On August 31, 2020, Vice Chancellor J. Travis Laster of the Delaware Chancery Court issued his long-awaited resolution of the prolonged litigation involving the failed merger of Anthem, Inc. and Cigna Corporation — two of the nation’s largest health insurance companies. As Vice Chancellor Laster found and detailed in the 311-page opinion, no party won this protracted battle, no merger was consummated, and no damages were awarded to either side.1 See In re Anthem-Cigna Merger Litigation, Case No. 2017-0114-JTL, at 305-06 (Del. Ch. 2020).
The Merger. On July 23, 2015, Anthem and Cigna entered into a merger agreement, with Anthem agreeing to pay over $54 billion, a 38.4% premium over Cigna’s market capitalization. The proposed business combination would have created the nation’s largest healthcare insurer, combining the second- and third-largest insurance companies in the country. The merger agreement included certain “Efforts Covenants,” which included: (1) the Reasonable Best Efforts Covenant obligating the parties to use their reasonable best efforts to satisfy all conditions of closing to consummate the merger and (2) the stricter Regulatory Efforts Covenant requiring the parties to take any and all actions necessary to avoid any legal impediments to the merger that a governmental entity might raise.
The Antitrust Lawsuit. In July 2016, the U.S. Department of Justice (DOJ) concluded that the merger would have anticompetitive effects and sued to block it. In February 2017, Judge Amy Berman Jackson issued a permanent injunction preventing the merger from closing. See United States v. Anthem, Inc., 236 F. Supp. 3d 171 (D.D.C. Feb. 21, 2017). In April 2017, the U.S. Court of Appeals for the D.C. Circuit affirmed the decision to enjoin the merger. United States v. Anthem, Inc., 855 F.3d 345 (D.C. Cir. 2017).
Delaware Litigation (In re Anthem/Cigna Merger Litigation). After the district court issued its opinion, Cigna filed suit in the Delaware Chancery Court to establish its right to terminate the merger. Anthem followed with its own suit to continue the merger, which was consolidated into the In re Anthem/Cigna Merger Litigation case. The Court issued a temporary restraining order in February 2017 enjoining Cigna from terminating the merger. In May 2017, the Court denied Anthem’s motion to convert the TRO into a preliminary injunction, but kept the TRO in place by staying its May ruling to allow Anthem to appeal the denial of the preliminary injunction to the Delaware Supreme Court, which it ultimately chose not to do. The cases continued as a damages action with (1) Anthem alleging Cigna’s breach of the Reasonable Best Efforts and Regulatory Efforts Covenants, (2) Cigna alleging Anthem’s breach of the Regulatory Efforts Covenant, and (3) Cigna seeking recovery of the reverse termination fee contemplated by the merger agreement.
Differing Views on CEO Succession. According to the opinion, Cigna’s and Anthem’s difficulties arose because of their divergent visions of the future of the combined company. David Cordani, Cigna’s CEO, and the Cigna leadership team envisioned that he would eventually become CEO of the proposed combined company. This succession plan was not formally documented during the merger negotiations. Meanwhile, after the merger agreement was signed and announced, the Court stated that Anthem began to act like an “acquirer” and engaged in integration planning in a manner that Cigna’s team strategically disagreed with. Joseph Swedish, the CEO of Anthem, effectively sidelined Cordani and eventually made clear that Cordani would not be his anointed successor as CEO.
The parties became increasing adversarial, and the Court found that Cigna engaged in a series of actions that did not align itself with its merger partner Anthem:
- Declining to issue joint press releases on the antitrust investigation.
- Failing to support Anthem’s efforts to line up divestitures to address DOJ concerns about excessive concentration in certain markets.
- Opposing Anthem’s efforts to mediate with the DOJ and obtain antitrust approval.
- Providing deposition testimony by Cigna in a manner that had the effect of helping the DOJ block the merger.
- Cross-examining Anthem’s economic expert to question his credentials and undercut his projections.
- Cross-examining Swedish to intentionally highlight the CEO dispute and bolster the DOJ’s argument that efficiencies could not be achieved because of such disputes.
Anthem’s Claims Against Cigna. Because the merger agreement was a contract governed by Delaware law, Vice Chancellor Laster applied the Restatement (Second) of Contracts to guide his analysis, emphasizing the dispositive element of causation. The parties’ obligation to consummate the merger was subject to a No Injunction Condition, which required the absence of any injunction that would prevent consummation of the merger. Because the district court’s antitrust decisions caused this condition to fail, neither party ever became obligated to close. Anthem thus had to show that Cigna’s breaches made DOJ approval less likely and therefore contributed materially to the failure of the No Injunction Condition. Upon making this showing, Cigna then had the burden to prove that, even if it fulfilled its obligations, the No Injunction Condition would have failed.
