On May 3, 2021, Anthem, Inc. secured its win over Cigna Corp.'s pursuit of a $1.85 billion breakup fee following the collapse of their proposed $54 billion merger. In a brief order, Justice Karen L. Valihura, writing for the full five-member Delaware Supreme Court, rejected Cigna's appeal and affirmed "on the basis of and for the reasons assigned by" Vice Chancellor J. Travis Laster in his sprawling 306-page decision issued in August 2020.1 The deal thus ultimately ends in a draw, with neither side receiving any compensation or damages after years of litigation. However, the decision now clears the way for the pending shareholder suits against Anthem and Cigna to proceed.
The decision concludes a long, expensive, and contentious battle between the insurance giants, who quickly turned from merger partners to public foes as the deal fell apart. The Department of Justice (DOJ) raised antitrust concerns about the deal, which would have created the nation's largest healthcare insurer. Following the DOJ's suit to block the merger, the deal was enjoined in federal court in 2017. Litigation over the merger agreement provisions ensued. The opinion of the Delaware Court of Chancery, now affirmed by the Delaware Supreme Court, highlights the importance of involving antitrust counsel long before a merger agreement is signed to avoid costly pitfalls.
Delaware Litigation
Anthem and Cigna agreed to merge in 2015. The Anthem-Cigna merger agreement obligated Cigna to oppose any antitrust litigation "fully and vigorously" and to follow Anthem's chosen litigation strategy.2 But due in part to divergent views over executive control of the merged company, Cigna instead actively undermined Anthem's defense. Cigna's opposition to the deal was apparent even to the district court, who called it the "elephant in the courtroom" during the antitrust trial.3 Cigna elicited testimony from its own CEO and Anthem witnesses that aided the DOJ's case, proposed trial exhibits that undermined Anthem's efficiencies, cross-examined Anthem's CEO and its key expert to bolster DOJ arguments, failed to make an opening or closing argument in support of the merger, and engaged in a stealth public relations campaign to derail the deal.4 Rather than vigorously pursue all avenues for appeal following the district court's injunction, Cigna declined to support Anthem's appeal, then issued a termination notice and filed a lawsuit of its own.5
Cigna sued to recover the $1.85 billion reverse termination fee and to recover $14.7 billion in damages as a result of Anthem breaching the regulatory efforts covenant in the merger agreement. Anthem, in turn, sought $21.1 billion in expectation damages, alleging that Cigna breached the regulatory efforts covenant and its covenant to use reasonable best efforts to consummate the transaction when it ran a campaign to sabotage the merger.
In assessing Anthem's claims against Cigna, Vice Chancellor Laster found that Cigna willfully breached its merger efforts covenants by engaging "in a knowing and intentional effort to undermine Anthem's position in the Antitrust Litigation."6 However, Anthem could not collect on its claim for billions in damages because it failed to prove that Cigna's breaches led to causally related damages. Cigna proved that even if it fulfilled its efforts obligations, the DOJ still would have blocked the merger, the district court would have enjoined the merger, and the ruling on appeal would still be upheld.7
In assessing Cigna's claims against Anthem, Vice Chancellor Laster found that Cigna failed to show that Anthem's strategy for obtaining regulatory approval breached the regulatory efforts covenant. Even if Cigna had shown Anthem's breach, Cigna could not recover damages because Anthem's conduct was not "willful" as the merger agreement required. Turning to the reverse termination fee, the court found that while Cigna attempted to terminate, it did not validly do so. The agreement stated that a party could not terminate if that party's own breach of the agreement was the proximate cause of the failure to have closed, and Anthem had already validly terminated.8
Key Implications
Specificity of Best Efforts Clauses
Companies should be aware that even seemingly boilerplate language in a merger agreement may be litigated, to the tune of tens of billions of dollars. Due to the potential ambiguity of efforts provisions, merger agreements that do not specify other requirements, such as divestiture and litigation requirements, may leave parties vulnerable to uneven court interpretation. Particularly when regulatory scrutiny is anticipated, parties must have a clear understanding of what is required pursuant to their efforts covenants. Delaware courts also have been reluctant to draw distinctions among different generically stated efforts standards—for example, "commercially reasonable efforts" versus "reasonable best efforts"—which creates even more reason for parties to consider exactly what will be expected of them.
