches its argument to the limit by contending that because the Voting Agreements concern a future merger, they are somehow more expansive than voting agreements on other matters. Obviously, that analysis is incorrect and fails to consider the plain language of the Voting Agreements. The Voting Agreements and the proxies contained therein are limited in scope to matters pertaining to the Genesis merger. In the Voting Agreements, Messrs. Outcalt and Shaw promise to vote for the Genesis Merger Agreement and against other proposals that would impede the merger. (A135-36, A130 emphasis added). That is the heart of the issue. The proxy granted to Genesis is similarly limited. Messrs. Outcalt and Shaw have directed Genesis how to vote on their behalf. Although some of the matters that could be put to a stockholder vote may be proposed in the future and may, therefore, call for Genesis to make a determination as to how such proposals would 25. impact the potential Genesis merger, it is clear that Messrs. Outcalt and Shaw have directed Genesis to vote in a manner that would support, not impede, the Genesis Merger Agreement. Thus, Genesis has no independent power to vote the Class B shares; it merely has the right to cast Messrs. Outcalt's and Shaw's "predetermined" votes. Indeed, the Voting Agreements themselves state "[a]s of the date hereof and for so long as this Agreement remains in effect . . . the Stockholder has full legal power, authority and right to vote all of the Shares then owned of record or beneficially by him, in favor of the approval and authorization of the Merger, the Merger Agreement and the other transactions contemplated thereby . . . without the consent or approval of, or any other action on the part of, any other person or entity." (A128-29, A134)(emphasis added). As stockholders, Messrs. Outcalt and Shaw had the right to vote their shares as they saw fit and to grant proxies accordingly. The Voting Agreements grant proxies to Genesis only "to vote all of the Shares beneficially owned by the Stockholder in favor of the Proposed Transaction and in accordance with the provisions of Section 2(b) and this Section 2(c)." (A130, A136). Omnicare's argument to construe Section 7(a) of the Charter in conjunction with the definition of "beneficial ownership" contained in Section 7(g) must also fail. The phrase "beneficial ownership" appears only in Section 7(e) of the Charter, a provision that simply gives a "beneficial owner" of Class B shares the right to have those shares registered in his name. Because of the limited purpose for which the Section 7(g) definition appears in the Charter, the Court of Chancery rightly determined that Section 7(g) was irrelevant to the issues presented on the motions for summary judgment. (SJ Op. at 4 n.3.) Omnicare fails to acknowledge that the voting power granted to Genesis is limited in scope to matters pertaining to the Genesis merger, and Messrs. Outcalt and Shaw retain the power to vote their Class B shares on other matters. Moreover, Messrs. Outcalt and Shaw directed Genesis how to vote - in favor of the Genesis Merger Agreement and against any other proposals that would impede the merger. Therefore, contrary to Omnicare's assertion, Genesis does not have "possession of the power to vote or to direct the vote," as the Section 7(g) definition of "beneficial ownership" requires. 26. Accordingly, the Court of Chancery correctly determined that because the Voting Agreements executed by Messrs. Outcalt and Shaw did not transfer full voting power to Genesis, the Voting Agreements did not constitute either prohibited "transfers" under Section 7(a) or transfers of "interests" in their Class B shares under Section 7(d) of the Charter. 4. Section 7(c)(5) Confirms The Voting Agreements Did Not Convey An "Interest" In The Class B Shares Because The Voting Agreements Were Executed In Connection With A Proxy Solicitation. Section 7(c)(5) of the NCS Charter provides an additional basis upon which to determine that the Voting Agreements executed by Messrs. Outcalt and Shaw did not constitute "transfers" of interests in their Class B shares resulting in the conversion of those shares into Class A shares. (SJ Op. at 15-21.) Section 7(c)(5) of the Charter expressly exempts the Voting Agreements from the definition of "transfer of an interest." Specifically, Section 7(c)(5) of the Charter states: 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 (emphasis added). Although Omnicare contends Section 7(c)(5) is merely intended to permit NCS to solicit proxies from Class B stockholders at its annual meeting of stockholders for essentially ministerial matters, that narrow interpretation of the provision is contrary to the express language of Section 7(c)(5). (See SJ Op. at 17.) 27. In addition, Omnicare is incorrect in arguing that Section 7(c)(5) does not apply to the proxies that Messrs. Outcalt and Shaw gave to Genesis in the Voting Agreements because those proxies were not given "in connection with" a solicitation of proxies subject to Section 14 of the Exchange Act. The Court of Chancery appropriately reasoned that Omnicare's contentions are overly broad and would nullify Section 7(c)(5) if taken at face value. (SJ Op. at 18. ) "[T]o have any meaning at all, Section 7(c)(5) must be read to apply to situations in which a holder of Class B shares gives a proxy in connection with a solicitation of proxies directed at the holders of the NCS Class A shares." (Id. at 18-19.) Indeed, the Court of Chancery aptly pointed out that Section 2(c) of Article IV of NCS' Charter states that "holders of Class A Common Stock and Class B Common Stock shall vote together as a single class in the election of directors of the Corporation and with respect to all other matters submitted to the stockholders of the Corporation for a vote." (Id. at 19; A24 (emphasis added)). Therefore, it is only logical that anyone soliciting proxies at NCS would solicit them from both the Class A and the Class B stockholders. (Summary Judgment Op. at 19.) The plain language of Section 7(c)(5) does not require that the giving of the proxy and the solicitation be contemporaneous. Moreover, as the Court of Chancery recognized, the phrase "in connection with" "implies no close relationship at all" and "`is always a vague, loose connective."' (Id. (quoting Bryan A. Gardner, A DICTIONARY OF MODERN LEGAL USAGE (2d Ed.) at 434)). In addition, the phrase "in connection with" also appears in federal securities laws and is interpreted quite broadly. (Id. at 19-20 (citing Manhattan Casualty Co. v. Bankers Life and Casualty Co., 404 U.S. 6, 12-13 (1971) (applying the "in connection with" language from Rule 10b-5 broadly as meaning "touching")). The Court of Chancery correctly determined that Messrs. Outcalt and Shaw granted their proxies to Genesis "in connection with" an anticipated solicitation of proxies from the Class A stockholders. (Id. at 20) The recitals in the Voting Agreements state that Messrs. Outcalt and Shaw executed the Voting Agreements "in order to induce [Genesis] to enter into tine Merger Agreement" (Id; A134, A128). The Merger 28. Agreement contains covenants by NCS that it will hold a special meeting of stockholders for the purpose of obtaining stockholder approval of the merger; that, in connection with such meeting, the NCS stockholders will be furnished with a proxy statement prepared in accordance with the provisions of the Securities Exchange Act of 1934 (the "1934 Act"); and that NCS will solicit proxies in favor of the Merger from the NCS stockholders.(8) (A89; Summary Judgment Op. at 20). The solicitation of the Class A stockholders is subject to Section 14 of the 1934 Act because the Class A shares are registered under Section 12(g) of the Securities Act. Therefore, the Voting Agreements executed by Messrs. Outcalt and Shaw clearly were made in connection with a solicitation of proxies subject to Section 14 of the 1934 Act. The definition of "solicitation" under Rule 14a-1(1)(1) also supports the argument that the Voting Agreements were executed in connection with a proxy solicitation. Rule 14a-1(1)(1); promulgated under the 1934 Act, defines "solicitation" to include: (i) any request for a proxy whether or not accompanied by or included in a form of proxy; (ii) any request to execute or not to execute, or to revoke, a proxy; or (iii) the furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy. - ------------------- (8) On August 29, 2002, NCS and Genesis filed a registration statement on Form S-4 with the Securities and Exchange Commission containing the joint proxy statement/prospectus of the two companies. A160-409. 29. Rule 14a-1(1)(1) (emphasis added). The Rule contains no requirement as to the timing of such solicitation. See also Centaur Partners IV v. National Intergroup, Inc., 1990 WL 96248 (Del. Ch.) (in examining the issue of soliciting consents, the Delaware Court of Chancery first looked to the definition of "solicitation" in Black's Law Dictionary, which defines "solicitation" as "asking; enticing; [or] urgent request"); Gulf Corp. v. Mesa Petroleum Co., 582 F. Supp. 1110, 1116 (D. Del. 1984) (citing Trans World Core. v. Odyssey Partners, 561 F. Supp. 1315, 1319 (S.D.N.Y. 1983) (relying on Rule 14a-1's definition of "solicitation"); Long Island Lighting Co. v. Barbash, 779 F.2d 793, 796 (2d. Cir. 1985) (in determining whether a "solicitation" has occurred, the issue to be decided in each case is "whether the challenged communication, seen in the totality of the circumstances is `reasonably calculated' to influence the shareholders' votes. . . . Determination of the purpose of the communication depends upon the nature of the communication and the circumstances under which it was distributed"). Clearly a direct request by a company such as Genesis to individual shareholders such as Messrs. Outcalt and Shaw to provide proxies to vote their Class A and Class B shares are proxy solicitations under Rule 14a-1. Indeed, such a direct request is the essence of a solicitation, for there can be no better way to solicit a proxy than to ask for it directly from a stockholder. Accordingly, through the Voting Agreements, Messrs. Outcalt and Shaw granted their proxies to Genesis "in connection with" a solicitation of proxies subject to Section 14 of the 1934 Act. Because Section 7(c)(5) of the Charter expressly provides that giving such proxies shall not be deemed to be a "transfer" of interest in Class B shares, Omnicare's claim that the Voting Agreements have resulted in the automatic conversion of Messrs. Outcalt's and Shaw's Class B shares into Class A shares is wrong. The Voting Agreements are valid, and no conversion has occurred. 30. CONCLUSION WHEREFORE, for all of the foregoing reasons and pursuant to the authorities cited, Appellees Jon H. Outcalt and Kevin B. Shaw respectfully request that this Court affirm in their entirety the Court of Chancery's rulings dismissing Omnicare's claims for lack of standing and granting summary judgment in favor of the defendants-appellees on the effect of the Voting Agreements. SQUIRE, SANDERS & DEMPSEY L.L.P. SPIETH, BELL, McCURDY & NEWELL CO., L.P.A. /s/ Frances Floriano Goins /s/ James R. Bright - --------------------------- ------------------------------- Frances Floriano Goins James R. Bright Thomas G. Kovach Timothy G. Warner 4900 Key Tower 2000 Huntington Building 127 Public Square Cleveland, OH 44115 Cleveland, OH 44114 (216) 696-4700 (216) 479-8500 MORRIS, NICHOLS, ARSHT & TUNNELL MORRIS, JAMES, HITCHENS & WILLIAMS L.L.P. /s/ Jon E. Abramczyk /s/ Edward M. McNally - --------------------------- ------------------------------- Jon E. Abramczyk (#2432) Edward M. McNally (#614) 1201 North Market Street Michael A. Weidinger (#3330) Wilmington, DE 19899 Elizabeth A. Brown (#3713) (302) 658-9200 222 Delaware Avenue, 10th Floor Post Office Box 2306 Attorneys for Defendant Wilmington, DE 19899 Jon H. Outcalt (302) 888-6800 Attorneys for Defendant Kevin B. Shaw November 22, 2002 CERTIFICATE OF SERVICE I hereby certify that on November 22, 2002 copies of the within document were served on the following attorneys of record as follows: BY HAND: Edward P. Welch, Esquire Skadden, Arps, Slate, Meagher & Flom LLP One Rodney Square Wilmington, DE 19801 David C. McBride, Esquire Young, Conaway, Stargatt & Taylor LLP 1000 West Street, 7th Floor Wilmington, DE 19801 Edward M. McNally, Esquire Morris, James, Hitchens & Williams 222 Delaware Avenue Wilmington, DE 19801 Donald J. Wolfe, Jr., Esquire Potter Anderson & Corroon Hercules Plaza 1313 N. Market Street Wilmington, DE 19801 /s/ Jon E. Abramczyk ------------------------- Jon E. Abramczyk EX-99 5 ex-a1vv.txt EXHIBIT (A)(1)(VV) Exhibit (a)(1)(VV) IN THE Supreme Court of the State of Delaware ------------------------- No. 605, 2002 ------------------------- OMNICARE, INC. Plaintiff-Below/Appellant, -v.- NCS HEALTHCARE, INC., JON H. OUTCALT, KEVIN B. SHAW, BOAKE A. SELLS, RICHARD L. OSBORNE, GENESIS HEALTH VENTURES, INC. and GENEVA SUB, INC., Defendants-Below/Appellees. ------------------------- ON APPEAL FROM THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY IN C.A. NO. 19800 - ------------------------------------------------------------------------------- ANSWERING BRIEF OF DEFENDANTS-BELOW/APPELLEES, GENESIS HEALTH VENTURES, INC. AND GENEVA SUB, INC. - ------------------------------------------------------------------------------- PAUL VIZCARRONDO,JR. David C. McBride THEODORE N. MIRVIS Bruce L. Silverstein MARK GORDON Christian Douglas Wright JOHN F. LYNCH Adam W. Poff LAURYN P. GOULDIN Young Conaway Stargatt WACHTELL, LIPTON, ROSEN & KATZ & Taylor, LLP 51 West 52nd Street The Brandywine Building New York, New York 10019 1000 West Street, 17th Floor (212) 403-1000 P.O. Box 391 Wilmington, DE 19899-0391 Of Counsel (302) 571-6600 Attorneys for Defendants- Below/Appellees November 22, 2002 TABLE OF CONTENTS
Page TABLE OF CITATIONS ...............................................................iv NATURE AND STAGE OF PROCEEDINGS ...................................................1 SUMMARY OF ARGUMENT ...............................................................2 STATEMENT OF FACTS ................................................................3 A. BACKGROUND OF THE NCS/GENESIS MERGER AGREEMENT AND THE VOTING AGREEMENTS ..............................................................3 B. THE APPLICABLE CHARTER AND CONTRACT PROVISIONS ..........................4 1. NCS Charter 'SS' 7 .................................................4 a. Background context ............................................4 b. Structure and language of 'SS' 7 ..............................5 2. The Voting Agreements ..............................................6 C. OMNICARE'S PURCHASE OF NCS STOCK ........................................8 ARGUMENT ..........................................................................9 I. THE COURT OF CHANCERY CORRECTLY APPLIED SETTLED PRINCIPLES OF STANDING IN DISMISSING THE FIDUCIARY DUTY COUNTS OF OMNICARE'S SECOND AMENDED COMPLAINT...9 A. SCOPE OF REVIEW .........................................................9 B. THE COURT OF CHANCERY CORRECTLY HELD THAT OMNICARE LACKS STANDING TO ASSERT COUNTS II-V ......................................................9 1. Omnicare has no standing to sue for alleged breaches of fiduciary duty owed to persons who,