Vice Chancellor Laster concluded that Anthem proved by a preponderance of the evidence that the following actions by Cigna breached the Efforts Covenants and contributed materially to the failure of the No Injunction Condition: (1) withdrawal from integration planning, (2) opposition to divestitures that would have addressed DOJ concerns, (3) undermining Anthem’s defenses in the antitrust litigation by resisting mediation, and (4) offering testimony helpful to the DOJ. The opinion also found that Anthem failed to prove that: (1) Cigna’s “covert” communications campaign contributed materially to the failure of the No Injunction Condition, (2) Cigna’s withdrawal from integration planning causally prevented Anthem from advancing an efficiencies defense, and (3) Cigna’s withdrawal prevented Anthem from relying on additional medical cost savings.
Cigna was able to prove by a preponderance of the evidence that even if it had fulfilled its obligations: (1) the DOJ still would have blocked the merger based on its anticompetitive effects on the market for national accounts and (2) the district court and D.C. Circuit still would have enjoined the merger on that basis. In particular, Cigna was able to show that Anthem made the tactical decision to not defend the merger based on the proposed combined company’s ability to sell new products — and thus the district court and D.C. Circuit would have reached the same outcome on the national accounts antitrust issue, regardless of whether Cigna breached its obligations under the Efforts Covenants. Accordingly, judgment on Anthem’s claims against Cigna was entered in Cigna’s favor.
Cigna’s Claims Against Anthem. Cigna failed to show that Anthem’s strategy for obtaining regulatory approval resulted in a breach of the Regulatory Efforts Covenant. In particular, Cigna failed to show that Anthem breached the Regulatory Efforts covenant by not taking more action to change the “Blues Rules,” which require that each member use its best efforts to generate 2/3 of its revenue using Blue Cross Blue Shield as part of membership in that association. Compliance with the 2/3 rule was viewed as a significant challenge for the proposed combined company. The Court was convinced that Anthem’s strategy — to address the 2/3 rule in a settlement in a pending multidistrict antitrust litigation relating to Blue Cross Blue Shield — was a sound course of action. And the Court found that Anthem did not breach the Regulatory Efforts clause by failing to pursue $704 million in potential claimed efficiencies — when Anthem’s lawyers could not confirm that figure because of Cigna’s failure to provide detailed support to verify those numbers. Finally, even if Cigna had shown Anthem’s breach, Cigna would not have been able to recover damages because Anthem’s conduct was not “willful” (within the meaning of the merger agreement) because Anthem at all relevant times attempted to consummate the merger. In order for Anthem to be subject to damages for a willful breach, the merger agreement required that Anthem have actual knowledge that its action or inaction would be a material breach of the merger agreement.
The Court then addressed the issue of whether Anthem owed Cigna the reverse termination fee. At the same time that Anthem notified Cigna that it had decided not to appeal the antitrust ruling, it also terminated the merger agreement because of Cigna’s breach. Under the terms of the merger agreement, Anthem’s termination did not trigger the reverse termination fee. Cigna attempted to terminate the merger agreement because the merger did not close prior to the outside date established in the merger agreement. Cigna’s termination could have triggered a reverse termination fee, if Cigna had been the first to exercise its termination right and had not breached the merger agreement. The Court found that Cigna failed to show that Anthem was liable for the reverse termination fee. The Court found that Cigna’s breaches caused Anthem’s termination right to ripen and Anthem could have terminated the merger long before Cigna gained a right to terminate. Accordingly, judgment was entered in Anthem’s favor on these issues.
Conclusion — No Damages. Vice Chancellor Laster’s decision concludes that the “outcome leaves the parties where they stand” and that “[n]either side can recover from the other.” After more than $800M expended in the merger process and undoubtedly millions spent on litigating the case in Delaware, no merger was consummated, and no damages were obtained for either party.
The In re Anthem-Cigna Merger Litigation presents several key lessons for litigation and transactional parties and professionals.
Drafting/Transaction Deal Dynamics Takeaways
1. Specificity of Regulatory Efforts Covenants
Particularly in transactions where regulatory scrutiny is anticipated, the case illustrates the need for the parties to have a clear understanding with respect to the actions each party is required to take pursuant to Regulatory Efforts Covenants, including the strategy the parties will take in the event of a regulatory challenge and each party’s anticipated cooperation with respect to that challenge. This should include certain protocols the parties will be entitled to follow in the event of a governmental challenge, even if not directly related to the action itself or providing information to the relevant governmental authority. This is especially important if, as was the case here, the Regulatory Efforts Covenant contains a higher standard of performance than the more broadly applicable Reasonable Best Efforts Covenant. It isn’t realistic — nor would it be productive — for these protocols to be spelled out in the body of the merger agreement, but they could be evidenced in a variety of ways, including memoranda between counsel.
