By Jeffrey H. Brochin, J.D.
Anthem validly terminated the Merger Agreement due to a Cigna breach, and therefore was not obligated to pay a Reverse Termination Fee. Because neither of Cigna’s termination notices were effective, Cigna did not validly exercise the Temporal Termination Right, and therefore could not base a claim to recover the Reverse Termination Fee under that right.
The Court of Chancery of the State of Delaware has resolved the long-running battle between two health insurance giants, Anthem, Inc. (Anthem) ad Cigna Corporation (Cigna) arising out of their failed 2015 merger agreement. Both parties filed cross-claims for damages in the billions of dollars, but in the end, despite Cigna not having given effective termination notices, the court denied both parties’ damages claims (In Re Anthem-Cigna Merger Litigation, August 31, 2020, Laster, T.).
Merger of the Century. On July 23, 2015, Anthem and Cigna entered into a merger agreement pursuant to which Anthem agreed to pay total consideration of over $54 billion, reflecting a premium of 38.4% over Cigna’s unaffected market capitalization. At the time, Anthem and Cigna were the second and third largest health insurers in the United States, and if completed, the deal would have created "NewCo," the nation’s largest health insurer. The merger agreement contained covenants that obligated both parties to try to close the merger by using their best efforts to satisfy all of the conditions of closing leading to consummating the merger.
One covenant obligated the parties take any and all actions necessary to avoid any legal impediment to the merger that a governmental entity might raise, and another one obligated them to cooperate in various ways when seeking regulatory approval. Authority over the regulatory approval process was allocated to Anthem.
Deal torpedoed by DOJ. The parties’ obligations to consummate the merger were subject to several conditions, the one most pertinent to the instant case being the absence of any injunction that would prevent consummation of the merger. However, the merger in fact failed to close after the DOJ filed suit in July 2016, opposing the merger on anti-competition grounds. The DOJ obtained a permanent injunction in February 2017 that prevented the merger from closing. The DC District Court injunction was upheld on appeal in April 2017.
Cigna moves to terminate. After the issuance of the district court’s opinion, but before the issuance of the circuit court opinion, Cigna purported to terminate the merger agreement and simultaneously filed the instant litigation, in which it sought to establish its right to terminate the merger agreement. Anthem filed its own lawsuit to keep the merger agreement in place so that it could appeal from the District Court’s decision, and the Delaware court entered a temporary restraining order (TRO) enjoining Cigna from terminating the merger agreement. After the issuance of the circuit court opinion, the Delaware court denied Anthem’s application to convert the temporary restraining order into a preliminary injunction, but stayed its ruling and kept the temporary restraining order in place to give Anthem an opportunity to appeal the court’s decision to the Delaware Supreme Court. However, on May 12, 2017, Anthem decided not to appeal and contemporaneously issued a notice terminating the merger agreement. That same day, Cigna issued another termination notice. The parties disagree about the effects of the competing notices, but they agree that the merger agreement was terminated as of May 12, 2017.
Billion-dollar finger-pointing. Cigna’s and Anthem’s lawsuits were consolidated and continued as damages litigation. Anthem contended that Cigna breached its obligations under the Efforts Covenants and sought expectation damages of $21.1 billion. Cigna contended that Anthem breached its obligations under the Regulatory Efforts Covenant and sought expectation damages of $14.7 billion. Cigna separately sought to recover a reverse termination fee in the amount of $1.8 billion.
The record established that much bad blood existed between the parties early on in the merger process, with Anthem acting like an acquirer and proceeding to engage in detailed integration planning—including conducting interviews that would lead to the selection of the NewCo executive leadership team—and Cigna resisting Anthem’s approach to integration planning and reacting angrily to Anthem’s CEO’s attempt to start the interviews.
Cigna found in breach. The court found that Anthem proved that Cigna breached its obligations under the Efforts Covenants: rather than seeking to complete the merger, Cigna sought to derail it. Cigna argued that under the merger agreement, notices in writing were deemed given "on the date of delivery" and that that meant that notices which were delivered on the same day had to be treated as having been delivered simultaneously. However, the plain language of the provision did not say that, rather, it was designed to establish a set of timing rules for the effectiveness of notices that would eliminate uncertainty by displacing comparable common law doctrines such as the mailbox rule.
Furthermore, the court found that Cigna did not offer any authority to support interpreting the subject provision as creating a rule that notices received on the same day were deemed to be delivered simultaneously, and in fact, by the time Cigna’s notice arrived, Anthem already had terminated the merger agreement. Because neither of Cigna’s termination notices were effective, Cigna did not validly exercise the temporal termination right, and therefore, Cigna could not base a claim to recover the reverse termination fee on a termination under the temporal termination right.
Anthem validly terminated. The court further found that Anthem validly terminated the merger agreement under the termination right for a Cigna breach. By its plain terms, that termination right did not obligate Anthem to pay the reverse termination fee. Cigna argued that this result would be inequitable because Anthem exploited the TRO to gain a timing advantage over Cigna, and, Cigna pointed out that because the decision to pursue an appeal was Anthem’s to make, Anthem, rather than Cigna, had control over when the TRO would end.
However, the court noted that the TRO was put in place because Cigna previously breached its contractual obligations by attempting to terminate the merger agreement on February 12 and thereby moot Anthem’s appeal. That attempt at preemptive termination failed to satisfy the temporal termination right, and it also violated the regulatory efforts covenant, which required Cigna to "vigorously pursue all available avenues of administrative and judicial appeal." Having previously sought to gain a timing advantage of its own in violation of the merger agreement, Cigna could not now complain about the effects of a TRO that its own conduct necessitated. Accordingly, the court concluded that Cigna was not entitled to the reverse termination fee, because by the time Cigna purported to terminate under the temporal termination right, Anthem had already terminated the merger agreement. When Cigna exercised its termination right, there was no longer a merger agreement in place to provide for the payment of the reverse termination fee.
‘Star-crossed’ venturers. The court wound up what it characterized as a soap opera concluding that while Anthem proved that Cigna breached its obligations under the efforts covenants, Cigna proved that it was more likely than not that the merger would have been enjoined anyway. Cigna failed to prove that Anthem breached its obligations under the efforts Covenants, and Cigna failed to prove that it was entitled to the reverse termination fee.
Based on the foregoing, the court ruled that each party must bear the losses it suffered as a result of what it described as their ‘star-crossed venture."
The case is C.A. No. 2017-0114-JTL.
Attorneys: William M. Lafferty (Morris, Nichols, Arsht & Tunnell LLP) for Anthem, Inc. David E. Ross (Ross Aronstam & Moritz LLP) for Cigna Corp.
Companies: Anthem, Inc.; Cigna Corp.
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