-i- unlike Omnicare, were stockholders when those alleged breaches occurred ...........................................................9 2. Omnicare has no standing to sue for alleged breaches of fiduciary duty occurring before it purchased any stock ......................10 3. Omnicare's "continuing wrong" theory must be rejected because it was not fairly presented below and because it is factually incorrect and contrary to applicable law ..........................11 a. Omnicare is precluded from raising its "continuing wrong" theory on appeal because it was not fairly presented to the Court of Chancery ............................................12 b. Omnicare's "continuing wrong" theory is factually illogical and contrary to applicable law ...............................12 II. THE COURT OF CHANCERY CORRECTLY GRANTED SUMMARY JUDGMENT AGAINST OMNICARE'S CLAIM THAT THE OUTCALT/SHAW VOTING AGREEMENTS RESULTED IN THE CONVERSION OF THEIR CLASS B SHARES TO CLASS A SHARES UNDER 'SS' 7 OF THE NCS CHARTER ......15 A. SCOPE OF REVIEW ........................................................15 B. SUMMARY OF POSITION ....................................................16 C. APPLICABLE STANDARDS OF INTERPRETATION .................................17 D. THE VOTING AGREEMENTS DO NOT CONSTITUTE A "TRANSFER" OF AN "INTEREST" PROHIBITED BY 'SS' 7(a) OF THE NCS CHARTER .............................19 1. Under the plain language of 'SS' 7(a), the Voting Agreements do not constitute a "transfer" of any kind ...........................19
-ii- 2 'SS' 7(c)(5) expressly provides that the giving of a proxy is not "the transfer of an interest" in the Class B shares ...............23 3. Neither NCS nor the stockholders understood or intended the Charter to prohibit the Voting Agreements .........................27 4. Omnicare's arguments are unpersuasive, and incorrect ..............29 a. Omnicare's mischaracterization of the Voting Agreements ......29 b. Omnicare's "beneficial ownership" argument ...................31 E. THE VOTING AGREEMENTS DO NOT CONSTITUTE A "TRANSFER OF SHARES OF CLASS B COMMON STOCK" UNDER THE CONVERSION PROVISION OF 'SS' 7(d) OF THE NCS CHARTER ................................................................33 CONCLUSION .......................................................................35
-iii- TABLE OF CITATIONS
Cases Page Application of Delaware Racing Ass'n, 213 A.2d 203 (Del. 1965) ..................................................................15 Arden Farms v. State, 60 N.Y.S.2d 47 (N.Y. App. Div. 1946) ...................20n.14 Baker v. Carr, 369 U.S. 186 (1962) .............................................9n.7 Bangor Punta Operations, Inc. v. Bangor & A. R. Co., 417 U.S. 703 (1974) ..................................................................10 Bird v. Lida, Inc., 681 A.2d 399 (Del. Ch. 1996) .................................13 Brady v. Mexican Gulf Sulphur Co., 88 A.2d 300 (Del. Ch. 1952) .........................................................20, 21 Brown v. Automated Mktg. Sys., 1982 Del. Ch. LEXIS 571 (Del. Ch.) ..................................................................13 Cassidy v. Cassidy, 689 A.2d 1182 (Del. 1997) ....................................12 Clark v. Kelly, 1999 Del. Ch. LEXIS 148 (Del. Ch.) ...............................17 Concept Communications, Inc. v. Gold'n M Television, Inc., 1993 Del. Ch. LEXIS 70 (Del. Ch.) ...........................................17 Continental Airlines v. American Gen. Corp., 575 A.2d 1160 (Del. 1990) .................................................................16 Continental Ins. Co. v. Rutledge & Co., 2000 Del. Ch. LEXIS 40 (Del. Ch.) ...................................................................1 Dieter v. Prime Computer, Inc., 681 A.2d 1068 (Del. Ch. 1996) ................11, 14 Elliott Assocs., L.P. v. Avatex Corp., 715 A.2d 843 (Del. 1998) ..........17, 18n.13 Elster v. American Airlines, 100 A.2d 219 (Del. Ch. 1953) ....................13, 14 Emerson Radio Corp. v. International Jensen Inc., 1996 WL 483086 (Del. Ch.) ..........................................................9n.9
-iv- Fiduciary Trust Co. v. Fiduciary Trust Co., 445 A.2d 927 (Del. 1982) ..................................................................15 Garrett v. Brown, 1986 Del. Ch. LEXIS 516 (Del. Ch.), aff'd on op. below, 511 A.2d 1044 (Del. 1986) .............................17, 20, 21, 23 Gilbert v. El Paso Co., 575 A.2d 1131 (Del. 1990) ................................15 Glaser v. Norris. 1989 WL 79875 (Del. Ch.) .......................................11 In re Chilson, 168 A. 82 (Del. Ch. 1933) .................................20, 23, 30 In re Explorer Pipeline Co., 781 A.2d 705 (Del. Ch. 2001) ........................27 In re Gaylord Container Corp. S'holder Litig., 747 A.2d 71 (Del. Ch. 1999) ......................................................10, 10n.10 Kahn v. Seabord Corp., 625 A.2d 269 (Del. Ch. 1993) ..............................13 Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392 (Del. 1996) ..........17, 18, 19n.13 Kerbs v. California Eastern Airways, Inc., 1952 Del. LEXIS 87 (Del. Supr.)..................................................................12 Lavine v. Gulf Coast Leaseholds, 122 A.2d 550 (Del. Ch. 1956) ....................14 Leung v. Schuler, 2000 WL 264328 (Del. Ch.) ......................................11 McKeague v. United States, 12 Cl. Ct. 671 (1987), aff'd, 852 F.2d 1294 (2d Cir. 1988) .................................................20n.14 Merrill v. Crothall-American, Inc., 606 A.2d 96 (Del. 1992) ......................16 Mitchell Assocs., Inc. v. Mitchell, 1980 Del. Ch. LEXIS 562 (Del. Ch.) ...................................................................17 Mummert v. Mummert, 755 A.2d 389, 2000 Del. LEXIS 229 (Del. Supr.) .................................................................12 Newkirk v. W.J. Rainey, Inc., 76 A.2d 121 (Del. Ch. 1950) ....................13, 14 Nickson v. Filtrol Corp., 262 A.2d 267 (Del. Ch. 1970) .......................13, 14
-v- Rainbow Navigation, Inc. v. Yonge, 1989 Del. Ch. LEXIS 41 (Del. Ch.) ...................................................................18 Rohe v. Reliance Training Network, Inc., 2000 Del. Ch. LEXIS 108 (Del. Ch.) ...............................................................18 Rosenbloom v. Esso V.I., Inc., 766 A.2d 451 (Del. 2000) ...........................9 R.S.M. Inc. v. Alliance Capital Mgmt. Holdings L.P., 790 A.2d 478 (Del. Ch. 2001) ......................................................23n.19 Saito v. McKesson HBOC, Inc., 806 A.2d 113 (Del. 2002) ...........................14 Schreiber v. Bryan, 396 A.2d 512 (Del. Ch. 1978) .................................13 SEC v. Okin, 132 F.2d 784 (2d Cir. 1943) .....................................26n.23 Shields v. Shields, 498 A.2d 161 (Del. Ch. 1985) .................................17 SI Mgmt L.P. v. Wininger, 707 A.2d 37 (Del. 1998) ................................17 Star Cellular Tel. Co. v. Baton Rouge CGSA, Inc., 1993 Del. Ch. LEXIS 158 (Del. Ch.), aff'd, 1994 Del. LEXIS 190 (Del. Supr.) .......................................................................17 Stroud v. Grace, 606 A.2d 75 (Del. 1992) ..........................................1 Stuart Kingston, Inc. v. Robinson, 596 A.2d 1378 (Del. 1991) ...................9n.7 Sundlun v. Executive Jet Aviation Inc., 273 A.2d 282 (Del. Ch. 1970) .............................................................29 Superintendent of Ins. v. Bankers Life & Cas. Co., 404. U.S. 6 (1971) ..................................................................24n.21 Thorpe v. CERBCO, Inc., 1993 WL 35967 (Del. Ch.) .............................11, 14 U-H Acquisition Co. v. Barbo, 1994 WL 34688 (Del. Ch.) .........................9n.9 Watkins v. Beatrice Cos., 560 A.2d 1016 (Del. 1989) ..............................12 Statutes 8 Del. C. 'SS' 141 ................................................................1
-vi- 8 Del. C. 'SS' 212 ............................................4, 18, 20n.14, 27, 32 8 Del. C. 'SS' 218 ........................................................4, 18, 27 8. Del. C. 'SS' 327 ......................................................2,11,13,14 Securities Exchange Act of 1934 ......................................23, 24, 25, 26 Other Authorities David A. Drexler, et al., Delaware Corporation Law and Practice 'SS' 25.09[2] (2001) ............................................20n.14 Louis Loss & Joel Seligman, Securities Regulation 'SS' 9-B-7 (3d ed. 2001) ................................................................25n.21 Rodman Ward, Jr., et al., Folk on the Delaware General Corporation Law 'SS' 212.4.9 (4th ed. 2001) ..............................20n.14
-vii- NATURE AND STAGE OF PROCEEDINGS On August 1, 2002, Omnicare, Inc. filed its initial complaint in this action. On August 12, Omnicare filed its First Amended Complaint that for the first time alleged that the Voting Agreements that each of Messrs. Jon H. Outcalt and Kevin B. Shaw entered into with Genesis Health Ventures, Inc. and NCS Healthcare, Inc. constituted a "transfer" of an "interest" in their shares of NCS Class B common stock to Genesis, in contravention of the transfer restrictions in the NCS Certificate of Incorporation (the "NCS Charter" or "Charter"). DE7.(1) On August 23, 2002, defendants moved to dismiss on the ground that Omnicare lacked standing because it did not own NCS stock at the time of the allegedly wrongful conduct.(2) Omnicare subsequently filed a Second Amended Complaint, alleging the Charter claim as Count I and four fiduciary duty claims (Counts II-V): (a) "abdication" of 8 Del. C. 'SS' 141(a) by the NCS directors; (b) breach of fiduciary duty by the NCS directors; (c) aiding and abetting fiduciary breach by Genesis; and (d) an unreasonable break-up fee. A411-32. While defendants' motion to dismiss was pending, Omnicare moved for summary judgment on Count I. On October 24, 2002, the Court of Chancery heard oral argument on both motions. On October 25, the Court issued a Memorandum Opinion and Order granting defendants' motion to dismiss as to Omnicare's fiduciary claims ("Standing op."). On October 29, 2002, the Court issued a second Memorandum Opinion and Order in which it denied Omnicare's motion for partial summary judgment on the Charter claim ("SJ op."). The Court instead granted summary judgment for defendants on that claim, the sole remaining claim in Omnicare's Second Amended Complaint.(3) The Court of Chancery's authority to grant summary judgment for defendants as a result of Omnicare having so moved is well established. See Continental Ins. Co. v. Rutledge & Co., 2000 Del. Ch. LEXIS 40, at *2 & n.3 (Del. Ch.) (quoting Stroud v. Grace, 606 A.2d 75, 81 (Del. 1992)). On October 31, 2002, Omnicare filed its Notice of Appeal. Omnicare filed its Opening Brief on November 14 (cited as "OB at __"). This is the Answering Brief of Genesis and Geneva Sub, Inc. - ---------- (1) Docket entries are cited as "DE__. " The Appendix filed by Omnicare is cited as "A__." Citations to the Genesis Appellees Appendix are "BG__." (2) A class of individual NCS stockholders is pursuing a parallel action in the Court of Chancery (Consol. C.A. No. 19786), which had been coordinated with Omnicare's action. (3) The Opinion also granted summary judgment against Count I of the class plaintiffs' complaint. SUMMARY OF ARGUMENT 1. The Court of Chancery's ruling, that Omnicare lacks standing to pursue fiduciary duty claims as to alleged breaches by the NCS directors at a time when Omnicare was not an NCS stockholder, should be affirmed. Under settled Delaware precedent, no fiduciary duty is owed to a bidder, and no Delaware court has ever suggested or held that a bidder who was not a stockholder at the time of a target company's directors' alleged fiduciary misconduct may pursue such claims. As the Court below noted, while "Delaware courts have shown considerable latitude in entertaining fiduciary duty litigation brought by stockholders who are also themselves bidders for control," our courts have imposed the "consistent limitation" that "they also be stockholders at all relevant times and, thus, among those to whom a duty was owed." Standing op. at 17-18. Omnicare's "bidder standing" position is unprecedented, contrary to numerous Delaware precedents, and doctrinally and practically unsound. 2. The Court of Chancery's grant of summary judgment against Omnicare's claim that the Voting Agreements violated the NCS Charter should be affirmed. The plain language of 'SS' 7(a), 'SS' 7(c)(5) and 'SS' 7(d) of the Charter demonstrate the meritlessness of Omnicare's claim, as is further confirmed by the prior practices and understanding of NCS and its stockholders. As the Court of Chancery ruled, there is no merit to Omnicare's position that the agreements to exercise their voting power made by Outcalt and Shaw on July 28, 2002 [i.e., the Voting Agreements] run afoul of the restrictive transfer provisions of Article IV, Section 7 of the NCS Charter. There is simply 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. In reply to Omnicare's Summary of Argument: 1. Denied. The standing issue here is not whether Omnicare has a stake in the outcome. Moreover, the Court of Chancery's application of principles akin to 8 Del. C. 'SS' 327 was fully supported by applicable precedents and sound policy. Finally, Omnicare's new "continuing wrong" theory was not fairly presented below, and is otherwise factually illogical and incorrect under established Delaware case law that Omnicare ignores. 2. Denied. The Voting Agreements did not constitute a "transfer" to Genesis of either the Class B shares owned by Messrs. Outcalt and Shaw, or of "any interest therein," under the plain language of 'SS' 7 of the NCS Charter. -2- STATEMENT OF FACTS A. BACKGROUND OF THE NCS/GENESIS MERGER AGREEMENT AND THE VOTING AGREEMENTS A complete account of the background of the negotiation and execution of the NCS/Genesis merger agreement and the Voting Agreements is contained in the NCS Schedule 14D-9 of August 20, 2002 and the Joint Proxy Statement/Prospectus that has been disseminated to the stockholders in advance of the December 5, 2002 special meeting on the NCS/Genesis merger. See A144-52; BG45-63. That factual background is not relevant to the issues presented by Omnicare's appeal; nevertheless, Omnicare's brief includes an account of the context in which the NCS/Genesis transaction was negotiated and agreed to that is seriously distorted, as the Schedule 14D-9 and Joint Proxy Statement/Prospectus make clear.(4) In particular, contrary to Oninicare's account (OB at 5-6), NCS did not ignore Omnicare. For two years, NCS - which was insolvent - had searched desperately for a buyer to save it from a bankruptcy that would provide no return to the stockholders and losses to its debtholders. In July 2002, it finally found a savior in the form of Genesis. The Genesis offer provided the certainty of making whole all of NCS' debtholders and a very significant premium on a tax-free basis, with upside potential in the combined enterprise, to its stockholders.