Ncs Healthcare v. Candlewood Partners, LLC

• Decision Date: 07 April 2005
• Docket Number: No. 84646.,84646.
• Citation: 827 N.E.2d 797,2005 Ohio 1669,160 Ohio App.3d 421
• Parties: NCS HEALTHCARE, INC., Appellant, v. CANDLEWOOD PARTNERS, LLC, et al., Appellees.
• Court: Ohio Supreme Court

Page 797

827 N.E.2d 797

160 Ohio App.3d 421

2005 Ohio 1669

NCS HEALTHCARE, INC., Appellant, v. CANDLEWOOD PARTNERS, LLC, et al., Appellees.

No. 84646.

Court of Appeals of Ohio, Eighth District, Cuyahoga County.

Decided April 7, 2005.

Porter, Wright, Morris & Arthur, Hugh E. McKay, and John A. Mugnano, Cleveland, for appellant.

Rotatori, Bender, Gragel, Stoper & Alexander Co., L.P.A., Richard L. Stoper Jr., Susan L. Gragel, and Robert J. Rotatori, Cleveland; and Jenner & Block, James A. McKenna, and Anders C. Wick, Chicago, IL, for appellees.

ANTHONY O. CALABRESE JR., Judge.

{¶ 1} Plaintiff-appellant, NCS Healthcare, Inc. ("NCS"), appeals from the decision of the trial court. Having reviewed the arguments of the parties and the pertinent law, we hereby affirm the lower court.

I

{¶ 2} NCS brought this action to recover fees paid by the former board of directors to former financial advisors, appellees Candlewood Partners, LLC, and Candlewood Partners, Inc. ("Candlewood"), in connection with the acquisition of NCS by Omnicare, Inc.

{¶ 3} On June 3, 2003, NCS filed a three-count complaint against Candlewood. The complaint alleged that Candlewood was unjustly enriched and committed the torts of aiding and abetting a breach of fiduciary duty and corporate waste by the former directors of NCS. Candlewood filed its motion to dismiss on July 7, 2003.

{¶ 4} Candlewood's primary ground for dismissal was that the merger agreement and company letter disclosed the amount of Candlewood's fees. In its motion, Candlewood stated that the fees were to be borne by Omnicare under the merger agreement, and NCS and Omnicare agreed to the fees by entering into the merger agreement and consummating the merger. Therefore, under Delaware law, Omnicare cannot use the corporate form of NCS to retroactively improve the deal at Candlewood's expense.

{¶ 5} As alternative grounds for dismissal, Candlewood also argued that (1) NCS's claim for aiding and abetting a breach of fiduciary duty was barred by the business-judgment rule, (2) NCS's claim for corporate waste was barred because the complaint, on its face, disclosed consideration, (3) NCS's claim of aiding and abetting was legally insufficient because it failed to allege facts constituting aiding and abetting, and (4) NCS's claim of unjust enrichment was barred by the existence of a contract and NCS's admitted acceptance of the benefit of Candlewood's services.

{¶ 6} NCS filed its opposition to Candlewood's motion to dismiss, and Candlewood filed a reply brief. The trial court granted Candlewood's motion to dismiss and dismissed NCS's complaint with prejudice on April 16, 2004.¹ NCS filed this appeal.

{¶ 7} The record reflects that NCS is an independent provider of pharmacy services to long-term care institutions, including skilled-nursing facilities, assisted-living facilities, and other institutional healthcare facilities. NCS is a Delaware corporation with its principal place of business located in Beachwood, Ohio. Candlewood is an investment banking firm based in Chagrin Falls, Ohio. Among other things, Candlewood served as financial advisor to NCS in connection with the Omnicare-NCS merger. The action in the case sub judice arises out of the January 2003 merger between NCS and its former competitor, Omnicare. In this merger, Omnicare became the sole shareholder of NCS.

{¶ 8} The merger between NCS and Omnicare resulted in an unanticipated and extraordinary cash purchase price payable to the NCS shareholders. Consequently, in December 2002, the NCS board of directors approved the payment of certain fees to Candlewood and other professionals. These fees were set forth and agreed to in the final merger agreement signed by both Omnicare and NCS on December 17, 2002. This agreement was later approved by the NCS shareholders.

{¶ 9} Following the Omnicare-NCS merger, NCS became a wholly owned subsidiary of its former competitor, Omnicare. On June 3, 2003, the new NCS, now owned and controlled by Omnicare, filed a complaint against Candlewood regarding the service fees. In its complaint, the new organization, still known as NCS, did not complain about the quality of Candlewood's work. Instead, NCS alleged that the former NCS board breached its fiduciary duties and committed corporate waste by paying Candlewood too much money for its services. However, appellee argues that Candlewood's fees were expressly agreed to and approved by Omnicare and NCS six months earlier in the merger agreement.