Litigation Requirements
Merging parties recognize the shared difficulty of litigating antitrust challenges and seek to mutually bind each other for the long haul. Litigation requirements often serve to reinforce all other risk mitigation tactics. But Anthem's failed acquisition of Cigna illustrates that exceptions do exist. There, not only did a litigation requirement fail to salvage the transaction, but it turned a bad situation worse, ultimately forcing both companies to endure years of costly litigation for naught.
Given the high number of transactions that include litigation requirements, it is possible that litigation requirements are over-deployed. When negotiating deal terms and risk allocation, parties should step back and consider whether such stringent requirements are truly necessary. While litigation requirements may provide some level of comfort, insisting upon them is not free.
Termination Rights
A key preliminary question for the court was whether Cigna validly terminated the agreement to trigger the reverse breakup fee. Vice Chancellor Laster found that Cigna lost the race to exercise its termination right and noted that the parties could have bargained for a different merger provision. To avoid the race to terminate, the parties should have included an express provision that Cigna was entitled to the reverse termination fee even if the merger was terminated on other grounds. Accordingly, parties must ensure their termination provisions are designed to avoid a potential inequitable loss of termination rights amid a race to terminate.
Requirements in Conjunction with a Reverse Breakup Fee
The failed Anthem-Cigna deal included a reverse termination fee as well as a requirement to litigate, illustrating the benefit of placing obligations on the seller in addition to a reverse breakup fee. Anthem was the first to validly terminate the merger agreement once Cigna breached its efforts obligations in litigation. Cigna's unwillingness to support the deal during litigation allowed Anthem to escape paying the hefty reverse termination fee. Had the agreement not included a litigation requirement, the result may have been very different.
Clarity on Social Issues
The failed merger highlights the outsized role that social issues may play in a transaction. Although absolute specificity on post-integration roles may not be achievable, an early agreement of basic principles can help set expectations. For instance, determining whether a merger is a true acquisition (as Anthem thought) or a merger of equals (as Cigna thought) and ensuring a meeting of the minds on integration efforts could help to prevent surprise and potential sabotage of the deal down the road.
Maintaining Credibility
Vice Chancellor Laster noted repeatedly that key witnesses suffered from credibility problems and gave conflicting testimony during the DOJ litigation and the litigation over the merger agreement, which was one factor in concluding that neither party should receive damages.9 Cigna witnesses attempted to "manufacture an alternative narrative," while Anthem gave testimony that was at times "unsupported" and "untrue."10 The decision illustrates the vital importance of maintaining a consistent narrative across multiple litigations.
Consulting with Antitrust Counsel
Involve antitrust counsel early in the process of merger negotiation. In complex transactions that are likely to attract regulatory scrutiny, antitrust counsel should be consulted from the beginning. Such counsel can aid in starting initial negotiations, assessing risk, drafting merger agreement provisions, developing communications strategy, and assisting in other deal-related workstreams that will impact future interactions with antitrust regulators and determine the final outcome of the transaction.
[1] Cigna Corp. v. Anthem, Inc., C.A. No. 2017-0114 (Del. May 3, 2021).
[2] In re Anthem Cigna Merger Litigation, C.A. No. 2017-0114-JTL, at 252 (Del. Ch. Aug. 31, 2020).
[3] Id. at 6.
[4] Id. at 252-53.
[5] Id. at 257-58.
[6] Id. at 259.
[7] Id. at 273.
[8] Id. at 302-05.
[9] Id. at 10-12.
[10] Id. at 11-12.