(5) The NCS directors reasonably decided on July 28, 2002 that the certainty of recovery for all NCS stakeholders that would result from the Genesis merger outweighed the uncertainty and risks of pursuing the July 26, last-minute, conditional indication of interest from Omnicare - a party that NCS had invited to bid a year before, that had steadfastly refused to offer anything for the stockholders, that had chosen to deal exclusively with the NCS Ad Hoc Noteholder Committee for a bankruptcy sale, that appeared motivated primarily to disrupt the competitive threat of an archrival (Genesis), and that conditioned its proposal on yet additional due diligence (that, by Omnicare's own testimony, it considered critical) so as to leave it with every option to reduce its offer, impose unacceptable terms, revert to a bankruptcy transaction yielding the stockholders nothing, or walk away entirely. That decision was made by - ---------- (4) The factual background is the subject of the pending motion for preliminary injunction in the parallel stockholder class suit, which was heard by the Court of Chancery on November 14, 2002 and is currently sub judice. (5) NCS common stock traded in a $.10-$.25 per share range in the year prior to the July 28, 2002 merger agreement, exceeded $.25 per share only in May 2002, and closed at $.74 per share on July 26, 2002, the last trading date before announcement of the agreement. See finance.yahoo.com (historical prices for ticker symbol "NCSS.OB" for 7/25/01-7/26/02). The merger exchange ratio (.1 share), even in the short term based on the Genesis stock close of July 26 ($16.00 per share), represented $1.60 per NCS share. -3- unconflicted directors, on an informed basis, and supported by director-stockholders (Outcalt and Shaw) representing the largest economic and voting interest in the matter. There has never been any basis to argue that the NCS directors had any reason to prefer Genesis over Omnicare. The NCS directors could not have been better informed. They had openly shopped the company for nearly two years, and were well aware of Omnicare's offer when they approved the Genesis transaction. The NCS directors properly considered the pros and cons of not accepting the certain Genesis offer - at which point, as the record is unequivocal, Genesis would have exited the scene - in favor of attempting to negotiate with Omnicare, whose last-minute interest in paying something to the stockholders was insistently conditioned on its satisfaction with additional due diligence. The NCS directors reasonably determined that the risks in that course of action were too great. Accordingly, the directors determined to enter into the merger agreement and Messrs. Outcalt and Shaw determined to execute the Voting Agreements which, on this appeal, Omnicare claims violated 'SS' 7 of the NCS Charter. B. THE APPLICABLE CHARTER AND CONTRACT PROVISIONS 1. NCS Charter 'SS' 7 a. Background context NCS was incorporated in Delaware in 1995, as a wholly owned subsidiary of a privately-held Ohio corporation, Aberdeen Group, Inc. SJ op. at 3. Aberdeen was controlled by Messrs. Outcalt and Shaw, as founders of the enterprise, through a dual class capitalization: Class A (one vote) and Class B (10 votes) shares. Id. Shortly before its initial public offering in February 1996, NCS merged with Aberdeen, with NCS as the surviving corporation. Id. In that merger, the NCS Charter was restated and amended to (among other things) carry forward the dual-class capitalization. That Amended and Restated Certificate of Incorporation is the current NCS Charter. A22-40. NCS' 1996 prospectus for its initial public offering contained a description of the Class B shares and of the restrictions on their transfer contained in 'SS' 7 of the Charter. BG263-64. Contrary to Omnicare's position concerning the restrictions on the Class B shares, nothing in that description even faintly suggests that the Class B stockholders are precluded from giving a proxy or entering into a voting agreement with respect to their shares, both of which are rights affirmatively granted to stockholders under the DGCL. See 8 Del. C. 'SS''SS' 212, 218. Indeed, the prospectus description does not even mention any restriction on the transfer of an "interest" in those shares - the phrase to which Omnicare would apply such an expansive reading: The Class A Common Stock and the Class B Common Stock are identical in all material respects except that (i) shares of the Class B Common Stock entitle the holders thereof to ten votes per share on all matters and shares of -4- the Class A Common Stock entitle the holders thereof to one vote per share on all matters, and (ii) the shares of Class B Common Stock are subject to certain restrictions on transfer. The shares of Class B Common Stock are not transferable except in certain very limited instances to family members, trusts, other holders of Class B Common Stock, charitable organizations and entities controlled by such persons (collectively, "Permitted Transferees"). These restrictions on transfer may be removed by the Board of Directors if the Board determines that the restrictions may have a material adverse effect on the liquidity, marketability or market value of the outstanding shares of Class A Common Stock. The Class B Common Stock is fully convertible at any time into shares of Class A Common Stock on a share-for-share basis and will automatically be converted into shares of Class A Common Stock upon any purported transfer to non-Permitted Transferees. BG263. From the outset, the major part of the NCS Class B shares were held by Messrs. Outcalt and Shaw. BG262. Through this structure, the founders were able to attract public investment in NCS while maintaining an absolute controlling position, and the 'SS' 7 limitations had the effect of assuring that the control over NCS inherent in the Class B holdings would not continue to exist if those holders chose to sell their Class B shares. See BG264. Every public stockholder of NCS thus bought his or her shares with full knowledge of the dual class structure, which was an organic part of NCS' existence from its birth as a public company. b. Structure and language of 'SS' 7 Three provisions in 'SS' 7 of the NCS Charter - "Limitations on Transfer of Class B Common Stock" - are pertinent: 'SS' 7(a) states the general prohibition against "transfer": Subject to the provisions of Section 7(i) of this Article IV, no 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." 'SS' 7(c)(5) states the corollary principle that the grant of a proxy by a Class B holder does not constitute "the transfer of an interest in the shares": (c) For purposes of this Section 7 of this Article IV: . . . (5) 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 -5- 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. The principle stated in 'SS' 7(c)(5) is an unambiguous (and, here, conclusive) statement that the granting of a proxy on Class B shares is not a prohibited "transfer of an interest" in the Class B shares. 'SS' 7(d) then provides that a prohibited transfer of Class B shares results in their automatic conversion to Class A shares: 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 conversion penalty of 'SS' 7(d) does not apply to a transfer of "any interest" in "shares of Class B Common Stock," which is the scope of the 'SS' 7(a) limitation on transfers. 'SS' 7(d) applies only to a "purported transfer of shares of Class B Common Stock" - not of any interest therein. A31. Also notably, the application of 'SS' 7(d) is both automatic and forever. If there is a transfer of the Class B shares in violation of 'SS' 7(a), the shares are converted into Class A shares and lose the Class B voting power for all time. Thus, Omnicare's claim sought to strip Messrs. Outcalt and Shaw of some 70% of their voting power - from 68% to approximately 20.4% by Omnicare's count, see DE105 at 8-9 - for all time and for all purposes. 2. The Voting Agreements The Voting Agreements, executed on July 28, 2002 by Messrs. Outcalt and Shaw (A128-139), covered all of the Class A and Class B shares owned by them. Two provisions in the Voting Agreement reflect the decision of Outcalt and Shaw to vote all their shares in favor of the NCS/Genesis merger: 'SS' 2(b) states the stockholder's agreement to vote all of his shares at the stockholders meeting on the NCS/Genesis merger in favor of the merger and against any competing proposal (as well as against a defined set of other transactions or matters that would materially interfere with consummation of the merger). A130, 135-36. The core, affirmative commitment to vote for the merger is contained in 'SS' 2(b)(A) of the Voting Agreement. The corresponding commitment to vote against competing transactions - in corporate parlance, the "picket fence" that protects the core commitment from being undermined - is contained in 'SS' 2(b)(B). 'SS' 2(c) is a grant by the stockholder of an irrevocable proxy to Genesis representatives authorizing them to vote all of the stockholder's shares in favor of the NCS/Genesis merger and otherwise in accordance with the voting agreement -6- contained in 'SS' 2(b). A130, 136. In effect, the 'SS' 2(c) proxy enforces the core agreement to vote contained in 'SS' 2(a). The Voting Agreements further provide that "[p]rior to the Effective Time [i.e., consummation of the NCS/Genesis merger], the Stockholder shall not Transfer (or agree to Transfer) any of his Shares owned of record or beneficially by him." A129, 135 ('SS' 2(a)). (As of the date of the Voting Agreements, the record date for voting on the merger had not been set.) That provision obviously prevents the stockholder from taking action with respect to his shares that could interfere with his commitment to exercise his full voting power in favor of the merger. In particular, the no-transfer provision in the Voting Agreements ensured that the Class B shares would not be converted to low-vote Class A shares before the NCS stockholder vote.(6) The Voting Agreements terminate by their terms upon the earlier of the consummation of the NCS/Genesis merger or the termination of the merger agreement in accordance with its terms. A132, 138. The merger agreement provides for its termination in a number of circumstances, including by mutual consent of NCS and Genesis; by either company if the merger is not closed on or before January 31, 2003; by NCS or Genesis if the other materially breaches a representation, warranty or covenant in certain circumstances; by Genesis, if the NCS board of directors or special committee withholds or changes its recommendation of the merger in a manner adverse to Genesis, or determines to recommend to the stockholders a different transaction; by either company, if the required stockholder vote to approve the merger is not obtained at the stockholders meeting; by Genesis, if another party to the Voting Agreements breaches its obligations thereunder and the requisite stockholder approval is not obtained; or by Genesis, if there has been a "Material Adverse Effect" on NCS. A99-101('SS' 7.1). The Voting Agreements thus involve a commitment to vote for a specific transaction and corollary commitments to protect that core commitment from being undermined. All of the provisions of the Voting Agreements operate to achieve a singular and time-limited objective: a commitment to vote for a specific transaction. The contractual obligations of Outcalt and Shaw, and the corresponding rights of Genesis, are limited in time (the Voting Agreements expire when the merger agreement terminates) and are limited to a specific transaction (the NCS/Genesis merger). In advancing that single objective, the Voting Agreements do not provide Genesis with any discretion or power over the vote of the shares owned by Outcalt - ---------- (6) While Omnicare relied below on 'SS' 2(a) of the Voting Agreements, the Court of Chancery noted: "It should suffice to observe that an agreement not to transfer shares can hardly be thought to constitute a transfer of those shares." SJ op. at 6 n.5. Omnicare no longer relies on 'SS' 2(a). -7- and Shaw. The vote remains the vote of Outcalt and Shaw. Nor do the Voting Agreements give Genesis any other indicia of ownership, dominion, or control - economic or vote - over the shares. To the contrary, as Vice Chancellor Lamb recognized, the Voting Agreements simply embody the decisions of Outcalt and Shaw to vote their shares in favor of the NCS/Genesis merger ('SS' 2(b)), and the related grant of a proxy to Genesis to vote those shares, as directed by Outcalt and Shaw, in favor of the merger, i.e., "all of the Shares beneficially owned by the Stockholder" ('SS' 2(c)). See SJ op. at 13, 15. In connection with the execution of the merger agreement and Voting Agreements, both NCS (which is a party to the Voting Agreements) and the Class B stockholders evidenced their understanding that the Voting Agreements were not prohibited by 'SS' 7 of the Charter and did not result in the conversion of the Class B shares. In the negotiations leading to the execution of these contracts, neither NCS nor the Class B stockholders indicated to Genesis that there was even an issue with respect to the validity of the Voting Agreements under 'SS' 7 of the Charter or that there was any question but that Outcalt and Shaw had, and would have at the time of the stockholders meeting, the voting power to approve the merger agreement - a fact that is prominently featured in the Joint Proxy Statement/Prospectus that NCS and Genesis filed with the SEC and that has now been disseminated to the stockholders for the December 5 meeting. See A162, 169; BG3, 13. C. OMNICARE'S PURCHASE OF NCS STOCK Omnicare never owned NCS stock of any type until after the execution of the merger agreement and Voting Agreements. Standing op. at 6-7. On July 29, 2002, before the market opened, NCS and Genesis issued a joint press release announcing the merger and setting forth the specific terms of the agreements. Id. at 6. Omnicare learned of the terms and purchased 1,000 shares of NCS Class A Common Stock either later that same day or the next day (July 30). Id. at 6-7; OB at 4. Three days later, on August 1, 2002, Omnicare initiated this lawsuit. -8- ARGUMENT I. THE COURT OF CHANCERY CORRECTLY APPLIED SETTLED PRINCIPLES OF STANDING IN DISMISSING THE FIDUCIARY DUTY COUNTS OF OMNICARE'S SECOND AMENDED COMPLAINT. A. SCOPE OF REVIEW Dismissal for lack of standing is subject to de novo review. Rosenbloom v. Esso V.I., Inc., 766 A.2d 451, 458 (Del. 2000). B. THE COURT OF CHANCERY CORRECTLY HELD THAT OMNICARE LACKS STANDING TO ASSERT COUNTS II-V. 1. Omnicare has no standing to sue for alleged breaches of fiduciary duty owed to persons who, unlike Omnicare, were stockholders when those alleged breaches occurred. The standing issue here is whether a bidder that was not also a stockholder of the target at the time of alleged breaches of fiduciary duty by the target's directors has standing to sue those directors for the alleged breaches of fiduciary duty. Standing op. at 9-10.