II Merger Negotiations

{¶ 10} In January 1999, prior to the merger, NCS stock had traded at as high as $20 per share. However, by early 2001, NCS had defaulted on approximately $350 million in debt, and its shares traded in the range of $.09 to $.50 per share. In the summer of 2001, Omnicare sent NCS two proposals for acquisition of NCS, neither of which was accepted.

{¶ 11} Later, in May 2002, NCS and Genesis Health Ventures, Inc. began negotiations for the acquisition of NCS by Genesis. NCS and Genesis were close to executing a merger agreement by the end of the year. Around the same time, NCS learned that one of its financial advisors, Brown, Gibbons, Lang & Company, had a conflict that required it to withdraw. NCS entered into its first engagement letter with Candlewood in connection with a possible merger or sale of NCS on July 26, 2002. The agreement was terminable by either party with or without cause. Omnicare sent NCS a letter proposing an offer on that same day.

{¶ 12} Omnicare's offer proposed acquiring NCS for $3 per share in cash and repaying all NCS's creditors and note holders. Genesis then improved its offer and set a deadline for approval: July 28, 2002, at midnight. On July 28, 2002, Candlewood delivered a fairness opinion stating that the Genesis merger agreement was fair. The agreement provided that each NCS share would be converted into.1 share of Genesis common stock. That same day, Genesis and NCS entered into a merger agreement.

{¶ 13} On August 1, 2002, Omnicare and various NCS stockholders filed a lawsuit to enjoin the NCS-Genesis merger. Omnicare announced that it planned to launch a hostile tender offer for NCS shares. Omnicare offered $3.50 per share of NCS common stock, which offer NCS recommended that its shareholders reject. On September 13, 2002, Omnicare officials, including Joel Gemunder, the CEO, met with Glenn Pollack of Candlewood and other legal and financial advisors of NCS to discuss Omnicare's proposal. Omnicare provided NCS with a merger agreement at $3.50 per share similar to the Genesis agreement. The NCS board withdrew its recommendation to shareholders that they vote in favor of the Genesis transaction, and Candlewood withdrew its fairness opinion applicable to the NCS-Genesis merger.

{¶ 14} On December 9, 2002, Glenn Pollack of Candlewood and the CEO of Omnicare discussed the potential for increasing the price per share offered by Omnicare to the NCS stockholders. On December 12, 2002, Omnicare increased its tender offer from $3.50 per share to $5.50 per share. Glenn Pollack stated in his December 13, 2002 note that the value of the transaction to NCS and its shareholders and creditors increased from $190 million to $434 million. Due to this significant increase in the value of the Omnicare offer, NCS approved payment of a $3.5 million bonus to Candlewood. The NCS board decision was memorialized in a letter agreement.

{¶ 15} Candlewood delivered its fairness opinion stating that the $5.50 per share was fair. The NCS board approved the merger, and NCS and Omnicare entered into the merger. The merger agreement included a document captioned "company letter" provided by NCS to Omnicare. The company letter set forth more than $4 million in bonuses paid to NCS officers, directors, and employees, more than $7 million in professional fees paid to two law firms, and Candlewood's total fee of $4,190,000. The NCS Board unanimously approved the Omnicare merger agreement, and NCS and Omnicare entered into the merger agreement. Omnicare proceeded with the merger, which closed on January 16, 2003.

III

{¶ 16} Appellant's assignment of error states the following: "The trial court erred to NCS's prejudice by failing to acknowledge NCS's allegations that the second Candlewood agreement lacked consideration, constituted corporate waste and was the product of a breach of fiduciary duty aided and abetted by Candlewood."

{¶ 17} A motion to dismiss for failure to state a claim upon which relief can be granted is procedural and tests the sufficiency of the complaint. State ex rel. Hanson v. Guernsey Cty. Bd. of Commrs. (1992), 65 Ohio St.3d 545, 605 N.E.2d 378.

{¶ 18} Recognizing the severity of granting such motions, the Supreme Court of the United States, in Conley v. Gibson (1957), 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80, held that a complaint should not be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley, 355 U.S. at 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80. The Supreme Court of Ohio, in O'Brien v. Univ. Community Tenants Union, Inc. (1975), 42 Ohio St.2d 242, 71 O.O.2d 223, 327 N.E.2d 753, adopted the analysis presented by the Conley court. "In construing a complaint upon a motion to dismiss for failure to state a claim, [appellate courts] must presume that all factual allegations of the complaint are true and make all reasonable inferences in favor of the non-moving party." Mitchell v. Lawson Milk Co. (1988), 40 Ohio St.3d 190, 192, 532 N.E.2d 753; see York v. Ohio State Hwy. Patrol (1991), 60 Ohio St.3d 143, 573 N.E.2d 1063. Thus, in deciding Civ.R. 12(B)(6) motions, trial courts are to construe a plaintiff's complaint liberally, giving every benefit of the doubt to the plaintiff.²

{¶ 19} While the factual allegations of the complaint are taken as true, "[u]nsupported conclusions of a complaint are not considered admitted * * * and are not sufficient to...