Delaware Court of Chancery Finds Neither Cigna nor Anthem Entitled to Damages in Connection with Their Terminated Merger Agreement
September 4, 2020
Publication| Corporate Governance| Corporate Transactions| Corporate & Chancery Litigation
In In re Anthem-Cigna Merger Litigation, 2020 WL 5106556 (Del. Ch. Aug 31, 2020), the Delaware Court of Chancery found that neither Anthem, Inc. nor Cigna Corporation were entitled to recover damages in connection with the parties’ 2015 merger agreement (the “Merger Agreement”) providing for their proposed $54 billion merger (the “Merger”) that was terminated in 2017 after the Merger was enjoined on antitrust grounds.
The 311-page decision meticulously detailed the prolonged saga between Anthem and Cigna. The Court traced many of the parties’ disputes to their disagreements on post-closing integration and management that arose after they entered into the Merger Agreement. Although the parties reached certain understandings at the time of signing as to post-closing governance, the Court found that both sides attempted to retreat on their initial understandings, which ultimately led Cigna’s executive leadership to turn against the Merger.
The Court found that Cigna, in furtherance of its desire to avoid closing, conducted a “covert communications campaign against the Merger” and withdrew from integration planning in breach of its covenant under the Merger Agreement to use its reasonable best efforts to consummate the Merger. In addition, the Court found Cigna breached its covenants under the Merger Agreement to take any and all actions necessary to avoid every impediment under antitrust or other applicable law and to generally follow and adhere to the antitrust strategy formulated by Anthem by opposing potential divestitures intended to mitigate the concerns of the Department of Justice (the “DOJ”), refusing to mediate with the DOJ and undermining Anthem’s defense in the ensuing antitrust litigation (the “Antitrust Litigation”). The Court nevertheless held that Anthem could not recover against Cigna for any of these breaches because it was not shown that they led to any resulting damages. In particular, the Court found that neither Cigna’s covert communications campaign nor its withdrawal from integration planning contributed materially to the injunction against the Merger that prevented the Merger Agreement’s “no injunctions” closing condition from being satisfied. Although the Court held that Cigna’s other breaches materially contributed to the imposition of the injunction and the failure of the related condition to have been satisfied, it concluded that Cigna proved that the injunction would have been imposed (and the condition not satisfied) even in the absence of these breaches.
The Court also found that Cigna could not recover for any of its own claims against Anthem. Although Cigna took issue with Anthem’s positions throughout the Antitrust Litigation and resolution of related issues and claimed that Anthem breached its reciprocal covenant to take any and all actions necessary to avoid any applicable antitrust impediments, the Court dismissed these claims as after-the-fact criticisms of reasonable strategies pursued by Anthem that were consistent with its covenants under the Merger Agreement. Moreover, the terms of the Merger Agreement provided that its termination generally extinguished Anthem’s liability for these alleged breaches unless its conduct amounted to a “Willful Breach,” and even assuming for the sake of argument that Anthem breached its covenants, the Court found that no such breach would have constituted the type of “Willful Breach” necessary to give rise to any liability on the part of Anthem. Finally, the Court rejected Cigna’s claims that Anthem was obligated to pay the $1.85 billion reverse termination fee payable by Anthem in the event of certain terminations of the Merger Agreement resulting from the failure to secure regulatory approval. Although Cigna attempted to terminate the Merger Agreement on two occasions pursuant to its termination provisions that, if validly exercised, may have potentially obligated Anthem to pay the reverse termination fee, the Court found each such termination ineffective. Cigna’s first termination notice was ineffective because it was delivered prior to the Merger Agreement’s outside date (which Anthem had previously extended) on which the applicable termination right could be exercised. Cigna’s second termination notice was ineffective in light of a temporary restraining order Anthem obtained from the Court of Chancery itself earlier in the case that enjoined Cigna (but not Anthem) from terminating the Merger Agreement while Anthem’s appeal in the Antitrust Litigation was pending. Before the temporary restraining order was lifted, Anthem validly terminated the Merger Agreement pursuant to a separate termination right that did not obligate it to pay the reverse termination fee.