(7) Omnicare has been unable to cite even one case - not one - in which this Court or the Court of Chancery held or suggested that a bidder may sue for breaches of fiduciary duty by a target's directors when the bidder did not own stock in the target at the time of the alleged breaches. The reason for this failure is a bedrock principle of fiduciary law - a person who seeks to assert a claim for breach of fiduciary duty must be a person to whom that duty was owed at the time of the alleged breach.(8) Bidders are not persons to whom a target board owes fiduciary duties;(9) a bidder has standing only if it was owed fiduciary duties in some other - ---------- (7) The issue is not, as Omnicare misleadingly frames it (OB at 12), whether Omnicare has a "sufficient stake in the controversy" - ignoring as it does the need for the litigant to have a legally-cognizable right tied to that "sufficient stake." See, e.g., Baker v. Carr, 369 U.S. 186, 204 (1962); see also Stuart Kingston, Inc. v. Robinson, 596 A.2d 1378, 1381-82 (Del. 1991) (affirming standing based on "distinct prejudice to preexisting contractual rights") (emphasis added). (8) See Standing op. at 14 & n.21 and cases there cited. (9) E.g., Emerson Radio Corp. v. International Jensen Inc., 1996 WL 483086, at *13 (Del. Ch.); U-H Acquisition Co. v. Barbo, 1994 WL 34688, at *4 (Del. Ch.). -9- capacity, i.e., in its capacity as a stockholder.(10) And because Omnicare, as a bidder, was not also a stockholder at the relevant times, Omnicare was owed no fiduciary duties and thus has no standing to seek relief on that basis. Omnicare never directly addresses this dispositive point. Instead, Omnicare misleadingly asserts that "[t]he Court of Chancery has frequently found that stockholder-bidders such as Omnicare have sufficient standing." OB at 13 (emphasis added). Contrary to Omnicare's assertion, the "stockholder-bidders" in each of the cases cited by Omnicare were not "stockholder-bidders such as Omnicare" because, unlike Omnicare, they were stockholders at the time of the alleged breaches of fiduciary duty. Vice Chancellor Lamb carefully so noted as to each of the cases relied upon by Omnicare. See Standing op. at 14 n.22, 15 n.23. There is no authority - none - for Omnicare's "bidder standing" position. As the Court of Chancery noted in Gaylord, the settled practice is "bidder standing as stockholders" - not bidder standing as bidders even if non-stockholders. 747 A.2d at 81 n.14. To recognize "bidder standing even if non-stockholders" would go far beyond the pro-bidder doctrinal incoherence referred to in Gaylord, id., and embrace doctrinal anarchy. Cf. Bangor Punta Operations, Inc. v. Bangor & A. R. Co., 417 U.S. 703, 717 (1974) ("If deterrence were the only objective, then in logic any plaintiff willing to file a complaint would suffice. No injury or violation of a legal duty to the particular plaintiff would have to be alleged.... Suffice it to say that we have been referred to no authority which would support so novel a result, and we decline to adopt it."). The Court should also consider the unsound implications inherent in Oninicare's "bidder standing" theory. If accepted, the theory does not admit of any reasonable limitation. As advocated by Omnicare, bidder standing does not require Omnicare to have ever purchased NCS shares. The same bidder standing would attach to anyone who expresses such an intent, and there is nothing that would delimit when such intent to bid would have to appear - i.e., before the filing of the complaint, just before entry of judgment, or, perhaps, before final disposition of an appeal. There is no warrant to so unmoor settled standing principles and treat bidders as some specially protected class of litigants, immunized from fundamental requirements applicable to all other parties. 2. Omnicare has no standing to sue for alleged breaches of fiduciary duty occurring before it purchased any stock. The Court of Chancery's holding was soundly based on a "longstanding Delaware public policy against the `evil' of purchasing stock in order `to attack a - ---------- (10) In re Gaylord Container Corp. S'holder Litig., 747 A.2d 71, 77 n.7 (Del. Ch. 1999) (bidder's standing to sue for breach of fiduciary duty "has remained putatively tethered, if only by a bare thread, to its status as a stockholder"). -10- transaction which occurred prior to the purchase of the stock.'" Standing op. at 11. As the Court below explained, this general principle applies both to derivative and direct claims: The policy against purchasing lawsuits involving the internal relations of Delaware corporations . . . is derived from "general equitable principles" and has been applied to preclude stockholders who later acquire their shares from prosecuting direct claims as well. Id. at 11-12 (emphasis added; collecting cases). Omnicare asserts that the Court of Chancery's ruling was "broad and unprecedented," OB at 17, and accuses the Court of "grafting" or "extending" 8 Del. C. 'SS' 327 to individual/direct claims. OB at 16. These accusations are without merit. The Court of Chancery cited established Delaware case law applying this precise principle to direct claims, and Omnicare fails to cite, let alone distinguish, any of them. See cases cited in Standing op. at 12-13 & nn.15, 16 & 17. For example, Omnicare is silent on the 1993 opinion in Thorpe v. CERBCO, Inc., where Chancellor Allen held that the stockholder-plaintiffs did not have standing to assert direct claims for fiduciary breaches occurring before the plaintiffs became stockholders: I conclude that while 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 these 1982 acts. ... Nor is there authority to accord stockholders' standing to plaintiffs in their capacity as successors to the earlier holders of the stock. It has been held that those owning shares at the time of the proxy wrong are the persons who possess rights arising from any disclosure violations and that their successors do not. 1993 WL 35967, at *3 (Del. Ch.) (emphasis added). See also Leung v. Schuler, 2000 WL 264328, at *6 (Del. Ch.) ("well established in Delaware that to 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"); cf. Dieter v. Prime Computer, Inc., 681 A.2d 1068, 1072 (Del. Ch. 1996) ("[t]he same policy and the rationale supporting ['SS' 327] would arguably apply here [in direct action] as well"); Glaser v. Norris, 1989 WL 79875, at *9 (Del. Ch.) (holding no fiduciary duty owed to plaintiffs-unit holders prior to plaintiffs' acquisition of units) - all cited by Genesis below. 3. Omnicare's "continuing wrong" theory must be rejected because it was not fairly presented below and because it is factually incorrect and contrary to applicable law. Omnicare's final argument is that Counts II through V involve "a continuing wrong that both predates and postdates the stockholder's purchase date," -11- and that Omnicare therefore has standing. OB at 21. This argument must be rejected for two reasons: (a) Omnicare is raising this issue for the first time on appeal, and (b) the argument is factually incorrect and misstates the applicable law. a. Omnicare is precluded from raising its "continuing wrong" theory on appeal because it was not fairly presented to the Court of Chancery. Under Supreme Court Rule 8, Omnicare may not raise for the first time on appeal an issue that it could have, but did not, raise before the Court of Chancery: "Only questions fairly presented to the trial court may be presented for review; provided, however, that when the interests of justice so require, the Court may consider and determine any question not so presented." Supr. Ct. R. 8. Rule 8 has been studiously enforced. See, e.g., Cassidy v. Cassidy, 689 A.2d 1182, 1184 (Del. 1997); Watkins v. Beatrice Cos., 560 A.2d 1016, 1020 (Del. 1989). Omnicare did not so much as reference its continuing wrong theory in its opposition brief below. See DE 147. That theory is not merely an additional reason supporting a proposition actually urged below - it is, instead, an entirely new theory not fairly presented to the Court of Chancery. See Kerbs v. California Eastern Airways, Inc., 1952 Del. LEXIS 87, at *18 (Del. Supr.) ("We will not permit a litigant to raise in this court for the first time matters not argued below where to do so would be to raise an entirely new theory of his case"). Nor is the "interests of justice" exception availing to Omnicare. That exception is inapplicable unless a party can show that the asserted deficiency rises to the level of "plain error," a "material defect" that is "basic, serious and fundamental" and "apparent on the face of the record." Cassidy, 689 A.2d at 1184 ("Plain errors must be so clearly prejudicial to substantial rights as to jeopardize the fairness and integrity of the trial process."); see also Mummert v. Mummert, 755 A.2d 389, 2000 Del. LEXIS 229, at *3 (Del. Supr.). b. Omnicare's "continuing wrong" theory is factually illogical and contrary to applicable law. The premise of Omnicare's argument is that the NCS directors breached their fiduciary duties by entering into the merger agreement and approving the Voting Agreements on July 28, 2002, and then compounded those breaches by "continu[ing] to invoke the Genesis Merger Agreement and the Voting Agreements ..... to thwart Omnicare's bid and cram down on the NCS stockholders the admittedly inferior Genesis merger." OB at 18. Even were Omnicare permitted to raise its continuing wrong theory for the first time on appeal, the theory must be rejected because it is factually illogical and contrary to applicable law. First, Omnicare's mischaracterization of the NCS directors' actions as constituting a "cram down" on the stockholders demonstrates Omnicare's continuing refusal to acknowledge the single salient feature about the stock -12- ownership of NCS - there is and can be no "cram down" because the NCS stockholders have never had the ability to vote a merger up or down irrespective of how Messrs. Outcalt and Shaw might vote, because Outcalt and Shaw have always controlled the outcome of any vote. This has been the case since the day NCS was formed, and every person purchasing NCS stock since that day, including Omnicare, has known it. Second, and most fundamentally, Omnicare's continuing wrong theory ignores virtually the entire body of Delaware case law that defines what actually constitutes a "continuing wrong" in the breach of fiduciary duty context - and that makes clear that wrongfully entering into a contract does not make the continuing contractual obligations a "continuing wrong." See Newkirk v. W.J. Rainey, Inc., 76 A.2d 121, 123 (Del. Ch. 1950) (holding that plaintiffs had no standing because real complaint was about prior stock purchases, not consummation of the merger itself);(11) Elster v. American Airlines, 100 A.2d 219, 224 (Del. Ch. 1953) ("Assuming that the individual defendants did wrong to the Corporation by entering into the contract, it does nor follow that they committed any wrong in carrying out the contract once it had been made. Indeed, had they not done so, the Corporation would presumably have been subject to liability for breach of contract.") (emphasis added); Bird v. Lida, Inc., 681 A.2d 399, 406 (Del. Ch. 1996) (adopting Elster's above-quoted language and holding that entering into a lease which was or became unfair did not constitute a continuing wrong); Kahn v. Seabord Corp., 625 A.2d 269, 271 (Del. Ch. 1993) ("[T]he payments [the contract] calls for are legal obligations, not wrongs. Thus, unlike a continuing wrong the only liability matter to be litigated involves defendants' 1986 actions in authorizing the creation of these contract rights and liabilities."); Schreiber v. Bryan, 396 A.2d 512, 516 (Del. Ch. 1978) ("what must be decided is when the specific acts of alleged wrongdoing occur, and not when their effect is felt"); Brown v. Automated Mktg. Sys., 1982 Del. Ch. LEXIS 571, at *6 (Del. Ch.) ("[I]t is not the merger itself that constitutes the wrongful act . . ., but rather it is the fixing of the terms of the transaction which will be finalized by the consummation of the merger which provides the foundation for the suit."); Nickson v. Filtrol Corp., 262 A.2d 267, 269-70 (Del. Ch. 1970) ("The allegations of retention and concealment cannot obscure the fact that Slick is complaining about - ---------- (11) As Chancellor Seitz there explained: Of course, in one sense every wrongful transaction constitutes a continuing wrong to the corporation until remedied. But if the rule embodied in Sec. 51A [the predecessor to 8 Del. C. 'SS' 327] is to be meaningful, then clearly "continuing wrong" cannot be construed in such a sense because it would substantially defeat the statutory policy embodied in Sec. 51A. That policy is the prevention of the evil of purchasing stock in order to maintain a derivative action designed to attack a transaction which occurred prior to the purchase of the stock. -13- a fraudulent purchase made before it owned Filtrol stock. Continuing to hold bonds which have depreciated does not, in this case, state an independent transaction to be remedied without reference to any overpayment by Filtrol . . . .. In short, both such allegations are of consequences or results flowing from the alleged acquisition of the Bantrell bonds, and are not independent transactions within the meaning of 'SS' 327."); Dieter v. Prime, 681 A.2d at 1072 (citing Brown; "[a]rguably, Defendants' refusal to cancel the Merger was not the wrongful act producing allegations of breach of fiduciary duty; it was the original decision to effectuate the Merger"); Thorpe v. CERBCO, 1993 WL 35967, at *4 ("the effects of an act can ripple through decades. But that fact does not mean that the act itself continues for Section 327 purposes so as to entitle later purchasers of the stock to sue on earlier wrongs."). In contrast, Omnicare cites just two Delaware cases, Saito v. McKesson HBOC, Inc., 806 A.2d 113 (Del. 2002), and Lavine v. Gulf Coast Leaseholds, 122 A.2d 550 (Del. Ch. 1956), neither of which provides Omnicare any support. Saito, which addressed whether 8 Del. C. 