Louisiana Mun. Police Ret. Sys. v. Crawford

• Decision Date: 23 February 2007
• Docket Number: C.A. No. 2663-N.,C.A. No. 2635-N.
• Citation: 918 A.2d 1172
• Parties: LOUISIANA MUNICIPAL POLICE EMPLOYEES' RETIREMENT SYSTEM and The R.W. Grand Lodge of Free & Accepted Masons of Pennsylvania, on behalf of themselves and all other similarly situated shareholders of Caremark Rx, Inc., Plaintiffs, v. Edwin M. CRAWFORD; C.A. Lance Piccolo; Edwin M. Banks; C. David Brown, II; Colleen Conway-Welch; Harris Diamond; Edward L. Hardin, Jr.; Kristen E. Gibney-Williams; Roger L. Headrick; Jean-Pierre Millon; Michael D. Ware; Caremark Rx, Inc. and CVS Corporation, Defendants. Express Scripts, Inc., a Delaware corporation; KEW Corp., a Delaware corporation and Skadden, Arps, Slate, Meagher & Flom, LLP, a Delaware Limited Liability Partnership, Plaintiffs, v. Edward M. Crawford; Edwin M. Banks; C. David Brown, II; Colleen Conway-Welch; Harris Diamond; Kristen E. Gibney-Williams; Edward L. Hardin, Jr.; Roger L. Headrick; Jean-Pierre Millon; C.A. Lance Piccolo; Michael D. Ware; Caremark RX, Inc., a Delaware corporation; CVS Corporation, a Delaware corporation; and AdvancePCS, a Delaware corporation, Defendants.
• Court: Court of Chancery of Delaware

918 A.2d 1172

LOUISIANA MUNICIPAL POLICE EMPLOYEES' RETIREMENT SYSTEM and The R.W. Grand Lodge of Free & Accepted Masons of Pennsylvania, on behalf of themselves and all other similarly situated shareholders of Caremark Rx, Inc., Plaintiffs, v. Edwin M. CRAWFORD; C.A. Lance Piccolo; Edwin M. Banks; C. David Brown, II; Colleen Conway-Welch; Harris Diamond; Edward L. Hardin, Jr.; Kristen E. Gibney-Williams; Roger L. Headrick; Jean-Pierre Millon; Michael D. Ware; Caremark Rx, Inc. and CVS Corporation, Defendants.

Express Scripts, Inc., a Delaware corporation; KEW Corp., a Delaware corporation and Skadden, Arps, Slate, Meagher & Flom, LLP, a Delaware Limited Liability Partnership, Plaintiffs, v. Edward M. Crawford; Edwin M. Banks; C. David Brown, II; Colleen Conway-Welch; Harris Diamond; Kristen E. Gibney-Williams; Edward L. Hardin, Jr.; Roger L. Headrick; Jean-Pierre Millon; C.A. Lance Piccolo; Michael D. Ware; Caremark RX, Inc., a Delaware corporation; CVS Corporation, a Delaware corporation; and AdvancePCS, a Delaware corporation, Defendants.

C.A. No. 2635-N.

C.A. No. 2663-N.

Court of Chancery of Delaware, New Castle County.

Submitted: February 16, 2007.

Decided: February 23, 2007.

Stuart M. Grant, Michael J. Barry, Stephen G. Grygiel and James P. McEvilly, of Grant & Eisenhofer, P.A., Wilmington, DE; Gerald H. Silk, Salvatore J. Graziano, Elliott J. Weiss, Mark Lebovitch, Brett M. Middleton and Noam Mandel, of Bernstein Litowitz Berger & Grossmann, LLP, New York City, of counsel, for Plaintiffs Louisiana Municipal Police Employees' Retirement System and The R.W. Grand Lodge of Free & Accepted Masons of Pennsylvania.

David C. McBride, Richard H. Morse, Bruce L. Silverstein, C. Barr Flinn, Rolin P. Bissell, James P. Hughes, Jr., John T. Dorsey, Christian Douglas Wright, John J. Paschetto, Elena C. Norman, Adam W. Poff, Dawn M. Jones, Michael W. McDermott, Andrew A. Lundgren, D. Fon Muttamara-Walker, Mary F. Dugan, Karen Lantz, Kristen Salvatore DePalma, Chad S.C. Stover and Jeffrey T. Castellano, of Young Conaway Stargatt & Taylor, LLP, Wilmington, DE, for Plaintiffs Express Scripts, Inc. and KEW Corp.

William M. Lafferty, R. Judson Scaggs, Jr., Thomas W. Briggs, Jr., John P. DiTomo, William E. Green, Jr. and Amaryah Kishpaugh, of Morris, Nichols, Arsht & Tunnell, LLP, Wilmington, DE; M. Robert Thornton, B. Warren Pope and Michael J. Cates, of King & Spalding, LLP, Atlanta, GA; Eric M. Roth, David Gruenstein, George T. Conway III, Jonathan E. Pickhardt, Jeffrey C. Fourmaux and Graham W. Meli, of Wachtell, Lipton, Rosen & Katz, New York City, of counsel, for Defendants the Caremark Directors; Kevin G. Abrams, of Abrams & Laster, LLP, Wilmington, DE, for Defendants Caremark Rx, Inc. and AdvancePCS.

Allen M. Terrell, Jr., Lisa A. Schmidt, Richard P. Rollo, Charles A. McCauley, III, Harry Tashjian, IV and Megan R. Wischmeier, of Richards, Layton & Finger, P.A., Wilmington, DE; Lawrence Portnoy, Thomas P. Ogden and Eric Halper, of Davis Polk & Wardwell, New York City, of counsel, for Defendant CVS Corporation.

OPINION

CHANDLER, Chancellor.

