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

In Omnicare v. NCS Healthcare, the Delaware Supreme Court recently announced a bright-line rule against precommitment in mergers and acquisitions. Even in the context of a "friendly" merger, transacting parties may not fully protect their deal from intervening bidders and instead must insert an escape clause, in the form of a fiduciary out, in their merger agreements. As a result, targets can no longer offer contractual certainty as a part of the transaction.This article engages in a close analysis of the NCS opinion, first exposing the weaknesses in its doctrinal foundations, then analyzing its implications from the perspective of shareholder welfare. It finds that the NCS rule is both unsupported by existing law and harmful to shareholder welfare. The article then draws upon economic theory to propose an alternative, the "market check rule," that would control the costs of commitment while preserving the ability of target boards, under certain circumstances, to follow an affirmative precommitment strategy.