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IN THE COURT OF THE CHANCERY OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY 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. )

C.A. No. 2635-N

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. 2663-N

OPINION
Date Submitted: February 16, 2007 Date Decided: February 23, 2007

Stuart M. Grant, Michael J. Barry, Stephen G. Grygiel and James P. McEvilly, of GRANT & EISENHOFER P.A., Wilmington, Delaware; OF COUNSEL: 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, New York, Attorneys 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, Delaware, Attorneys 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, Delaware; OF COUNSEL: M. Robert Thornton, B. Warren Pope and Michael J. Cates, of KING & SPALDING LLP, Atlanta, Georgia; 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, New York, Attorneys for Defendants the Caremark Directors; Kevin G. Abrams, of ABRAMS & LASTER LLP, Wilmington, Delaware, Attorney 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, Delaware; OF COUNSEL: Lawrence Portnoy, Thomas P. Ogden and Eric Halper, of DAVIS POLK & WARDWELL, New York, New York, Attorneys for Defendant CVS Corporation.

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 1

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 managedcare 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.

For the sake of expediency, all references to plaintiff LAMPERS in this Opinion include the Masons, unless otherwise noted. 2 For the sake of expediency, all references to plaintiff Express Scripts in this Opinion include KEW, unless otherwise noted.

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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

In re Caremark, Rx., Inc. Derivative Litig., Master Docket No. 3:06-cv-00535 (M.D. Tenn.).

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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 4

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. 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 Discussions broke off in March 2006, but resumed in

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
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The parties disagree as to the cause of the May-August 2006 hiatus in negotiations. Defendants insist that CVS needed the time to focus on implementing the acquisition of another drugstore chain. Plaintiffs suggest that the hesitation was due to an investigation into stock options backdating conducted by the U.S. Department of Justice and the SEC. As my decision does not turn upon the issue, it need not be considered here.

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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 agreement, Caremark shareholders would own approximately 45% of the combined company, having received 1.67 shares of CVS stock for every share of Caremark stock owned. Neither party would receive a premium. The board of directors would be evenly split between Caremark and CVS shareholders, and management positions would

On October 9, 2006, Crawford also met with David Snow, CEO of Medco (a Caremark competitor), at Snow's behest, to talk about possible strategic opportunities, but Crawford rejected such overtures due to his concern regarding anti-trust issues.

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be divided between the two companies. Crawford would serve as Chairman of the combined company, while Ryan would remain as CEO. Whatever the merger's strategic significance, many Caremark directors and managers stand to benefit handsomely from this agreement, whether or not they remain employed by the combined entity. The merger will constitute a "change of control" for purposes of most of Caremark's senior executive employment contracts and many, if not most, such employees will find that their outstanding Caremark options become immediately exercisable at the time of the merger.6 Caremark's deferred compensation plan for outside directors, designed to pay out ordinarily upon a director's cessation of

Even defendants such as Crawford, who will retain substantial authority as Chairman, benefit from this "change of control" acceleration of their options. Defendants insist that this "merger of equals" does not, however, constitute a corporate change of control for purposes of this Court's jurisprudence under Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). This brings to mind Lewis Carroll's Humpty Dumpty, who made a similar assertion when he claimed that "[w]hen I use a word . . . it means just what I choose it to mean--neither more nor less." When Alice asks whether he can truly make a word hold so many meanings, Humpty Dumpty quickly explains: "The question is . . . which is to be master--that's all." Lewis Carroll, Through the Looking Glass (1871). The Caremark directors' assertion of mastery has a very Through the Looking Glass feel to it. Certainly words may change in legal significance depending upon their context, and the Court realizes that the practical effect of invoking Revlon duties when directors receive "change of control" payments will be to inspire the drafters of executive employment contracts to simply rename this particular class of remuneration. It is an unfortunate and disappointing spectacle, however, to watch a board of directors insist that it simultaneously deserves the protection of the business judgment rule because the company is not changing hands, while a massive personal windfall is bestowed because it is. As Alice's cantankerous egg puts it, "When I make a word do a lot of work like that . . . I always pay it extra." Id.

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employment, pays out immediately after the "change of control." Crawford alone gains over $14 million from accelerated realization of options, while Hardin may receive over $2 million. Crawford stands to receive an additional "severance" payment ranging somewhere between $36 million and $40 million, although he has generously agreed to accept a mere $26.4 million "as an indication of his commitment to the merger and his confidence in the longterm economic benefits to be derived" therefrom.7 Finally, the merger

protects Caremark directors and executives from possible liability for option backdating in three ways. First, the new entity will contractually honor any grant of options awarded by Caremark, whether or not it is later found to have been granted in violation of the Caremark board's fiduciary duties. Second, the combined company will indemnify all past and present directors of Caremark either "to the same extent such individuals are indemnified pursuant to Caremark's certificate of incorporation and bylaws in effect as of the date of the merger agreement" or "to the fullest extent permitted by law."8
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Opening Br. of LAMPERS in Supp. of Pls.' Mot. for Prelim. Inj. Ex. 5 at 88 [hereinafter Am. Proxy]. Presumably, Crawford will not be so generous to shareholders if he is asked to exercise his authority following a different merger that implicates his change of control rights. In practical effect, Crawford is unilaterally increasing the termination fee facing Caremark's shareholders by approximately $10 million. 8 Id. at 94. That the indemnification is not merely coterminous with Caremark's former indemnification, but spans "the fullest extent permitted by law," may be quietly critical. A corporation may only indemnify its own directors to the extent that a director acts in good faith and in the best interests of the corporation and, therefore, may not eliminate or limit

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Finally, the merger may eliminate the standing of derivative plaintiffs in certain ongoing backdating lawsuits. Whether the boards of Caremark and CVS were attempting to secure a merger of equals that offers considerable strategic benefit or protecting personal benefits that would flow from the merger, they made certain that the transaction contained a full complement of deal-protection devices. First, both boards are contractually bound to submit the merger to their shareholders under a "force the vote" provision. Second, both boards are subject to a "no shop" provision, under which neither board may speak with a competing bidder unless the board concludes, after examining a competing offer, that the offer either is a "Superior Proposal" or is likely to lead to one.9 A "last look"

the liability of a director who acts in violation of their duty of loyalty. See 8 Del. C.

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