Delaware courts place great faith in the discernment and acumen of shareholders and directors. Only in extraordinary circumstances will this Court substitute its business judgment for that of directors, or usurp the rights of shareholders to make their own informed decisions. When, as here, plaintiffs seek to prevent shareholders from making a fundamental decision, they bear a heavy burden to persuade the Court that shareholders are somehow unable to provide for their own protection, or that effective use of the corporate franchise is barred by some critical lack of information. Plaintiffs seek to enjoin a merger already agreed between two boards of directors and ready to be put to shareholders. Although plaintiffs allege facts concerning the process by which the deal was negotiated that trouble the Court, very few of their arguments suggest that I am in a better position than Caremark's shareholders to make the ultimate decision.

I. STATEMENT OF FACTS

A. The Parties

Shareholders are represented by two named plaintiffs, one private and one public. Plaintiff Louisiana Municipal Police Employees' Retirement System ("LAMPERS"), an entity created by enabling legislation passed by the Louisiana State Legislature in 1973, provides retirement allowances and other benefits for full-time municipal police officers and employees in the State of Louisiana, secretaries to chiefs of police and employees of LAMPERS. LAMPERS' fellow plaintiff, The R.W. Grand Lodge of Free & Accepted Masons of Pennsylvania ("Masons"), an entity with approximately $500 million in assets, is part of the oldest and largest fraternity of freemasons in the world. Both plaintiffs have been shareholders at all material times in this transaction.¹

Plaintiff Express Scripts, Inc. is a Delaware corporation with its principal place of business in St. Louis, Missouri. Express Scripts is one of the largest pharmacy benefit manager companies in North America, providing pharmacy benefit services to thousands of client groups, including managed-care organizations, insurance carriers, employers, third-party administrators, and public sector and union-sponsored benefit plans. Plaintiff KEW Corp., a Delaware corporation and Caremark stockholder, is a wholly-owned subsidiary of Express Scripts.² KEW currently owns at least 591,180 Caremark shares, all purchased on or after December 13, 2006.

Plaintiff Skadden, Arps, Slate, Meagher & Flom LLP, a leading international law firm with offices in, among other places, Wilmington, Delaware and New York City, is a Delaware limited liability partnership.

Defendant Caremark Rx, Inc. is a Delaware corporation, headquartered in Nashville and founded in 1993. A leading pharmaceutical benefits management ("PBM") company, Caremark provides comprehensive drug benefit services through its affiliates to over 2,000 health plans and their plan participants throughout the country. Defendant AdvancePCS, a Delaware corporation, is a wholly-owned subsidiary of Caremark.

Edwin M. Crawford, Edwin M. Banks, C. David Brown, II, Colleen Conway-Welch, Harris Diamond, Kristen E. Gibney-Williams, Edward L. Hardin, Jr., Roger L. Headrick, Jean-Pierre Millon, C.A. Lance Piccolo, and Michael D. Ware are members of the board of directors of Caremark. Crawford serves as Chairman and Chief Executive Officer. These directors are also defendants in a separate action filed in Tennessee, alleging that they breached their fiduciary duties by approving and/or benefiting from improperly backdated stock options.³

Defendant CVS Corporation ("CVS"), a Delaware corporation with its principal place of business in Rhode Island, is America's largest retail pharmacy. CVS operates approximately 6,200 retail and specialty pharmacy stores in forty-three states and the District of Columbia.

B. Factual Background

1. Preliminary negotiations

Because Caremark is an intermediary between pharmaceutical companies and health plans, it always confronts the traditional fear of the middleman: being cut out. Thus, Caremark management has long sought strategic combinations that would ensure Caremark's continued profit growth. To this end, Caremark hired William Spaulding, a former mergers and acquisitions attorney who had assisted Caremark in its acquisition of AdvancePCS, in June 2005. Between May and October 2005, Caremark and Express Scripts entered into preliminary discussions regarding a possible merger, but negotiations were dropped after Express Scripts issued a disappointing earnings announcement. Around the same time, Crawford and Thomas M. Ryan, Chairman and CEO of CVS, began to discuss the strategic advantages of a vertical merger between their two firms. From the outset, Caremark and CVS have envisioned any potential transaction between the two companies as a no-premium "merger of equals"—a stock-for-stock merger in which neither side would be perceived as the acquiror, the combined entity would be owned in nearly equal proportion by its current shareholders, the combined entity's board would have equal representation, and the management teams from each company would continue to run their respective businesses. Both parties retained investment advisors to study the strategic rationale behind this investment, entered into a confidentiality agreement, and began to assess potential synergies that might exist between the two parties. Discussions broke off in March 2006, but resumed in August.⁴

On August 16, 2006, Caremark's management met with the board to review strategic opportunities for Caremark, including a discussion of potential acquisitions or combinations with retail pharmacy chains, diagnostic companies, and health care information technology companies. The presentation included potential "game changer" strategic transactions, other significant transactions, and an array of smaller tactical deals. Management suggested, and the board agreed, that a potential business combination with a retail drugstore chain offered both strategic and financial opportunities for the company. A transaction with another PBM, on the other hand, was deemed to have the lowest strategic impact, although there might be some material upside depending upon the particular PBM partner. Management identified CVS as a strong potential merger partner in the event the board decided to pursue the former strategy. The meeting ended with the board instructing management to concentrate on a strategic transaction.

2. The CVS/Caremark Merger Agreement

Negotiations then resumed between Caremark and CVS. The Caremark board met, either via telephone or in person, four times in October 2006 to consider various aspects of a Caremark/CVS merger.⁵ As a result of those negotiations, the boards of Caremark and CVS entered into a merger agreement, subject to the approval of the shareholders of both companies, on November 1, 2006. By the terms of this...