The Court’s analysis and factual findings supporting these rulings shed light on numerous issues related to the negotiation of M&A agreements and the interim operations and obligations of counterparties prior to closing.
Managing Pre-Closing Issues in Light of Covenants to Work Towards Closing
- Consistent with other recent cases, the Court explained that covenants requiring parties to use their reasonable best efforts to consummate a transaction impose affirmative obligations on counterparties “to take all reasonable steps to solve problems and consummate the transaction.” See, e.g., Williams Cos. v. Energy Transfer Equity, L.P., 159 A.3d 264, 273 (Del. 2017). Parties subject to such covenants will often be better served by investigating and directly addressing any issues that may arise between signing and closing instead of avoiding them.
- The Court’s findings that Cigna—which attempted “to paint a picture” that it “still supported the Merger . . . . while covertly engaging in passive-aggressive resistance to increase the chances of regulatory failure”—breached its interim covenants under the Merger Agreement, while Anthem—which “acted at all times with the belief that it was complying with the Merger Agreement and using its utmost efforts to complete the Merger”—did not, are consistent with several other recent decisions illustrating the value that the Delaware courts place on the candor of counterparties in resolving pre-closing disputes. For example:
- In Channel Medsystems, Inc. v. Boston Scientific Corp., 2019 WL 6896462, at *38 (Del. Ch. Dec. 18, 2019), an acquiror’s “utter failure to make any meaningful attempt” to confer with the target upon becoming concerned with a potential fraud that served as its basis for purporting to terminate a merger agreement was found to constitute a breach of the acquirer’s obligation to use commercially reasonable efforts to consummate the merger. In addition, the Court found that the balance of the equities weighed in favor of granting the target specific performance due to, among other things, such breach by the acquiror and the target’s good faith investigation and remediation of the fraud upon its discovery. Id. at *40.
- In upholding an acquiror’s termination of a merger agreement in Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *3 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018), the Court of Chancery highlighted the acquiror’s response to the target’s downturn in which the acquiror consulted with the target regarding the cause of the downturn, “appropriately began evaluating its contractual rights” upon receiving “unconvincing answers” to its questions while simultaneously continuing “to move forward with the transaction” and conducted its own investigation using its contractual information rights under the merger agreement before terminating it. The Court contrasted this response from other cases in which it has “criticized buyers” that have “agreed to acquisitions, only to have second thoughts” and then file “litigation in an effort to escape their agreements without consulting with the sellers.” Id.
- In Williams v. Energy Transfer LP, 2020 WL 3581095, at *16 (Del. Ch. July 2, 2020), the Court of Chancery denied a motion for summary judgment brought by the acquiror in a terminated merger with respect to claims that the acquiror breached its obligations to use reasonable best efforts to consummate the merger where the acquiror “generally did not act like an enthusiastic partner in pursuit of consummation of the Merger Agreement.”
- In Vintage Rodeo Parent, LLC v. Rent-A-Center, Inc., 2019 WL 1223026 (Del. Ch. Mar. 14, 2019), the Court of Chancery held that a target validly terminated a merger agreement pursuant to its unambiguous termination right under the agreement after the acquiror inadvertently failed to extend the agreement’s outside date. In holding that the target, which had previously worked toward closing the merger consistent with its contractual obligations, had no duty to make its intentions known to the acquiror prior to exercising its termination right, the Court distinguished “the exercise of a contractual right” from “compliance with contractual commitments,” which had been at issue in other cases where the Delaware courts indicated that parties may have an obligation to address problems with counterparties. Id. at *19 n.210.
