Securities Regulation Daily Neither side gets damages in failed Anthem/Cigna merger
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Monday, August 31, 2020

Neither side gets damages in failed Anthem/Cigna merger

By Anne Sherry, J.D.

The Department of Justice would have successfully opposed the merger between Anthem and Cigna on antitrust grounds even if Cigna had not undermined Anthem’s attempts to secure approval.

The Delaware Court of Chancery determined that neither Cigna nor Anthem was entitled to damages for the other’s breach of a $54 billion merger agreement that would have created the country’s largest health insurer. While Anthem proved that Cigna deliberately undermined Anthem’s efforts to secure DOJ approval of the merger, Cigna established that the regulator would have withheld its approval regardless. In turn, Cigna failed to prove that Anthem breached its obligations to take best efforts or was liable for a termination fee. "In this corporate soap opera, the members of executive teams at Anthem and Cigna played themselves," the court concluded (In re Anthem-Cigna Merger Litigation, August 31, 2020, Laster, J.).

The opinion describes several years of merger talks that culminated in a 2015 merger agreement where Anthem agreed to pay over $54 billion to merge with Cigna. The merger agreement obligated the parties to use their best efforts to satisfy conditions to closing and avoid legal impediments that could be a barrier to regulatory approval. Ultimately, the Department of Justice sought and obtained a permanent injunction blocking the merger on antitrust grounds; the Court of Appeals for the D.C. Circuit upheld the D.C. District Court’s issuance of the injunction.

Judgment for Cigna. According to Anthem, Cigna soured on the deal shortly after it was inked, but the parties could not terminate the merger agreement until 2017. In the meantime, Cigna worked to thwart the merger by conducting a covert communications campaign, withdrawing from integration planning, opposing a divestiture, resisting mediation, and undermining Anthem’s defense in the DOJ antitrust case. The chancery court found that Anthem met its burden of proving that several of these actions contributed materially to the failure to obtain DOJ approval and therefore to the breach of the merger agreement’s no-injunction condition.

Notably, during the antitrust litigation, Cigna filed an answer nearly two months after Anthem filed its answer; failed to make any arguments in favor of an expedited trial date; blocked Anthem from contacting potential witnesses; failed to take any depositions; elicited deposition testimony from witnesses that was favorable to the DOJ’s case; proposed trial exhibits that supported the DOJ’s position; undercut Anthem’s key expert during cross-examination; and otherwise signaled its lack of interest in pursuing the merger. Most damaging was the testimony of Cigna CEO David Cordani, which was "exaggerated and embellished" in a way that harmed Anthem’s defense. The chancery court found Cordani to be "a skilled communicator who can resist hostile questioning" yet "testified eagerly, as if he were a friendly witness" when questioned by DOJ attorneys.

The district court took notice, calling Cigna’s opposition to the merger "the elephant in the courtroom" and relying frequently on Cordani’s testimony in issuing the injunction. The appeals court also cited Cordani’s testimony in affirming the issuance. Accordingly, Anthem met its burden of proving that Cigna’s conduct contributed materially to the issuance of the antitrust decisions.

However, the burden then shifted to Cigna to prove that the DOJ would have obtained an injunction even if Cigna had not breached the merger agreement. Cigna did so by pointing to the merger’s effect on the market for the sale of commercial insurance to national accounts. Cigna’s actions had no effect on the district court’s finding that the market for the sale of commercial insurance to national accounts was a distinct market, and once the court made that finding, it was undisputed that the merger would have the anticompetitive effect of reducing the number of carriers from four to three. Cigna also did not influence findings that customers’ sophistication and bargaining power was not enough to offset the anticompetitive effects of the merger, that new entrants would not be able to compete in this market, or that other means of serving customers were not viable solutions.

Anthem countered that Cigna’s breaches were so pervasive that the process may have come out differently if Cigna had complied with its agreement to use best efforts. Then-Judge Brett Kavanaugh, in a lengthy dissent from the appeals court majority opinion, showed how the analysis could have come out differently. But while this was a possibility, the chancery court found it more likely than not that the federal courts would have reached the same conclusion whether or not Cigna fulfilled its contractual obligations.

Judgment for Anthem. For its part, Cigna claimed that Anthem breached its covenant to make best efforts to obtain regulatory approval. Anthem allegedly failed to try to change rules stemming from its relationship with the Blue Cross Blue Shield Association, primarily the Association’s requirement that it use best efforts to generate at least two-thirds of its total revenue using the Blues brands.

The chancery court reasoned that the parties entered the merger agreement knowing that the so-called Blues Rules were unlikely to change and that the best avenue for change was likely through a settlement in pending multi-district antitrust litigation. This strategy was sound, albeit ultimately unsuccessful. While there were other possible strategies, including the "nuclear option" of refusing to comply with the two-thirds rule or attempting to change the rule through grassroots outreach with other Association members, raising these possibilities amounted to hindsight criticism of what was, at the time, a reasonable strategy that Anthem pursued consistent with its best-efforts obligations.

Reverse termination fee. Finally, the court rejected Cigna’s claim that Anthem was liable for the merger agreement’s reverse termination fee. While Anthem considered whether to appeal from the district court’s decision, the chancery court entered a temporary restraining order enjoining Cigna from terminating the merger agreement. On May 12, 2017, Anthem delivered a termination notice to Cigna, then immediately informed the court that it would not appeal, lifting the TRO. Shortly thereafter on the same day, Cigna sent its notice of termination, but Anthem had already terminated. And by the plain terms of the termination right that Anthem invoked—termination in the event of a Cigna breach—Anthem was not obligated to pay the reverse termination fee.

Cigna argued that the two terminations were contemporaneous because they occurred on the same day, but the chancery court found no support for this proposition. Cigna also said the result was unfair because Anthem had control over the lifting of the TRO and was able to exploit this fact to gain a timing advantage. The court noted, however, that the TRO was only in place because Cigna had previously tried to moot Anthem’s appeal by terminating the merger agreement. "Having previously sought to gain a timing advantage of its own in violation of the Merger Agreement, Cigna cannot now complain about the effects of a TRO that its own conduct made necessary," the court reasoned. Addressing policy arguments about a "race to termination," the court said that parties can bargain that the reverse termination fee remain due even if the merger agreement is terminated on other grounds.

Accordingly, the court awarded no damages to either side, concluding, "Each party must bear the losses it suffered as a result of their star-crossed venture."

The case is No. 2017-0014-JTL.

Attorneys: William M. Lafferty (Morris, Nichols, Arsht & Tunnell LLP) and Glenn M. Kurtz (White & Case LLP) for Anthem, Inc. David E. Ross (Ross Aronstam & Moritz LLP) and Stephen R. Diprima (Wachtell, Lipton, Rosen & Katz) for Cigna Corp.

Companies: Anthem, Inc.; Cigna Corp.

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