'SS' 327 had any application in a books-and-records action, merely recognizes the potentiality of a continuing wrong in the breach of fiduciary duty context. Lavine, decided by the same Chancellor who decided Newkirk, supra, is similarly unavailing. On the law, it merely confirms the converse of Elster, supra - when a critical part of the alleged wrong did not occur until after the stockholder acquired its shares, the wrong is not "completed" until that later time. Lavine, 122 A.2d at 552 (citing Elster). On the facts, Lavine merely concluded that a stock exchange agreement conditioned on stockholder approval was not "completed" until that approval was obtained. Id. The requisite stockholder approval here was obtained before Omnicare purchased its shares, when Outcalt and Shaw entered into the Voting Agreements with Genesis and NCS. Indeed, Omnicare complains here about so-called "preclusive lock-ups" (OB at 21) precisely because the requisite stockholder approval has already been obtained. All of the wrongs of which Omnicare truly complains began and ended with the execution of the merger agreement and the Voting Agreements on July 28. Every one of the alleged additional breaches since then has not been an independently cognizable wrong, but, rather, the "consequences or results flowing from" NCS, Outcalt and Shaw complying with the contractual obligations undertaken on July 28 (Nickson, 262 A.2d at 269-70). -14- II. THE COURT OF CHANCERY CORRECTLY GRANTED SUMMARY JUDGMENT AGAINST OMNICARE'S CLAIM THAT THE OUTCALT/SHAW VOTING AGREEMENTS RESULTED IN THE CONVERSION OF THEIR CLASS B SHARES TO CLASS A SHARES UNDER 'SS' 7 OF THE NCS CHARTER. This argument begins with a point that is undisputed. Messrs. Outcalt and Shaw have the uncontested right under the NCS Charter, as it has existed since NCS went public, to vote to cause a merger between NCS and Genesis. Nonetheless, while Omnicare concedes that Outcalt and Shaw are entitled to vote to cause the merger, Omnicare urges the inexplicable, if not plainly illogical, proposition that Outcalt and Shaw cannot contractually obligate themselves to do so. As the Court below ultimately concluded, there is nothing in the NCS Charter that remotely suggests that Messrs. Outcalt and Shaw are prohibited from agreeing to vote their shares in a manner clearly permitted under the Charter. Vice Chancellor Lamb's conclusion well summarizes the basic point that Omnicare has offered nothing substantial to challenge: In the end, the court is unable to agree with Omnicare's and the stockholder-plaintiffs' position that the agreements to exercise their voting power made by Outcalt and Shaw on July 28, 2002 ran afoul of the restrictive transfer provisions of Article IV, Section 7 of the NCS Charter. There is simply 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 approved and authorized by the NCS board of directors. SJ op. at 21. A. SCOPE OF REVIEW With respect to the questions of law raised by Omnicare's appeal, this Court exercises de novo review. See, e.g., Gilbert v. El Paso Co., 575 A.2d 1131, 1141-42 (De1. 1990). But the scope of review is not, as Omnicare claims (OB at 22), de novo with respect to factual findings made by the Court of Chancery below: The decision below, having been rendered on cross-motions for summary judgment and on a "paper" record, the scope of review on appeal calls for this Court to review the entire record and draw its own conclusions with respect to the facts if the findings below are clearly wrong and if justice requires, especially where the findings arise from deductions, processes of reasoning or logical inferences. Fiduciary Trust Co. v. Fiduciary Trust Co., 445 A.2d 927, 930 (Del. 1982) (citing Application of Delaware Racing Ass'n, 213 A.2d 203, 207-08 (Del. 1965)). See also -15- Continental Airlines v. American Gen. Corp., 575 A.2d 1160, 1164 (Del. 1990) (same); Merrill v. Crothall-American, Inc., 606 A.2d 96, 100 (Del. 1992) (citing Fiduciary Trust Co. with approval and noting that "deference is warranted" to the lower court's factual findings when decided on cross-motions for summary judgment). B. SUMMARY OF POSITION Omnicare's claim for conversion of the Class B shares hinges on the twin assertions that the Voting Agreements constitute a prohibited "transfer" under 'SS' 7(a) of the NCS Charter, and trigger the conversion penalty of 'SS' 7(d). Omnicare fails to cite a single authority in support of its essentially ipse dixit presentation of what constitutes a "transfer," largely ignores Delaware precedents that establish that a voting agreement is not a transfer of the shares or any interest therein, and fails - necessarily - to ground its assertions in the plain words of 'SS' 7. Omnicare instead is compelled to resort to mischaracterization of the Voting Agreements, and other meritless efforts to invoke 'SS' 7 to strip voting power from Outcalt and Shaw. Omnicare's position - that the provisions of the Voting Agreements amount to a prohibited transfer under the NCS Charter - is manifestly wrong under any common sense understanding of the meaning of the word "transfer," and proves even weaker under an analysis of the relevant provisions of the NCS Charter. In the Voting Agreements, Outcalt and Shaw agreed to vote their Class B shares in favor of the Genesis transaction and against a competing transaction, and granted a limited-purpose proxy ensuring that that agreement is effectuated. These commitments amount to (a) an exercise of voting discretion over the Class B shares by the current holders, and (b) a contractual, self-imposed obligation not to undo or undermine their voting decision. The Voting Agreements are not a "transfer" at all (either of the shares or an interest in them), but a contractual commitment on the stockholder's part embodying the stockholder's own decision on how to vote his shares, that is limited in time and limited to a particular transaction. In no common sense understanding have Outcalt and Shaw "transferred" anything. What did Genesis and NCS, the other parties to the Voting Agreements, receive? They have no economic interest in the shares, no power of disposition, and no power to direct the voting of the shares. The limited-purpose proxy is no exception, for it merely authorizes Genesis to vote as previously directed by Outcalt and Shaw in the Voting Agreements -- an obvious conclusion that is confirmed by 'SS' 7(c)(5) of the NCS Charter, which expressly states that the granting of a proxy does not constitute a transfer of an interest in the shares. As set out below, under the plain language of 'SS' 7(a), 'SS' 7(c)(5) and 'SS' 7(d), the Court of Chancery properly granted summary judgment against Omnicare's Charter claim. -16- C. APPLICABLE STANDARDS OF INTERPRETATION Delaware courts employ general principles of contract interpretation in construing certificates of incorporation. See, e.g., Elliott Assocs., L.P. v. Avatex Corp., 715 A.2d 843, 852-54 (Del. 1998). Accordingly, the provisions of the Charter will be "interpreted using standard rules of contract interpretation which require a court to determine from the language of the contract the intent of the parties. In discerning the intent of the parties, the [Charter] should be read as a whole and, if possible, interpreted to reconcile all of the provisions of the document." Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 395 (Del. 1996) (citation omitted). "If no ambiguity is present, the Court must give effect to the clear language of the Certificate." Id. If the language is determined to be ambiguous, the Charter must be construed to "adhere to the reasonable expectations" of the stockholders, id. at 399 - here, to protect the rights of the Class B stockholders, and not to impose restrictions on those shares if the existence or operation of the restriction is not clearly stated. See SI Mgmt L.P. v. Wininger, 707 A.2d 37, 42-43 (Del. 1998) (applying the principle to a partnership agreement that was not a bilateral negotiated agreement). In the case of contracts that prohibit the transfer of stock or any interest in the stock, the Delaware courts reject interpretations that result in a forfeiture, as Omnicare urges should occur here. Garrett v. Brown, 1986 Del. Ch. LEXIS 516, at *22, *30 (Del. Ch.) (holding that a voting agreement is not a transfer of shares or an interest in shares), aff'd on op. below, 511 A.2d 1044 (Del. 1986). Indeed, it is well-settled that constraints on alienation are to be strictly construed. See Mitchell Assocs., Inc. v. Mitchell, 1980 Del. Ch. LEXIS 562, at *8 (Del. Ch.). Consequently, the Delaware decisions consistently construe anti-transfer clauses so as to apply the prohibition only to transactions that clearly constitute prohibited transfers, and not broadly to apply where reasonable doubt may exist and the clause operate as a trap for the unwary. See, e.g., Garrett v. Brown, 1986 Del. Ch. LEXIS 516, at *23-24 (first-refusal option conditioned on "transfer" of shares not reasonably interpreted to apply to "non-sale transfers"); Concept Communications, Inc. v. Gold'n M Television, Inc., 1993 Del. Ch. LEXIS 70, at *13-15 (Del. Ch.) (first-refusal option conditioned on "transfer" not triggered because a pledging of shares did not constitute a transfer of "that residual right that we most closely associate with 'ownership'"); Star Cellular Tel. Co. v. Baton Rouge CGSA, Inc., 1993 Del. Ch. LEXIS 158, at *23-25 (Del. Ch.) (transfer by operation of law in merger not a "transfer" where the agreement did not clearly indicate such an intent), aff'd, 1994 Del. LEXIS 190 (Del. Supr.); Clark v. Kelly, 1999 Del. Ch. LEXIS 148, at *33-34 (Del. Ch.) (transfer of stock into a trust not a "transfer"); Shields v. Shields, 498 A.2d 161, 167-68 (Del. Ch. 1985) (conversion of stock in a merger not a "sale, transfer or exchange" because the agreement could reasonably be interpreted to prohibit only stockholder-level acts). -17- In particular, because the Voting Agreements do no more than exercise rights granted to stockholders by the DGCL, any interpretation of the NCS Charter to negate such rights must be established by clear and convincing evidence. The DGCL expressly authorizes stockholders to enter into voting agreements (8 Del. C. 'SS' 218), and to grant a proxy to another person to act for such stockholder (id. at 'SS' 212(b)). At the very least, if 'SS' 7 of the NCS Charter is claimed to deprive stockholders of rights that are otherwise granted by statute, that interpretation must be established clearly and convincingly. See, e.g., Rohe v. Reliance Training Network, Inc., 2000 Del. Ch. LEXIS 108, at *57-58 (Del. Ch.), citing Rainbow Navigation, Inc. v. Yonge, 1989 Del. Ch. LEXIS 41, at *12 (Del. Ch.) (court will not construe a contract to disable stockholders from exercising statutorily-granted rights "unless that reading of the contract is certain and unambiguous"). Finally, there is no force to Omnicare's uncited assertion that the NCS Charter should be construed against stockholders Outcalt and Shaw as "drafters" of the Charter, OB at 31. Nothing in the record supports the assertion that Outcalt and Shaw were the "drafters" of the NCS Charter. As the Court of Chancery noted, there is "no reason to treat Outcalt and Shaw, whose interests as stockholders are at stake, as if they are the 'corporate drafters' of the provisions." SJ op. at 9 n.10.(12) Indeed, given that 'SS' 7 of the Charter restricts their ability to transfer their shares, it would seem appropriate to presume that the provisions were imposed on Outcalt and Shaw when NCS made its IPO, rather than drafted by them. In all events, as already noted, there is no warrant to construe the Charter against one class of stockholders (the B holders) -- the position for which Omnicare contends.(13) - ------------------- (12) Both Outcalt and Shaw were deposed in this action, and Omnicare did not seek to establish their role, if any, in the drafting of the Charter. What the record does reveal is that Omnicare's current counsel (the Dewey Ballantine firm) was counsel for the underwriters in the 1996 IPO of NCS, when the Charter was described in a manner entirely inconsistent with Omnicare's present position. BG270; see supra at 4-5. (13) Omnicare cites Elliott Associates, supra, to support construing the Charter against Messrs. 0utcalt and Shaw. OB at 31. Elliott Associates comes nowhere close to supporting Omnicare's contention; Omnicare "badly misconstrues" the case, as the Vice Chancellor noted. SJ op. at 9 n.10. The doctrine stated in Elliott Associates is that when a charter contains a "hopeless ambiguity" "that could mislead a reasonable investor," and when that hopeless ambiguity is "attributable to the corporate drafter," then the ambiguity "must be construed in favor of the investor and against the drafter." Elliott Assocs., 715 A.2d at 853 (emphasis added). Omnicare cannot contort that doctrine to fit the present case. First, there is no ambiguity pertinent to Omnicare's position here; accordingly, the claimed doctrine "is not applicable." Id. And if there is any ambiguity, it certainly is not "hopeless." As opposed to the "patent drafting error" (id. at 853 n.47) in Kaiser Aluminum, supra - an error that drove this Court to apply contra -18- D. THE VOTING AGREEMENTS DO NOT CONSTITUTE A "TRANSFER" OF AN "INTEREST" PROHIBITED BY 'SS' 7(a) OF THE NCS CHARTER. Omnicare's position that the Voting Agreements constitute a "transfer" of an interest in the stockholders' Class B shares to Genesis is belied both by common sense, and the plain language and structure of 'SS' 7 of the NCS Charter. 1. Under the plain language of 'SS' 7(a), the Voting Agreements do not constitute a "transfer" of any kind. The essence of the Voting Agreements is a commitment by Messrs. Outcalt and Shaw to support the NCS/Genesis merger agreement by voting their shares in favor of the merger. Having made the determination on July 28 to vote for the merger, the Voting Agreements (a) obligate Outcalt and Shaw to maintain that commitment by voting for the merger when it is submitted to the stockholders of NCS, (b) obligate Outcalt and Shaw not to take actions that would have the effect of undermining their ability to vote for the merger (such as, for example, by voting for a competing transaction or other corporate act that would interfere with or otherwise adversely impact the merger), i.e., the "picket fence" provision, and (c) grant an irrevocable proxy to Genesis to permit Genesis to vote Outcalt's and Shaw's shares for the proposed merger, as a mechanism to enforce the contractual obligation. As a matter of plain language, by no stretch can the Voting Agreements be deemed a "transfer" of any kind from the Class B stockholders to Genesis under 'SS' 7(a) of the Charter. A "transfer" must, at barest minimum, consist of some economic or voting element of the shares being "transferred" from the stockholder and received by Genesis. The Voting Agreements do not do that. The Voting Agreements simply embody the decision by the stockholders, qua stockholders, to vote their shares - all of their shares - in favor of the NCS/Genesis merger. That was the stockholders' decision. That was not, and is not, a decision that Genesis made or is now empowered to make by anything in the Voting Agreements. Genesis has acquired no dominion of any kind over the Class B shares owned by Outcalt and Shaw. Genesis has none of the powers of ownership of the - ------------------- proferentum against the issuer (and in favor of preferred stockholders) "only as a last resort" (Kaiser, 681 A.2d at 399) - the NCS Charter can be interpreted through "standard rules of contract interpretation" without venturing beyond its plain language, as the Court below demonstrated. SJ op. at 10. Second, even under the rule of contra proferentum any ambiguity must be construed against the corporation and in favor of the reasonable expectations of the Class B stockholders, not in favor of limiting or restricting the rights of stockholders, particularly with respect to a proffered constraint on alienation or restriction of statutory rights. Kaiser, 681 A.2d at 399. -19- shares - not of the shares, nor of any "interest" in the shares; not of any economic nature, nor of any voting power. All that Genesis received in the Voting Agreements is the stockholders' commitment to vote for the NCS/Genesis merger - their decision, not Genesis'. Genesis did not, and is not, determining how the shares will be voted. The existence of contractual obligations or restraints on how the Class B stockholders exercise their voting power does not transfer anything to the other party; it simply imposes an obligation on the Class B stockholders. See, e.g., Garrett v. Brown, supra, 1986 Del. Ch. LEXIS 516, at *5, *30 (voting agreement commitment to vote restricted shares in certain manner held not to be "transfer" of the shares or of an "interest therein"); In re Chilson, 168 A. 82, 86 (Del. Ch. 1933) ("interest" in shares means not "an interest in the bare voting power or the results to be accomplished by the use of it," but rather a "recognizable property or, financial interest in the stock in respect of which the voting power is to be exercised") (emphasis added), cited in Brady v. Mexican Gulf Sulphur Co., 88 A.2d 300, 303 (Del. Ch. 1952) (trustee could not confer an "interest" because trustee had "nothing but the voting rights" relating to the shares in question).