Regulatory Approval Covenants
- Consistent with similar indications in Akorn, the Court’s findings demonstrate the extent to which control over regulatory strategy may color each parties’ interim regulatory covenants. For example, in light of the control the Merger Agreement vested in Anthem over antitrust strategy, the Court found that Cigna’s interim antitrust covenants obligated Cigna “to follow” and “support” Anthem’s strategy and pursue any divestitures or other strategies that Anthem believed to be “necessary and appropriate.” By contrast, the Court found various actions and positions taken by Anthem to be consistent with its antitrust covenants even though Anthem’s actions and positions proved unsuccessful and were later called into question by Cigna.
- The Court indicated an unwillingness to extend the parties’ obligations under their “hell-or-high water” regulatory covenants to matters that were related, but “at least one step removed,” from the specific antitrust and regulatory matters expressly addressed by such covenants. For example, integration planning, Cigna’s communications campaign in respect of the Merger and Anthem’s interactions with the Blue Cross Blue Shield Association were all found to fall within the scope of the parties’ reasonable best efforts covenant rather than the hell-or-high water covenant. Thus, if a hell-or-high water covenant requires parties to take affirmative action necessary or advisable to receive regulatory approval, the covenant may not necessarily prohibit the parties from taking ancillary action that could ultimately undermine the receipt of such approval in the absence of language to the contrary.
- While Cigna was found to have breached its general regulatory covenants by refusing to sign non-disclosure agreements with interested parties or join in Anthem’s filings during the Antitrust Litigation, Anthem ultimately had no remedy for such breaches. If these types of specific actions can be anticipated in advance in connection with transactions subject to antitrust scrutiny, it may be advisable to include covenants expressly requiring parties to take such actions. Express requirements provide less leeway and are more likely to compel counterparties to take the required action in the first place and, given the difficulty that pursuing a damages action and proving causation may entail, counterparty performance is often preferable to a damages claim.
Limitations on Liability
- The Court upheld the Merger Agreement’s limitations on liability, explaining that parties may do so by contract “as long as the agreement is not invalid for unconscionability or on other grounds.” The opinion serves as a reminder that Delaware courts typically enforce limitation on liability clauses (except for those insulating parties for their actual fraud), which should be drafted carefully to avoid scenarios in which a party may have no adequate remedy for its counterparty’s breaches.
- The Court found that Anthem could not have been subject to liability even if it had committed the breaches alleged by Cigna because Anthem’s liability for any such breaches was limited under the Merger Agreement to damages for its “Willful Breach.” The Merger Agreement defined this term to mean “a material breach . . . that is the consequence of an act or omission by a party with the actual knowledge that the taking of such act or failure to take such action would be a material breach of this Agreement.” As the Court noted, the parties’ use of this defined term significantly limited their liability relative to analogous provisions limiting parties’ liability to “knowing and intentional breaches.” Specifically, the Merger Agreement’s Willful Breach standard required the breaching party to have known that its conduct constituted a breach. By contrast, the Delaware courts have found that the “knowing and intentional breach” standard is satisfied where a party “knowingly takes an action that results in a breach,” although only the action must be taken knowingly and “the party does not also have to know that its conduct constitutes a breach.” See Hexion Spec. Chems., Inc. v. Huntsman Corp., 965 A.2d 715, 746 (Del. Ch. 2008).
- In addition to potentially providing greater protection than alternatives relying on common law terms such as “knowing” and “intentional,” using a “Willful Breach” standard may give parties significantly greater freedom to exert their contractual rights based on their own subjective beliefs. Where litigable issues arise as to whether a particular contractual right is available, a party could attempt to exercise the right so long as it subjectively believes it was entitled to do so while still potentially avoiding liability under such a Willful Breach standard even if the party’s belief is ultimately incorrect and it breached the agreement by exercising the right.
