The Costs and Benefits of Transactional Certainty: An Appraisal of Omnicare v. NCS Healthcare

Abstract

In Omnicare v. NCS Healthcare, the Delaware Supreme Court recently announced what appears to be a bright-line rule against transactional certainty in mergers and acquisitions. Even in the context of a friendly merger agreement - that is, a negotiated transaction not involving a change in control - target boards may not agree to a fully protected merger agreement. Instead, it is now a requirement of law that target boards always include an escape clause, in the form of a fiduciary out, in their merger agreements. As a result, targets can no longer follow a strategy, offering contractual certainty as a means of negotiating a better deal for shareholders. This article engages in a close analysis of the NCS opinion, first probing the doctrinal foundations then the policy implications of the majority's holding. As a matter of doctrine, I show that existing precedent neither compels nor supports the bright-line rule announced by the Court. Worse, as a matter of policy, the Court's open hostility to precommitment strategies is likely to harm shareholder welfare. Finally, I draw upon economic theory to propose an alternative rule that would preserve, under certain circumstances, the ability of target boards to follow an affirmative precommitment strategy.