Chancery Awards No Damages to Either Party After the Break-Up of the Anthem/Cigna Merger
This action arose out of a failed merger transaction involving the second and third largest health insurers in the United States, Anthem, Inc. and Cigna Corporation (“the Merger”). The parties had entered into a merger agreement on July 23, 2015 (“Merger Agreement”). Either party could terminate if the transaction did not close by January 31, 2017, a date later extended to April 30, 2017. The parties each agreed to covenants to cooperate and to use their best efforts to accomplish the Merger (“Efforts Covenants”). Specifically, they agreed to take all reasonable steps to consummate the Merger (the “Reasonable Best Efforts Covenant”) and to take “any and all actions” necessary to avoid impediments to the Merger from government entities (the “Regulatory Efforts Covenant”). The parties authorized Anthem to take the lead in working with government entities to facilitate the Merger, but the parties were required to cooperate to obtain regulatory approval (the “Regulatory Cooperation Covenant”). The parties’ obligations to close the Merger were subject to the condition that no governmental entity or court had acted to enjoin the consummation of the Merger (the “No Injunction Condition”).
In connection with the antitrust review, the parties submitted white papers to the Department of Justice (“DOJ”). Two issues were salient: (i) a rule that required Anthem as a member of an association of Blue Cross providers to have two-thirds of its business in any service area derive from a Blue Cross provider (the “2/3 Rule”); and (ii) how to obtain regulatory approval without causing the DOJ to conclude the Merger would be anticompetitive due to the potential loss of an arguably uniquely innovative company, Cigna, whose business model was based on improving its insureds’ health and wellness to reduce claims as opposed to volume discounts. Following the Merger, the parties anticipated that Anthem would generate only 53% of its revenue from Blue Cross providers. If to obtain antitrust approval Anthem were required to divest some of its business, that would make the transaction even more likely to run afoul of the 2/3 Rule and it would be harder to obtain approval from the Blues Association for the Merger, as the Blues Association rules required. Nonetheless, when entering into the Merger Agreement, the parties thought they could achieve a workaround that would prevent the 2/3 Rule from prohibiting the consummation of the Merger.
Soon after the parties signed the Merger Agreement, Cigna came to believe that Anthem was acting like an acquirer, instead of treating the Merger as one of equals. The Court of Chancery found that Cigna then acted in a manner that evinced its opposition to the Merger by “(i) conducting a covert communications campaign against the Merger, (ii) withdrawing from integration planning, (iii) opposing a divestiture, (iv) resisting mediation, and(v) undermining Anthem’s defense in [subsequent antitrust lawsuits.]” Id. at 204. Cigna also failed to provide important information to Anthem for inclusion in white papers the parties submitted to the DOJ.
The DOJ sued to block the merger in 2016 as anticompetitive. The U.S. District Court for the District of Columbia (the “District Court”) issued a permanent injunction blocking the Merger in February 2017. Before decision by the U.S. Court of Appeals for the District of Columbia Circuit (the “DC Circuit Court”) on the parties’ appeal, Cigna acted to terminate the Merger Agreement and filed an action in the Court of Chancery for a declaratory judgment validating its termination. Anthem filed its own action to keep the Merger Agreement in place so that it could continue the appeal of the District Court’s permanent injunction order. The Court of Chancery granted a temporary restraining order to maintain the Merger Agreement to preserve Anthem’s appeal right. The DC Circuit in April 2017 affirmed the District Court’s entry of a permanent injunction. The Court of Chancery denied Anthem’s application to convert the temporary restraining order into a preliminary injunction but stayed its ruling to enable Anthem to appeal to the Delaware Supreme Court. Anthem elected not to appeal and first Anthem and then Cigna sent notices of termination on May 12, 2017. Anthem and Cigna then pursued their claims for breaches of the Efforts Covenants for $21.1 billion and $14.7 billion, respectively, in the Court of Chancery. Cigna also sought a $1.8 billion reverse termination fee from Anthem (the “Reverse Termination Fee”). The two cases were consolidated and tried in the Court of Chancery. In order to show a breach of the Efforts Covenants, Anthem first bore the burden of proving that Cigna materially contributed to the failure of the No Injunction Condition by making it less likely that the Merger would be approved. Upon that proof, the Court held that the burden then would shift to Cigna to prove that the No Injunction Condition would have failed regardless of Cigna’s breaches of the Efforts Covenants.