(14) As the Court below recognized, the decision in Garrett v. Brown, supra - a decision affirmed by this Court - is particularly pertinent on the precise point that a stockholder's entry into a voting agreement is not a transfer of an interest in the shares. The transfer prohibition in Brown, contained in a Stockholders Agreement, prohibited the "Transfer [of] any shares of the Common Stock or any right, title and interest therein or thereto." 1986 Del. Ch. LEXIS 516, at *5. "Transfer" was defined in the contract to mean "a sale, assignment, hypothecation, encumbrance, bequest or other transfer, whether by operation of the law or otherwise." Id at * 18 - ------------------- (14) Other jurisdictions have likewise held that proxies and other voting contracts do not constitute transfers of interests in the shares. See, e.g., McKeague v. United States, 12 Cl. Ct. 671, 676 (1987), aff'd, 852 F.2d 1294 (2d Cir. 1988); Arden Farms v. State, 60 N.Y.S.2d 47, 51 (N.Y. App. Div. 1946) (establishment of voting trust "does not constitute a transfer of the shares"), aff'd, 71 N.E.2d 469 (N.Y. 1947). The 1967 amendment of 8 Del. C. 'SS' 212(e) overruled Chilson's holding that only a "property or financial interest" in the shares - and not an interest in the corporation generally - was sufficient to support on irrevocable proxy. Rodman Ward, Jr., et al., Folk on the Delaware General Corporation Laws 'SS' 212.4.9 (4th ed. 2001). Chilson continues to establish that a voting right is not an "interest" in shares. And under the amended 'SS' 212(e), the "coupled with an interest" in the 'SS' 2(c) proxy of the Voting Agreement is not an interest in the shares, but Genesis' interest in NCS as its merger agreement partner. See David A. Drexler, et al., Delaware Corporation Law and Practice 'SS' 25.09[2] (2001) (interest under 'SS' 212(e) includes "some agreement by the proxy holder with the corporation with respect to which the proxy holder seeks assurance of the corporation's performance" or "detrimental economic reliance upon [the irrevocable proxy's] existence"). -20- (court notes that parties intended to control against transfers other than sales). One of the contracting parties (La Cadena) then entered into an agreement with a third party (Craig) as part of an effort to acquire a controlling position in the company (Stater Bros.). That agreement contained a commitment to vote the shares to elect specified candidates to the board(15) and broad covenants not to vote for a range of corporation actions(16) - contractual voting commitments at least as broad as those in the Voting Agreements here. Noting that the Stockholders Agreement "does not in any way limit the stockholders' freedom to vote their shares as they see fit" just as the NCS Charter here does not limit the Class B holders' freedom to vote their shares as they see fit - the Court concluded that: [The] provisions as to the manner in which La Cadena will vote its stock cannot reasonably be construed to constitute a transfer under the Stockholders' Agreement. As noted earlier, the Stockholders' Agreement does not in any way limit the stockholders' freedom to vote their shares as they see fit. That being case, it would be inappropriate to read the definition of transfer to include a voting agreement. Id. at *30 (emphasis added). Garrett v. Brown is thus four-square authority that contractual voting commitments do not constitute the transfer of the shares in question or of any "interest" therein - just as Chilson and Brady, supra, likewise held that voting rights over shares are not "interests" in the shares. (l7) As the Court below squarely found, the Voting Agreements did not transfer any interest in the shares to Genesis: The court cannot 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 interest in the shares.... Section 2(b) of the Voting Agreements simply expresses their promises to vote - ------------------- (15) BG314-15 (obliging La Cadena "to seek the prompt election to such boards of two Craig nominees;" "[i]n future elections," to "jointly support for election to the Board" agreed-upon nominees, and "agree to vote, so as to achieve, to the fullest extent possible, equal representation of each party's nominees upon the boards"). (16) BG315 (covenanting not to grant proxy or voting agreement for other director nominees, and not to vote for "(a) any merger or sale of all or substantially all of the assets of Stater Bros. or any other type or form of business combination requiring stockholder approval....; (b) any fundamental change in or amendment to the charter or by-laws....; (c) the issuance, or any major repurchase or retirement, of any [shares of any class]; or (d) the declaration or distribution of any dividend or distribution with respect to Stater Bros. Stock in excess of historical levels"). (17) Omnicare is simply incorrect in suggesting that Brown held that the voting aspects of the Craig agreement may have been the transfer of an interest in the shares albeit not sufficient to trigger the first-refusal option. See OB at 25 n.10. -21- 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. The common sense result in Brown applies equally here.... 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. For these reasons, relying on the decision in Brown, the court finds that the provisions of Section 2(a) of the Voting Agreements did not convey to Genesis an "interest" in the Class B common shares that are subject to that agreement. SJ op. at 13, 14-15. And as the Court below likewise held as to the proxy contained in 'SS' 2(c) of the Voting Agreements (even apart from 'SS' 7(c)(5) of the Charter): [T]he proxies are really just a convenient way to enforce the terms of the voting agreements found in Section 2(b). They are limited in scope to the matters covered in that section and can only be exercised in the manner and to the extent that the owners of the shares themselves promised to vote them. For these reasons, the proxies, by themselves, do not involve a transfer of any significant part of Outcalt's or Shaw's voting power. The court is aware that, because the two proxies in combination represent a majority of the NCS voting power, the exercise of the proxies to vote the shares in accordance with the terms of Section 2(b) will result in the ratification of the Merger Agreement, unless that agreement is earlier abandoned.... This ultimate substantial effect resulting from the exercise of the proxies does not mean, however, that the grant of the proxies (as opposed to Outcalt's and Shaw's determination to cast their votes in favor of the Merger Agreement) resulted in the transfer of any substantial part of Outcalt's or Shaw's ownership interest in the Class B shares. SJ op. at 15-16 (footnote omitted).(18) - ------------------- (18) Omnicare terms the Vice Chancellor's analysis a "fallacy... of course" because, it says, the agreement to vote is not a "stand-alone provision" but part of an agreement "that also contains the outright grant of an irrevocable proxy." OB at 27. That attack is unwarranted. The Vice Chancellor's analysis plainly comprehended that the agreement to vote in the Voting Agreements was combined with an irrevocable proxy of like extent. See SJ op. at, e.g., 12, 13, 15-16. Similarly, Omnicare asserts that the Court below "gets it exactly backwards" in describing the 'SS' 2(c) proxy as a mechanism to enforce the 'SS' 2(b) agreement to vote. OB at 27. There is no substance to that complaint. Omnicare itself notes that 'SS' 2(b) -22- The Court of Chancery correctly held that the Voting Agreements "Did Not Transfer An 'Interest'" in the shares. SJ op. at 11. Manifestly, Outcalt and Shaw did not give Genesis any "recognizable property or financial" interest in their Class B shares (Chilson, supra), and a voting agreement is not a transfer of any interest in the shares (Garrett v. Brown, supra). As a matter of plain language and Delaware precedent, there cannot be a transfer of an interest when the supposed transferee receives nothing except a voting commitment and corresponding proxy, embodying a voting decision made by the stockholder.(19) 2. 'SS' 7(c)(5) expressly provides that the giving of a proxy is not "the transfer of an interest" in the Class B shares. The plain terms of 'SS' 7(c)(5) of the NCS Charter are further conclusive against Omnicare's position. 'SS' 7(c)(5) provides that "[t]he 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... 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." Notably, 'SS' 7(c)(5) is not merely stated as an exception or carve out (as other provisions of 'SS' 7 are);(20) it is stated as a stand-alone rule. 'SS' 7(c)(5) renders frivolous Omnicare's position that the proxy grant in the Voting Agreements is a prohibited "transfer" - making clear that the grant of a proxy by the holder of the Class B shares is not a transfer of an interest in the shares within the intended meaning of the transfer prohibition. 'SS' 7(c)(5) does not require that the proxy be revocable, nor does it require that the proxy be given in a company-sponsored solicitation, nor does it require that it be given to the same party that conducts the overall stockholder solicitation, nor does it require that the proxy be granted pursuant to or under 'SS' 14 of the Securities Exchange Act of 1934 - only that it be "in connection with" a proxy solicitation that is subject to 'SS' 14. In this case, there is no question that the proxy that the Class B stockholders agreed to give to Genesis was to be exercised in connection with the proxy solicitation for the stockholder vote on the merger, which is undisputedly subject to 'SS' 14 of the Exchange Act. And even beyond the literal wording of 'SS' 7(c)(5), its common sense - ------------------- and 'SS' 2(c) of the Voting Agreements are "coterminous" (OB at 28), and the Vice Chancellor clearly did not - as Omnicare asserts (id.) - "misapprehend[]" that fact. See SJ op. at, e.g., 5-6, 12, 15-16. (19) Even if any particular part of the Voting Agreements was thought to violate 'SS' 7(a) of the Charter, the result should be at most to invalidate that particular provision, per the severability provision in 'SS' 4 of the Voting Agreements. A131, 136. See, e.g., R.S.M. Inc. v. Alliance Capital Mgmt. Holdings L.P., 790 A.2d 478, 494-95 & n.20 (Del. Ch. 2001). (20) E.g., 'SS' 7(b) (pledges as collateral securities for indebtedness); 'SS' 7(e) (separation of record from beneficial ownership in the hands of "street name" holders). -23- import is that where the Class B stockholders grant a proxy, of any kind, in connection with a matter being submitted to all of the stockholders, such as the merger, the grant of a proxy to vote the shares in a manner already determined by the owner of the shares is not a transfer of an interest. Moreover, 'SS' 7(c)(5) does not operate so as to lift the prohibition that might otherwise apply. Rather, it states that the giving of a proxy is not a transfer of an interest in the Class B shares at all. In other words, the existence of 'SS' 7(c)(5) demonstrates that the creation of contractual rights with respect to the shares, including the creation of contractual rights to vote the shares on a specific matter being submitted to a vote, are not the type of transactions intended to be encompassed within the meaning of a transfer of an interest. Consequently, if the grant of the power to exercise the vote by a proxy holder is not a transfer of an interest, the contractual undertaking of the Class B stockholders to vote in a particular manner certainly cannot be such a transfer. Indeed, the existence of contractual restraints on how the Class B stockholders exercise their voting power does not transfer anything to the other party; it simply imposes an obligation on the Class B stockholders. All of the provisions of the Voting Agreement accomplish but one objective: assuring that the Class B stockholders comply with their commitment to vote for this specific transaction. If that core undertaking is not a transfer, and it clearly is not, the other constraints that protect that obligation cannot be transfers. In its opening brief below (DE 105), Omnicare ignored 'SS' 7(c)(5). It subsequently advanced a number of arguments to evade 'SS' 7(c)(5), which the Court of Chancery considered and rejected. Omnicare repeats those contentions here: (a) that Class B shares are not registered under the Securities Exchange Act of 1934 and, consequently, a proxy with respect to those shares could never be a proxy granted pursuant to 'SS' 14 of that Act; and (b) that the proxy in the Voting Agreements was not given "in connection with" a solicitation of proxies subject to 'SS' 14 because the Voting Agreements preceded the solicitation of proxies from the other stockholders which is being conducted by NCS, not Genesis. OB at 32-33. These arguments are nothing but attempts to impose limitations on 'SS' 7(c)(5) that are unsupported by its plain language or manifest intent - or common sense. Omnicare's first contention - that the proxy is not covered by 'SS' 7(c)(5) because the Class B shares are not registered under the Exchange Act - actually proves the contrary of Omnicare's position. First, the clause nowhere requires that a proxy be given pursuant to 'SS' 14 of the Exchange Act. The clause simply requires that the proxy be given "in connection with" such a solicitation, which it clearly was.(21) And there is no logic to turning the definition of a "transfer" of an "interest" - ------------------- (21) Cf. Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 12-13 (1971) (interpreting "in connection with" in securities fraud litigation under SEC Rule 10b-5 as requiring only that the activity be "touching" the investor's purchase or sale of -24- on such a requirement. Second, the fact that the Class B shares never have been registered under the Exchange Act, and, as a practical matter, never would be registered under the Act,(22) proves that 'SS' 7(c)(5) was not intended to be limited to a proxy given pursuant to that Act. Since the Class B shares have never been registered and were never anticipated to be registered, such a limitation would render 'SS' 7(c)(5) meaningless because it could never apply. Thus, the clause only requires that the proxy be "in connection with" such a solicitation, not "pursuant to" or "in response to" such a solicitation, as a proxy for the unregistered Class B shares never could be technically pursuant to or in response to 'SS' 14 of the Act. Third, Omnicare's position would lead to absurd results. As Omnicare would have it, even the grant of a revocable proxy by the Class B stockholders, an event that has undoubtedly occurred on many occasions (see BG317-41), would constitute a transfer of an interest, causing the shares to convert to Class A shares. Even Omnicare must retreat from the illogic of this argument. As Vice Chancellor Lamb reasoned: The plaintiffs' first argument is overly broad and, if taken at face value, would nullify Section 7(c)(5). Of course, Class B shares are not registered under the Exchange Act. They never have been, and there is no reason to expect that they ever will be. Indeed, registration of those shares is completely inconsistent with the substantial transfer restrictions found in Section 7(a) of the NCS Charter. Thus, to have any meaning at all, Section 7(c)(5) must be read to apply to situations in which a holder of Class B shares gives a proxy in connection with a solicitation of proxies directed at the holders of the NCS Class A shares. This reading also 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 single class in the election of directors.... and with respect to all other matters 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 the Class B stockholders. SJ op. at 18-19. - ------------------- a security); Louis Loss & Joel Seligman, Securities Regulation 'SS' 9-B-7, at 3680-3726 (3d ed. 2001). The use of other "tighter" connective phrases in other sections of the Charter demonstrates, if any demonstration were needed, that the drafters knew how to require a tighter connection if that was intended. E.g., 'SS' 7(a)(2) ("pursuant to a trust"). (22) 'SS' 14 of the Exchange Act applies only to securities registered pursuant to 'SS' 12 of the Exchange Act. Classes of securities are registered under 'SS' 12 of the Exchange Act only if shares of that class are to be traded on a national securities exchange or held of record by more than 500 persons, both practical impossibilities in light of the transfer restrictions on the Class B shares. -25- Omnicare's second contention - that the proxy in the Voting Agreements obtained by Genesis is not covered by 'SS' 7(c)(5) because it was given before the commencement of the proxy solicitation by NCS - is not supported by any language in the clause. In effect, again, Omnicare seeks to engraft onto the clause the requirement that the proxy be given "in response to" or "as a result of" a solicitation under 'SS' 14 of the Exchange Act - as Omnicare's brief indeed concedes is the import of its contention, see OB at 33. But the clause nowhere imposes such a requirement. Rather, the clause only requires that the proxy be "in connection with" such a solicitation, which (again) it clearly was.(23) Indeed, the NCS/Genesis merger agreement expressly contemplates and requires that NCS solicit proxies from the stockholders in a solicitation subject to 'SS' 14 of the Exchange Act. See A67, 86-87, 89 (merger agreement 'SS''SS' 4.8, 5.1(c), 5.3(a)). And the proxy is "in connection with" that solicitation in the most important sense of those words: if there were no special meeting - no vote on the merger agreement - Genesis would have had no use for and would not have asked for a proxy. The whole point of the proxy is to be used at the special meeting. Moreover, there is no logic to Omnicare's contention. Why would it make a difference to the definition of the transfer of an interest whether the proxy was given before or during the formal proxy solicitation, or to the company or someone else (like Genesis)? The important point is that the grant of a proxy power to vote on a matter being submitted to stockholders is not the transfer of an interest in the shares, and there is no logical basis for differentiation based upon the time the proxy is given, or to whom it is given.(24) As Vice Chancellor Lamb reasoned: [I]f Section 7(c)(5) were read to contain a requirement of contemporaneity between the giving of a proxy and the pendency of the solicitation, the proxies at issue would not benefit from Section 7(c)(5)'s exemption. Nevertheless, such a constrictive reading is plainly unjustified by the language of that section. On the contrary, the phrase "in connection with" implies no close relationship at all. According to one scholar of modern legal usage, "in connection with is always a vague, loose - ------------------- (23) See note 21, supra. As far back as 1943, Judge Learned Hand held that an action taken before a formal solicitation starts is part of the solicitation covered by the securities law, so long as it is a "step" towards "an out-and-out solicitation later," and that it is sufficient that the action be "part of a continuous plan ending in solicitation and which paves the way for its success." SEC v. Okin, 132 F.2d 784, 786 (2d Cir. 1943); see Securities Regulation, supra, at 1944 & n.81. (24) Omnicare's anti-'SS' 7(c)(5) argument lapses further into illogic: To apply 'SS' 7(c)(5) here is not to "turn... the proxies granted to Genesis into a 'solicitation of proxies subject to the provisions of Section 14'" (OB at 32), does not "swallow the entire exception" (id. at 33), and does not render the 'SS' 7 restrictions "worthless" (id.). -26- connective." The phrase also appears in various provisions of the federal securities laws and is generally read quite broadly. 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. 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 the Voting Agreements that ties the promise to vote to that anticipated special meeting. SJ op. at 19-20 (footnotes omitted). Fundamentally, it is central to Omnicare's position that a voting agreement "transfers" an "interest" in the Class B shares to the other party to the agreement. However, 8 Del. C. 'SS' 218 expressly authorizes stockholders to enter into voting agreements, and there is nothing in the statute that allows the certificate of incorporation to deprive the stockholders of that power. Similarly, according to Omnicare, the Class B stockholders are prohibited from granting a proxy with respect to their shares, as the Voting Agreements include. However, 8 Del. C. 'SS' 212(b) expressly provides that "[e]ach stockholder entitled to vote at a meeting of stockholders ... may authorize another person or persons to act for such stockholder by proxy ...," and there is nothing in the statute that allows the certificate of incorporation to deprive the stockholders of that power. At the very least, if 'SS' 7 of the Charter is claimed to deprive stockholders of rights that otherwise are granted by statute, such an interpretation must be clearly and convincingly established by "certain and unambiguous" language. See supra at 18. 3. Neither NCS nor the stockholders understood or intended the Charter to prohibit the Voting Agreements. The transfer restrictions in 'SS' 7 of the NCS Charter unambiguously do not reach the types of contractual rights and obligations Omnicare contends they reach. If there is any ambiguity on that question, the ambiguity must be construed to narrow the restrictions for all the reasons discussed supra at pp. 17-18. In addition, it is a fundamental principle of contract construction that extrinsic evidence will be considered when construing an ambiguous, written contract. In re Explorer Pipeline Co., 781 A.2d 705, 714 (Del. Ch. 2001) ("Once the Court determines that the -27- language is ambiguous, then 'all objective extrinsic evidence is considered: the overt statements and acts of the parties, the business context, prior dealings between the parties, and other business customs and usage in the industry.'"). In this case, the only extrinsic evidence in the record does not support - but, indeed, defeats - the expansive interpretation of these restrictions advocated by Omnicare. The NCS Charter was amended to add the 'SS' 7 restrictions as NCS went public in 1996. NCS' IPO prospectus contained a description of the NCS capital structure, including the terms of the Class B shares and the Charter's transfer restrictions. See supra at 4-5; BG263. Nothing in that prospectus would alert the Class B stockholders, present or future, of the extraordinary restrictions that Omnicare claims apply to those shares. There is no suggestion that the Class B stockholders may not enter into voting agreements or grant proxies to third persons. There is nothing to suggest that the Class B stockholders cannot contractually restrict their ability to vote the shares. Indeed, the prospectus describes the restrictions as restricting only the transfer of the shares, and no mention is made of any restrictions on the transfer of interests in shares. BG263-64. Yet, according to Omnicare's position, buried in the silence of this prospectus is a restriction on the ability of the Class B stockholders to grant proxies, enter into voting agreements or generally to enter into contracts that create rights or obligations with respect to their shares. Surely such extraordinary restrictions would be noted in the prospectus if they were ever intended. The conduct of the parties to this contract, NCS and the stockholders, since the company's formation in 1966 also evidences that neither NCS nor the stockholders ever intended or understood the transfer restrictions to operate as Omnicare argues. In prior years, the Class B stockholders have repeatedly been invited to grant and undoubtedly have granted proxies to vote their B shares at prior NCS shareholder meetings - proxies that named as a proxy holder someone who was not a "Permitted Transferee" under the Charter (Gerald Stethem), and which were not limited to a single item but empowered the proxy holders to vote in their discretion on any matters that might come before the meeting. See BG336. At the time those proxies were granted, the Class B stockholders were not registered under the Exchange Act. Under Omnicare's interpretation of the Charter, such a proxy would not fall within 'SS' 7(c)(5) and would have effected a transfer prohibited by 'SS' 7. Quite obviously neither NCS nor any of the stockholders ever treated the grant of such proxies as prohibited transfers causing the conversion of the shares to Class A. 4. Omnicare's arguments are unpersuasive, and incorrect. a. Omnicare's mischaracterization of the Voting Agreements Much of Omnicare's position is, of necessity, built on mischaracterization of the Voting Agreements. Omnicare portrays the Voting Agreements as "transferring" control of the vote of Class B shares from Outcalt and Shaw to -28- Genesis. OB at 23, 24, 25, 30. The Voting Agreements do nothing of the sort. The decision to vote in favor of the NCS/Genesis merger was made by Outcalt and Shaw, not by Genesis. The Voting Agreements do nothing more than contractually obligate Outcalt and Shaw to vote for the merger, and - concomitantly - not to vote for other matters that could undermine consummation of the merger agreement (such as voting for a competing transaction) or take action that would undermine their ability to vote in accordance with their commitment (such as transferring the shares). See SJ op. at 13, 15-16. Similarly, Omnicare mischaracterizes the Voting Agreements as effecting a transfer of all "save mere physical possession of the underlying stock certificates." OB at 30. Omnicare argues that the Voting Agreements "purported to transfer . . . all other meaningful indicia of ownership in, and rights to, those shares" in that, because the Voting Agreements may cause the merger to occur, Outcalt and Shaw "effectively gave up all existing and future interests in their Class B shares" as the merger will result in "the ultimate transfer or elimination of the economic and other rights associated with those shares." Id. Manifestly, the Voting Agreements do not transfer all "save mere physical possession" of the Class B certificates. Most fundamentally, none of the economic interest in the shares is transferred. The right to dividends, the right to the merger consideration and any other economic rights of the shares remain with Outcalt and Shaw. These economic rights are considered critical elements of ownership of shares. See Sundlun v. Executive Jet Aviation Inc., 273 A.2d 282, 285-86 (Del. Ch. 1970). As to voting, the obligations are limited to the obligation to vote for the merger and not to vote for a transaction that would undermine that obligation. The power to vote on all other matters remains with Outcalt and Shaw, and the decision and commitment to vote for the merger was made by Outcalt and Shaw, not Genesis. The contractual rights of Genesis under the Voting Agreements are limited in substance to a particular transaction and limited in time, as described above. Omnicare's rhetorical characterization is also flawed logically. The elimination of the Class B shares is not caused by the Voting Agreements; it may be caused by the NCS/Genesis merger. And no one has suggested that the merger involves a prohibited "transfer" of an "interest" in the Class B shares. The merger is a transaction indisputably permitted by the NCS Charter. Moreover, Omnicare's argument, if accepted, would turn the determination of whether there is a transfer of interest not on the terms of the Voting Agreements, but on facts extrinsic to those agreements. Vice Chancellor Lamb correctly rejected Omnicare's "reductionistic" argument that the Voting Agreements should be deemed a prohibited transfer because the merger - which is the object of the Voting Agreements - will thereby be a "foregone conclusion" (OB at 30) and will entail elimination of the shares: These arguments significantly distort the appropriate legal analysis by improperly attributing to the Voting Agreements terms or consequences better understood to be associated with or derivative of the Merger -29- Agreement. For example, the promise to vote found in the Voting Agreements is limited in scope, and does not broadly transfer to Genesis either Outcalt's or Shaw's power to vote. Similarly, there is nothing in the Voting Agreements that provides for the elimination of the Class B shares or for the sale of Outcalt's and Shaw's Class B shares to Genesis . . . . . . . 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. Instead, if this happens, it will be because the Merger Agreement was approved by the NCS board of directors and adopted by the requisite vote. SJ op. at 12-13, 17; see also Chilson, supra, 168 A. at 86 ("an interest in the bare voting power or the results to be accomplished by the use of it" is not an "interest" in the shares) (emphasis added).