Sunday, 27 June 2004

Hostile Takeovers and Entrepreneurship

Corporate law professors are fascinated by hostile takeovers. My friend does an annual survey for the Corporate Practice Commentator to find the best corporate and securities law articles. In the most recent survey, there were 11 articles in the Top 10, and six of them focused on hostile takeovers -- including the article that my friend wrote entitled "Toward a New Theory of the Shareholder Role". Our preoccupation with hostile takeovers is now approaching the status of fetish. It is time, colleagues, to move on and start writing about myriad other important issues. If you are looking for new direction, I suggest following Ron Gilson's lead.

What do hostile takeovers have to do with entrepreneurship? In 1988 Fred Friendly did a series of videos, which he called "Ethics in America." One of those videos is the best television piece on hostile takeovers ever done, in my view. Called "Anatomy of a Hostile Takeover," the video has a panel of high-profile participants -- including Warren Buffett, T. Boone Pickens, Rudy Giuliani, and Joe Flom -- working through a hypothetical hostile transaction. When the moderator asks infamous "raider" Sir James Goldsmith to describe what he does, he compares hostile takeovers to entrepreneurial startups and asserts that "one is just as productive as the other." Fifteen years later, still riding the wake of the internet stock bubble, I miss Sir James.

You may be wondering why I have hostile takeovers on the brain today. Well, it's grading time at school, and I asked my students a question about the decision of the Delaware Supreme Court in Omnicare v. NCS Healthcare, where the Court held that deal protections devices were subject to "intermediate scrutiny" under the Unocal standard.

More specifically, the Court examined the combined effect of (1) stockholder voting agreements, pursuant to which two individuals holding 65% of the voting power of NCS stock irrevocably agreed to vote in favor of a proposed merger between NCS and Genesis Health Ventures, Inc.; (2) a provision of the merger agreement, expressly authorized under Delaware General Corporation Law § 251(c)), requiring the board of directors of NCS to submit the proposed merger for a stockholder vote, regardless of whether the board of directors continued to recommend the merger; and (3) the omission of a so-called "fiduciary out" clause, which would allow NCS to withdraw from the merger agreement if the board of directors of NCS concluded that its fiduciary duties required such action.

The majority opinion by Justice Holland focused on the fact that the proposed merger was completely locked up prior to the actual shareholder vote. Applying Unocal as modified by Unitrin (another horrible Holland opinion), Justice Holland concluded that the deal protection devices were both coercive and preclusive. He also wrote, in reference to the failure of the merger agreement to provide a fiduciary out, "We hold that the NCS board did not have authority to accede to the Genesis demand for an absolute ‘lock-up.’"

This is the latest in a series of absolutely awful opinions by Justice Holland, who seems to have no appreciation at all for the proper role of the Court in hostile takeover litigation. This follows MM Companies, Inc. v. Liquid Audio, Inc., where Justice Holland added another level to the "proportionality" prong of the Unocal analysis, making that standard even more incoherent than it already was. The only good thing that can be said about these opinions is that the Delaware Supreme Court is finally deciding that a board of directors might, in some hostile takeover contexts, breach their fiduciary duties.