In re NCS Healthcare, Inc., Shareholders Litigation

Failing pharmacy-service provider NCS Healthcare, Inc. (NCS) looked for ways to restructure for over a year. In 2001, NCS approached pharmacy company Omnicare, Inc., about a possible merger, but Omnicare was interested only in buying NCS’s assets in bankruptcy, which would leave nothing for NCS shareholders. NCS contacted another potential buyer, leading healthcare company Genesis. Because two NCS directors voted 65 percent of its shares, making them interested in the transaction, the board formed an independent committee of the other two directors to negotiate the transaction. Genesis had previously lost a bidding war with Omnicare over another business, leaving bitter feelings between their principals. To lock up the transaction, Genesis demanded NCS sign an exclusivity agreement precluding negotiations with anyone else. When Omnicare learned NCS was negotiating a deal that might give a competitor an advantage, Omnicare faxed NCS an offer not involving a bankruptcy, then left voicemails. The exclusivity agreement kept NCS from responding to Omnicare, but NCS used Omnicare’s offer to negotiate better terms with Genesis. The next day, Genesis sweetened its offer but also demanded that the majority shareholders agree to approve the merger—and gave NCS until midnight the next day to accept. The NCS board recommended the Genesis merger to NCS shareholders, and the majority shareholders signed agreements. The next day, Omnicare again outbid Genesis. The NCS board withdrew its recommendation but recognized that its contractual obligations to Genesis prevented NCS from accepting Omnicare’s offer and that the majority-shareholder agreements ensured NCS shareholders would approve the Genesis merger. NCS minority shareholders (plaintiffs) sued claiming the directors breached their duty of care and requested a preliminary injunction to block the merger.