2. “Willful Breach” as a Limitation on Post-Termination Damages
Even if Cigna had been able to prove that Anthem breached the Regulatory Efforts Covenant, it would not have been able to recover contractual damages under the merger agreement because Anthem’s conduct was not “willful.” Parties should consider whether such a restriction — long an industry “norm” in restricting recovery for damages due to pretermination breaches in public M&A transactions — is appropriate. If, for example, a party’s misguided strategy, though taken in good faith, causes the failure of a “regulatory approval” or “no injunction” condition, absence of this “willful” breach limitation would make recovery of damages by the non-breaching party far easier to prove. This would have to be balanced against the traditional structure of merger agreements, which typically provide for certain reverse termination (and, in some cases, termination) fees intended to largely be the sole source of damages for specific contractual termination scenarios. One possible approach would be for recovery of damages for non-willful breaches of certain covenants (such as the Regulatory Efforts Covenant), particularly in situations like this one where a higher “Regulatory Efforts” standard of performance is applied instead of “Reasonable Best Efforts.”
3. Applicability of Reverse Termination Fee in “Race to Terminate” Scenarios
As noted by Vice Chancellor Laster, despite Cigna’s loss in the “race to exercise” a merger agreement termination right, the merger agreement could have expressly provided that Cigna was nevertheless still entitled to its reverse termination fee. For example, the merger agreement could have provided that (a) if Anthem terminated the merger agreement pursuant to a provision that did not entitle Cigna to a reverse termination fee and (b) at such time, Cigna had the right to terminate the merger agreement pursuant to a provision that would permit it to recover the reverse termination fee, then the reverse termination fee would still be payable to Cigna, regardless of Anthem’s prior termination. It is important for parties to make sure their termination provisions will work in such a way to avoid a potential inequitable loss of a termination or reverse termination fee due to the loss by such party in the “race” to exercise these rights.
4. Clarity on Social Issues Prior to Signing
The dynamics on this transaction highlight the importance social issues often have on public M&A transactions. Absolute specificity on post-integration roles is often hard to achieve (and, often, not necessarily advisable — particularly when the regulatory review period is expected to last for an extended period), but agreement early in the process on basic overarching deal principles, including whether a merger is a “merger of equals” or a true acquisition, could help set the tone for expectations as matters move forward.
Privilege and Consistency of Positions
5. Privilege Considerations for Hiring Advisers or Communications Firms
This case also underscores the need to exercise caution when hiring an outside adviser or communications firm. In particular, privilege should be properly and extensively considered when hiring such firms. Vice Chancellor Laster’s opinion relied on the actions of Teneo Holdings, a strategic communications and consulting firm hired by Cigna, which played a large role in Cigna’s communications efforts.
In his opinion, Vice Chancellor Laster pointed to Cigna’s efforts to withhold evidence of Teneo’s activities under “manufactured” claims of privilege, even though Cigna’s counsel had retained Teneo. The case is a vivid and cautionary tale reinforcing that the mere retention of a communications firm by a law firm will not create privilege and that an aggressive assertion of privilege in such a manner can undermine credibility.
6. Importance of Consistent Positions
Finally, the decision also underscores the importance of maintaining a coherent and cohesive narrative across multiple litigation venues. In particular, Vice Chancellor Laster noted that the public positions taken by each party shortly after the transaction was announced were not entirely consistent with positions taken by those in the regulatory or litigation proceedings that followed later. The Court noted that those inconsistencies were one of the factors in the decision that each party should receive no damages in the matter.
What Comes Next
The saga may not yet be over. The parties will likely contemplate whether to appeal the decision over the coming weeks, although the detailed and extensive factual findings by Vice Chancellor Laster, especially his determinations regarding inconsistent positions, will likely make it more difficult to reverse his ruling. Moreover, given the conduct extensively detailed in Vice Chancellor Laster’s opinion, there is a distinct possibility of shareholder litigation pursued by shareholders of one or both of the companies.
1 The evidentiary record was vast — including a 10-day trial, 17 fact witnesses, four experts, 4,611 exhibits, and 111 deposition transcripts. The record was particularly expansive given that the litigation concerned the parties’ conduct during a related DOJ investigation and antitrust litigation. Indeed, the factual findings encompass more than 180 pages of the opinion.