Termination Rights and Fees
- Merger agreements often limit the ability of parties to exercise termination rights or receive termination fees where their own breach has caused or contributed to the merger’s failure to have been consummated. The opinion highlights that the specific wording of any such limitations may be critical. Limitations applicable to breaches “causing” the failure may have a far narrower scope than those applicable to breaches “materially contributing” to the failure. The Court’s analysis indicates the former only applies where the failure would not have occurred “but for” the breach, while the latter merely requires that the breach made the failure more likely.
- Although the Merger Agreement’s reverse termination fee provision only provided for the payment of the fee where Anthem’s other closing conditions were satisfied (which required Cigna to have performed its obligations under the Merger Agreement in all material respects), a proviso at the end of the provision added that the reverse termination fee was not payable where the failure to obtain antitrust approval was caused by Cigna’s Willful Breach of its covenants under the Merger Agreement. Cigna argued that this specific proviso prevailed over the more general terms of the provision that would have otherwise rendered the proviso meaningless such that only its Willful Breach causing the absence of antitrust approval could have absolved Anthem of the obligation to pay the reverse termination fee. The Court did not decide this issue, but Cigna’s argument illustrates the significance that provisos and exceptions may have even where they are included for clarification purposes. While the proviso at issue facially appeared to limit the scenarios in which Anthem owed the reverse termination fee, had Cigna’s interpretation prevailed, it would have significantly expanded the subset of scenarios in which the fee was payable.
- The Court’s ruling that Anthem did not owe the reverse termination fee was based in part on its analysis regarding the effectiveness of the parties’ competing termination notices. To avoid placing significant importance on the timing of termination notices and the potential for this type of “race to terminate,” termination fee provisions can be drafted in a manner that entitles a party to receive a termination fee regardless of which party terminated or their basis for termination so as long as the circumstances requiring payment of the termination fee are in effect at the time of termination.
Advisors
- The Court indicated that actions taken on behalf of Cigna through its advisors, including its strategy and communications advisor, breached Cigna’s interim covenants under the Merger Agreement. In this connection, the Court found Cigna’s arguments that it did not subjectively believe that the work of its advisor could influence the DOJ or courts or breach its interim covenants to be unavailing, explaining that intent was irrelevant to the performance of these covenants. Parties seeking to avoid inadvertent breaches of interim covenants caused by the action of their advisors may be well-served in reviewing the scope of any such covenants with their advisors upon entering into an acquisition agreement, including the terms of any non-solicitation or similar provision whose breach could give rise to significant consequences.
- The opinion highlights the limitations of the attorney-client privilege in litigation in the Delaware Court of Chancery. Among other things, the opinion illustrates that the attorney-client privilege does not protect the work of non-legal advisors solely because they have been retained by outside counsel or use outside counsel as a “conduit” for communicating with the company. The decision also serves as an example of the consequences that may arise from the overly aggressive assertion of privilege, which the Court found to undercut the credibility of each party.
- Given the extensive antitrust issues in the case, the opinion cited numerous materials and advice provided to the parties by their respective legal advisors, which serves as a reminder that counsel should be mindful of the circumstances in which communications may (or may not be) subject to the attorney-client or other privilege.
Post-Closing Governance
- The Merger Agreement’s relatively comprehensive provisions with respect to post-closing governance provided for the composition of the combined company’s board of directors and the appointment of its chairman, CEO, COO and President. Despite these agreements, the relationship between the parties deteriorated as a result of disputes relating to ancillary matters not expressly addressed, including the specific duties that the President and COO would possess. While it may not always prevent pre-closing disputes between competing management teams, negotiating and considering post-closing governance as thoroughly as practical before entering into strategic merger agreements, and memorializing the terms of any such agreements in the merger agreement itself, may help to limit the prospect and scope of any such disputes.
Information Rights
- The Court expressed concern with providing requested data relevant to the Antitrust Litigation as part of a 7-terabyte “data dump” and noted that “Anthem might have been able to assert a claim for breach” of its information rights based on Cigna’s “failure to provide assistance during the Antitrust Litigation,” thereby suggesting that responses to contractual information requests should typically be more tailored.