Post-trial, the Court of Chancery found Cigna breached the Efforts Covenants in several ways: by launching the covert communications campaign to undermine the Merger; by withdrawing from the integration planning process; by obstructing the parties’ divestitures; by resisting mediation unless the parties first agreed on a viable divesture proposal; and by undermining Anthem’s defenses with the DOJ and the Federal Courts. The Court held that Cigna’s actions materially contributed to the failure of the No Injunction Condition, as the DOJ’s findings and the Courts’ opinions included lengthy discussions of Cigna’s apparent opposition to the Merger.
Having found that Cigna breached the Efforts Covenants, the Court held that the burden then shifted to Cigna to prove that, even if Cigna had met its obligations under the Efforts Covenants, a condition to closing – the No Injunction Condition—still would have failed. The Court ruled that Cigna had proved, in part based on the opinions of two of its experts, that the District Court would have concluded, and the Circuit Court would have affirmed, that the effect of the Merger on the market for the sale of commercial insurance to national accounts violated the anti-trust laws regardless of Cigna’s breaches and thus would have enjoined the Merger. The Court held, therefore, that Cigna had proved that it was more likely than not, that Cigna’s breaches of the Efforts Covenants would not have affected those courts acting to enjoin the Merger. For that reason, the Court held that, notwithstanding Anthem’s proof of Cigna’s violations of the Efforts Covenants, Anthem was entitled to no damages.
The Court found Cigna’s efforts to hold Anthem liable for damages also unavailing. For example, while the Court found that, with the benefit of hindsight, Anthem may have pursued different strategies to attempt to comply with the 2/3 Rule, “[i]n real time, Anthem adopted a reasonable strategy and pursued it, consistent with its obligations under the Regulatory Efforts Covenant.” Id. at 288. The Court reached a similar conclusion in rejecting Cigna’s claim that Anthem failed to include $704 million in efficiencies in the white paper it submitted to the DOJ to demonstrate the efficiencies the Merger would achieve. The Court found that the evidence showed that the Anthem lawyers dropped language from the white paper concerning the incremental $704 million efficiencies due to a lack of detailed support, in part because Cigna failed to provide the necessary data. Finally, the Court rejected Cigna’s claim that Anthem breached by presenting an efficiencies defense grounded in discounted pricing rather than innovation. The Court held that Anthem’s choice was reasonable in part because Anthem was trying to avoid supporting the DOJ’s contention that Cigna was uniquely innovative. Although Anthem’s regulatory approach failed, the Court held that “Anthem pursued the best regulatory strategy that it believed was available . . . .” Id. at 289, and that Cigna failed to prove that Anthem knowingly committed a material breach of the Efforts Covenants as required by the Merger Agreement.
Lastly, the Court rejected Cigna’s claim for a Reverse Termination Fee. The Court did not need to reach the parties’ arguments concerning the interpretation and construction of complex termination provisions in the Merger Agreement because the Court found that Cigna had failed validly to exercise its Temporal Termination Right. Specifically, the Court held that Cigna’s first notice of termination was premature, having been issued on February 14, 2017, even though Anthem had validly extended the Termination Date to April 30, 2017. The Court found Cigna’s second notice on May 12, 2017 to be ineffective because Cigna delivered it after Anthem validly had delivered its own notice of termination earlier on the same day. Therefore, “[t]here no longer was a Merger Agreement in effect for Cigna to terminate.” Id. at 303.Share