In a recent decision relating to the proposed merger of Caremark RX, Inc. and CVS Corporation, the Delaware Court of Chancery emphasized that certain aspects of the proposed merger structure gave rise to additional disclosure requirements and additional shareholder rights (Louisiana Mun. Police Employees’ Retirement Sys. v. Crawford). A special cash dividend declared by Caremark prior to the merger, but payable only upon the approval and closing of the merger, was deemed to be cash consideration paid in connection with the merger, which in turn entitled the shareholders to appraisal rights. Also, because the bulk of a fee paid to investment banks was in part triggered by the initial approval of the transaction, the fee was necessarily ontingent and therefore required disclosure to the Caremark shareholders of the conditions precedent to the payment of the fee to the banks.


Appraisal rights under Delaware law were triggered by a special cash dividend? declared in connection with the proxy fight between CVS and Express Scripts, Inc. for Caremark. In response to a competing bid from Express Scripts, the Caremark board declared a special cash dividend. While the dividend was declared before the merger, the special cash dividend would be paid only if the merger was approved by Caremark shareholders and subsequently consummated.

Caremark and CVS claimed that the special cash dividend was separately approved and payable by Caremark, and therefore had independent legal significance and should not be deemed merger consideration, which would require appraisal rights. The Delaware Chancery Court rejected this argument in this context. The court held for the first time that the special cash dividend declared before the merger, but conditioned upon the approval and consummation of the merger, was nothing more than nonetoo- convincing disguised merger consideration. In this respect, the court stated that while the special cash dividend was declared by the Caremark board, it was nonetheless fundamentally cash consideration paid to Caremark shareholders on behalf of CVS. Further, the court noted that even Caremark stated in its public disclosures that the special cash dividend might be treated as merger consideration for tax purposes. The court explained that shareholders should not be denied their appraisal rights simply because their directors are willing to collude with a favored bidder to launder a cash payment. Because Caremark did not inform shareholders of their appraisal rights, the court ordered that the shareholder meeting to approve the merger be enjoined for the required 20-day notice period under statute.


In general, the nature and structure of non-contingent investment banking fees are not believed to require specific disclosure to shareholders. However, the Caremark decision makes clear that certain non-contingent aspects of a fee may, in fact, be contingent and therefore require disclosure.

In this case, UBS and JPMorgan rendered fairness opinions regarding the Caremark/CVS merger. The initial delivery of the opinions triggered a payment, regardless of the conclusion reached, of $1.5 million to each firm. In addition, each firm was entitled to receive a $17.5 million ?success? fee upon public announcement and consummation of the merger or other specified alternative third-party transactions. Caremark argued that because the approval and public announcement of the merger had already occurred by the time public disclosures about the fee were made, the only contingency that remained was the consummation of the merger.

The court disagreed and found Caremark?s disclosure of the fees to be misleading due to its failure to describe the initial requirement that the firms had to meet in order to receive their fees (i.e., initial endorsement by the banks of the merger and subsequent public disclosure). Without an initial favorable recommendation from the banks, there would be no public announcement of the merger and a condition for the payment of the success fee would not be met. The court concluded: It follows then that where a significant portion of bankers fees rests upon initial approval of a particular transaction, that condition must be specifically disclosed to the shareholder. Knowledge of such financial incentives on the part of the bankers is material to shareholder deliberations.

NASD (formerly known as the National Association of Securities Dealers) has also addressed disclosure of investment banking fees by proposing Rule 2290. The proposed rule would require NASD members receiving fairness opinions to disclose in proxy materials compensation contingent upon the successful completion of such transaction. Rule 2290, which was originally proposed in 2005 and recently resubmitted to the Securities and Exchange Commission, has not yet been formally adopted and is awaiting final review and approval by the SEC.