In one of the most renowned and highly controversial decisions in Delaware in the last 20 years, Omnicare, Inc. v. NCS Healthcare, Inc., the Delaware Supreme Court ruled that the board of a publicly traded target company cannot completely lock up a merger. According to the court’s ruling, the merger must include a fiduciary out clause that enables the board and the company to terminate the agreement if a better offer is proffered before the deal is approved by the company’s shareholders. The Omnicare decision has been widely criticized by practitioners and scholars who argue that it prevents the execution of time-sensitive deals that cannot take place without a complete lock-up of the agreement. The requirement also introduces a high degree of uncertainty into M&A transactions. No persuasive justification has been provided to explain this anomaly, which led the Delaware courts to narrow the scope of the requirement as much as possible. Vice Chancellor Lamb went as far as noting that “Omnicare is of questionable continued vitality.”
In this Article, we offer a novel justification for the Omnicare ruling: shareholders are unable to effectively monitor the functioning of the board when deals are insulated from market forces. Shareholders lack the requisite information to assess whether the price the board approved is the best price the company could receive. The only meaningful check on the board in making this crucial decision is the market. The emergence of a better offer prompts shareholders to question the desirability of the transaction that the board has approved. A complete lock-up of a deal prevents the emergence of competing offers and leaves the board without effective oversight in this crucial decision. In this Article, we discuss the implications of the oversight rationale for fine-tuning the Omnicare ruling. We argue that transactions in which directors and managers commit to having no role in the company after the merger or acquisition should be exempt from the Omnicare ruling. Further, by contrast to the narrow interpretation of Omnicare adopted by courts in subsequent cases, which treated mergers lacking an intervening bidder more leniently, we argue that even in such cases, the merger should be enjoined if it did not include a fiduciary out. Finally, we expand the Omnicare ruling to apply to mergers approved by immediate shareholder written consent.