(25) Indeed, if the existence of a transfer turned on the fact that Outcalt and Shaw, together, have the voting power to cause the merger, it would follow that neither Outcalt nor Shaw, acting alone, would have committed a prohibited "transfer" of their shares by entering into the Voting Agreements because neither alone had the power to cause the merger to occur (SJ op. at 2). Yet, it is absurd to suggest that the transfer restrictions in the Charter could turn upon the number of shares subject to the agreement in question, or that two Class B stockholders have entered into agreements that alone would not constitute a transfer, but together do involve a transfer. What is a transfer for one share is also a transfer for all shares, and what is not a transfer for one share is not a transfer for all shares. In this case, the Voting Agreements, whether executed by a Class B stockholder holding one share or Class B stockholders holding a majority of the voting power, are not prohibited transfers. b. Omnicare's "beneficial ownership" argument Omnicare also now relies heavily on the definition of "beneficial ownership" in 'SS' 7(g) of the NCS Charter. OB at 23, 24, 25-26, 29. Omnicare cited 'SS' 7(g) only in passing in its moving brief below (DE 105 at 13-14). Ignoring the - ------------------- (25) Omnicare accuses the Vice Chancellor of inconsistency in that the opinion below referenced the merger agreement in applying 'SS' 7(c)(5). OB at 28 n.11. There is no inconsistency. 'SS' 7(c)(5) by its very nature requires consideration of extrinsic events, i.e., there must be a proxy solicitation to be "in connection with." Omnicare is also flatly wrong in asserting there that the merger agreement "is in fact incorporated by reference in the Voting Agreement." It is not. -30- Court of Chancery's careful rejection of its reliance on 'SS' 7(g),(26) Omnicare now goes so far as to assert that "no contrary argument can be credibly advanced." OB at 24. Omnicare is all shrillness, no substance. First, under the plain terms of 'SS' 7(g), the Voting Agreements did not make Genesis the beneficial owner of Outcalt's and Shaw's Class B shares. 'SS' 7(g) defines "beneficial ownership" as including "possession of the power to vote or to direct the vote . . . of or the shares of Class B Common Stock." A32. The Voting Agreements do not cause Genesis to "possess" the "power to vote or to direct the vote" of the Class B shares. That power and that direction were exercised by Outcalt and Shaw in determining to agree to vote in favor of the NCS/Genesis merger and to grant Genesis a proxy to vote their shares as they so agreed. Genesis has no economic interest at all in the Class B shares owned by Outcalt and Shaw: Outcalt and Shaw remain entitled to receive the merger consideration payable on these shares, any - ------------------- (26) As Vice Chancellor Lamb noted: This definition is significantly narrower than that found in the federal securities laws. Most importantly, . . . Section 7(g) does not extend to persons who merely "share" the power to vote or dispose of the shares. This omission appears to be consistent with the quite limited function of Section 7(g) in Article IV, Section 7 of the Charter. The only place the phrase "beneficial ownership" appears is Section 7(e), a provision that simply gives the "beneficial owner" of Class B shares the right to have those shares registered in his name. Given the limited scope of the definition found in Section 7(g) and the limited purpose for which it appears in the Charter, the court concludes that Section 7(g) is irrelevant to the issues presented on the motions for summary judgment. ... At oral argument, Omnicare's counsel argued that Outcalt and Shaw have actually transferred "beneficial ownership" of their shares to Genesis, and that Genesis has the current ability, in accordance with Section 7(e) of the NCS Charter, to force NCS to register Outcalt's and Shaw's shares in its name. Suffice it to say that this argument finds no support in either the definition of "beneficial ownership" found in Section 7(g) or the provisions of Section 7(e). To the contrary, Section 7(e) clearly contemplates that there can be only one "beneficial owner" of a share of Class B Common Stock at a time. SJ op. at 4 n.3, 12 n.14. Contrary to Omnicare's attack, the Vice Chancellor clearly did not "read out" 'SS' 7(g) from the Charter (OB at 24, 29). The Vice Chancellor read it carefully in the Charter. -31- dividends, any proceeds of a liquidation, etc. - i.e., every single economic right of share ownership. All that the Voting Agreements effected is the embodiment of the commitment of Outcalt and Shaw, as the owners of the shares, to vote for the merger (and not to undermine that commitment). The holder of a proxy certainly does not "possess" the power to control the vote of the shares. The proxy itself is nothing but a delegation of the authority to cast the vote, in this case limited to a particular transaction and limited in time. See 8 Del. C. 'SS' 212(b) ("Each stockholder entitled to vote at a meeting of stockholders . . . may authorize another person or persons to act for such stockholder by proxy. . ."). In any event, the grant of the proxy is specifically defined as not being a transfer of an interest in the shares (per 'SS' 7(c)(5) of the NCS Charter), a proposition that is fully in accord with the overall import of the transfer restrictions. Second, and as the Court below correctly noted (SJ op. at 4 n.3, quoted supra), there is no relationship in the Charter between 'SS' 7(g)'s definition of beneficial ownership and the transfer restrictions of 'SS' 7(a) or the conversion penalty of 'SS' 7(d). The only other place in the Charter in which the term "beneficial ownership" appears, and to which the 'SS' 7(g) definition is relevant, is the provision in 'SS' 7(e) which prohibits Class B shares being held of record by someone other than the beneficial owner and which provides that if the shares are held of record by someone other than the beneficial owner, the beneficial owner is entitled to apply to the corporation to have the share registered in its name. See A32 ('SS' 7(e)). Thus, the function of the definition is to determine when shares must be registered in the name of the beneficial owner; the result of being found to be a beneficial owner is to require that the shares be registered in the name of such person. That very (and limited) purpose of the beneficial ownership definition demonstrates the illogic of Omnicare's position. The type of possessory power to control the vote envisioned by 'SS' 7(g) is necessarily a power so substantial and complete that it would justify registering the possessor of that power as the sole owner of the shares on the books of the corporation. A party who has a contract right to require the owner of the shares, for a specified period, to vote for a specified transaction (and against competing matters), certainly does not have the type of possessory interest in the shares that could conceivably justify registering the shares in the name of that party. The owner of the shares who has contractually committed to vote them remains the beneficial owner, and is the party appropriately identified on the corporation's books as the owner. Indeed, were Omnicare correct, the result would be that as of July 28, 2002 Genesis would have obtained beneficial ownership of the Class B shares, and be entitled to have those shares registered of record in its name per 'SS' 7(e) of the NCS Charter, for free. On Omnicare's view, Genesis would have thus obtained without cost ownership of some 20% of the equity of NCS, and those shares would no longer be owned by Outcalt and Shaw--as 'SS' 7(e) of the Charter "clearly contemplates that that there can be only one `beneficial owner' of a share of Class B Common Stock -32- at a time." SJ op. at 12 n.14. Surely, no one can reasonably contend that the Voting Agreements resulted in such a forfeiture. Can it reasonably be suggested that Genesis owns the Outcalt/Shaw shares and therefore will not be obliged to provide them the merger consideration in the NCS/Genesis merger? Or that if Omnicare ultimately succeeds in acquiring NCS, it will pay its acquisition price to Genesis for those shares? In the Court below, Omnicare at least owned up to the thoroughly incongruous results of its position. See DE 164 at 6; SJ op. at 12 n.14 (quoted supra). In this Court, Omnicare fails to acknowledge that absurd result - understandably perhaps, but tellingly nonetheless. E. THE VOTING AGREEMENTS DO NOT CONSTITUTE A "TRANSFER OF SHARES OF CLASS B COMMON STOCK" UNDER THE CONVERSION PROVISION OF 'SS' 7(d) OF THE NCS CHARTER. The admitted objective of Omnicare's claim is to convert the existing capital and voting structure of NCS, based on its invocation of 'SS' 7(d) of the Charter, which provides that "[a]ny 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 conversion provision of 'SS' 7(d) is importantly narrower than the limitation on transfer contained in 'SS' 7(a). 'SS' 7(a) applies to a transfer of "shares of Class B Common Stock or any interest therein," whereas 'SS' 7(d) applies only to a "purported transfer of shares of Class B Common Stock" - not of any interest therein. Omnicare has not even argued, because it cannot, that the Voting Agreements constituted a transfer of the Class B shares themselves. To overcome this obvious difference in the language of 'SS' 7(d), Omnicare argues that 'SS' 7(d) should be read in conjunction with 'SS' 7(a) such that the phrase "transfer of shares" (in 'SS' 7(d)) should be interpreted as synonymous with the phrase "transfer . . . such shares . . . or any interest therein" (in 'SS' 7(a)). OB at 23, 26. However, as the Court below recognized, that suggested interpretation - really rewriting - of 'SS' 7(d) only defeats Omnicare's fundamental argument that the Voting Agreements constituted the transfer of an interest in the shares. If 'SS' 7(d) - which does not even mention "interests" - is to be deemed to cover the same types of transfers of interests prohibited by 'SS' 7(a), it must be that the types of "interests" covered by 'SS' 7(a) are interests so substantial that they could be deemed an outright transfer of the shares themselves under 'SS' 7(d). For example, the pledge of the shares or the creation of a joint ownership interest in the shares could be deemed the creation of "interests" substantial enough to constitute a "transfer of shares" under 'SS' 7(d). But the contractual commitment of a B shareholder to vote for a merger, or the grant of proxy to effectuate that commitment, could never fairly be -33- deemed synonymous with an outright transfer of the shares. Thus, any argument that 'SS' 7(d) covers the same types of transfers as 'SS' 7(a) only demonstrates, as the Court below found, that the Voting Agreement is neither a transfer of the shares nor a transfer of an "interest" in the shares. The Court below sought to "harmonize" 'SS' 7(a) and 'SS' 7(d) by reading the two sections together "to encompass actual share transfers as well as other situations in which some interest in these shares although less than full legal or equitable ownership is transferred" - viz., "a substantial part of the total ownership interests associated with the shares in question." SJ op. at 10-11. Under this reconciliation of 'SS' 7(a) and 'SS' 7(d), the Court held that the voting commitment and proxy in the Voting Agreements did not transfer either an "interest" or "a substantial part of the total ownership interests" in the shares. Id. at 11("Did Not Transfer An `Interest'"), 13 ('SS' 2(b) of the Voting Agreements is not "a transfer of any part of Outcalt's or Shaw's ownership interest"), 15-17 ('SS' 2(c) proxy is not "a transfer of any significant part of Outcalt's or Shaw's voting powers," as confirmed by 'SS' 7(c)(5)'s provision that a proxy is not a "transfer of an interest"). In the final analysis, it is of no moment whether or not 'SS' 7 of the NCS Charter is read to encompass transfers of something less than actual "transfer of shares": regardless of any interpretation, the judgment against Omnicare's claim should be affirmed. First, it is indisputable that the Voting Agreements did not constitute an actual "transfer of shares" to Genesis. Second, even if the more expansive interpretation is followed, it is perfectly clear that the Voting Agreements did not transfer to Genesis "a substantial part of the total ownership interests associated with the shares" - just as the Court below held, as 'SS' 7(c)(5) likewise makes clear, and as otherwise demonstrated above. Third, and further still, even if 'SS' 7(d) were thought to require conversion on the transfer of "any interest" in the shares, i.e., the same scope as 'SS' 7(a), even then - as the Court below held, as 'SS' 7(c)(5) so plainly makes clear, and as otherwise demonstrated above - the Voting Agreements did not transfer "any interest" in the shares. At bottom, whatever "transfers" and "interests" are covered by 'SS' 7 do not reach the extreme expanse urged by Omnicare, and there is no basis here to conclude other than as the Court below did in its carefully considered opinion: There is simply 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 approved and authorized by the NCS Board of Directors. SJ op. at 21. The Voting Agreements did not "run afoul of the restrictive transfer provisions of Article IV, Section 7 of the NCS Charter" (id.). -34- CONCLUSION The Court should affirm the rulings of the Court of Chancery (a) dismissing Omnicare's fiduciary duty claims (Counts II-V of its Second Amended Complaint) for lack of standing, and (b) granting summary judgment in favor of defendants on Omnicare's claim under the NCS Charter (Count I). YOUNG CONAWAY STARGATT & TAYLOR, LLP Of Counsel: /s/ David C. McBride ----------------------------------- Paul Vizcarrondo, Jr. David C. McBride Theodore N. Mirvis Bruce L. Silverstein Mark Gordon Christian Douglas Wright John F. Lynch Adam W. Poff Lauryn P. Gouldin The Brandywine Building WACHTELL, LIPTON, ROSEN & KATZ 1000 West Street, 17th Floor 51 West 52nd Street P.O. Box 391 New York, NY 10019 Wilmington, DE 19899-0391 (212) 403-1000 (302) 571-6600 Attorneys for Defendants-Below/Appellees Genesis Health Ventures Inc. and Geneva Sub, Inc. November 22, 2002 -35- CERTIFICATE OF SERVICE I, Christian Douglas Wright, hereby certify that I caused copies of the foregoing Answering Brief of Appellees Genesis Health Ventures, Inc. and Geneva Sub, Inc. to be served by hand delivery on November 22, 2002 upon the following counsel of record: Donald J. Wolfe, Jr., Esquire Potter Anderson & Corroon LLP Hercules Plaza 1313 North Market Street Wilmington, DE 19801 Edward P. Welch, Esquire Skadden, Arps, Slate, Meagher & Flom LLP One Rodney Square Wilmington, DE 19801 Michael A. Weidinger, Esquire Morris, James, Hitchens & Williams LLP 222 Delaware Avenue, 10th Floor Wilmington, DE 19801 Jon E. Abramczyk, Esquire Morris, Nichols, Arsht & Tunnell 1201 North Market Street Wilmington, DE 19801 /s/ Christian Douglas Wright ----------------------------------- Christian Douglas Wright -----END PRIVACY-ENHANCED MESSAGE-----