The Failed Cigna-Anthem Merger: A “Corporate Soap Opera”

In 2017, Cigna, Corp. (“Cigna”) and Anthem, Inc. (“Anthem”), both major market participants in the United States (“U.S.”) healthcare industry, began what would have been a $54 billion merger. (Jeff Montgomery, Law 360). The merger between these entities ultimately failed in Delaware’s Chancery Court when Judge J. Travis Laster, who oversaw the trial in 2019, ruled that neither entity could recover damages for breach of contract as a result of the failed merger because of executive battles, unfulfilled contract obligations, and questionable conduct. Id. This article will address what happened during the failed Cigna-Anthem merger, why the court denied damages, the reasons the merger failed, and the effect that the failed merger will have on the mergers and acquisitions (“M&A”) market moving forward.

During litigation, Anthem sought $21.1 billion in expectation damages and Cigna sought $14.7 billion in expectation damages, along with $1.8 billion worth of reverse termination fees. Id. Expectation damages are awarded when a party to a contract breaches an agreement and are “intended to put the injured party in as good of a position as if the breaching party fully performed its contractual duties.” (Cornell Law School Legal Information Institute). Reverse termination fees compensate would-be purchasers for the time and resources used to further a deal if a seller backs out of the deal. (James Chen, Investopedia). After three years of litigation and the lengthiest decision issued by the Delaware Court of Chancery, the court held that Cigna “breached merger effort covenants.” (Jeff Montgomery, Law 360). However, the court also held neither Cigna nor Anthem were ordered to pay damages. Id.

The court denied an award of damages because of credibility issues and the high probability that Anthem and Cigna could have settled outside of court. Id. Judge Laster referred to Cigna as the “elephant in the room,” meaning that Cigna’s opposition to the merger was “obvious.” Id. The Anthem CEO accused the Cigna CEO of orchestrating sabotage efforts. Id. Judge Laster ultimately referred to the case as a “corporate soap opera.” Id.

The merger failed for three reasons. First, the merger instigated a battle for executive control over the merged entity. Id. Cigna Chief Executive Officer (“CEO”), David Cordani, sought to displace former Anthem CEO, Joseph Swedish. Id. Cigna accused Anthem of attempting to sacrifice the Cigna brand in order to satisfy a “bias to [Anthem].” Id. Additionally, Cigna cast doubts about whether Anthem would be able to complete the transaction without violating its obligation to ensure that two-thirds of the merged entity’s revenue be generated through Anthem brands, complicating control over the final entity. Id.

Second, even if Cigna proved that the company fulfilled its obligations under the merger efforts covenant, the merger would not have passed antitrust muster. Id. An ‘effort’ clause typically requires the entities to use best or reasonable efforts in fulfilling obligations. (Waltz, Palmer, & Dawson, LLC). The United States Department of Justice (“DOJ”) would have attempted to block the merger because of the anti-competitive affects the merger would have had on the health insurance market. (Jeff Montgomery, Law 360). Among 125 health insurance providers in 2018, Anthem controlled 6.1% of the U.S. health insurance industry as the third-largest health insurance provider while Cigna controlled 2.7% as the eight-largest health insurance provider. (National Association of Insurance Commissioners). If the two entities had merged, the combined entity would have become the second-largest health insurance provider by market share and direct premiums written. Id.

Third, both Anthem and Cigna traded accusations of deceit and engaged in questionable conduct. (Anna Wilde Matthews and Peg Brickley, Wall Street Journal). Cigna breached its obligations by failing to use reasonable efforts to satisfy closing conditions in an attempt to thwart the merger because executives did not want to give up control. Id. Rather, the executives wanted continue to run Cigna as an independent company. Id. Anthem was not a faultless victim either. To further frustrate matters, Anthem mislead the public and both entities by portraying its relationship with Cigna as “solid”. Id. According to Judge Laster, Cigna wanted the merger to fail so that executives could continue to run Cigna as an independent company. Id. While it may seem counter-intuitive for entities to merge while engaging in these types of actions, control of the final entity, which would produce control over the second largest U.S. health insurance provider by market share, may have been the driving force for the merger despite questionable conduct.

The Chancery Court’s Cigna-Anthem decision will have two takeaways for the M&A market moving forward. First, this decision highlights that potential issues should be solved in advance by protecting against risk in M&A deals. (Benjamin Horney, Law 360). Corporate lawyers can think of and help address possible scenarios that may occur, such as a successful or failed merger and the possibility of a lawsuit. Id. Cigna and Anthem both failed to address antitrust concerns. Id. Because of this, the DOJ enjoined both entities from collecting damages. Id. Cigna and Anthem could have tried to quell antitrust concerns in advance or structure the merger in a way that would prevent the court and DOJ from raising antitrust concerns that cause the deal to fail.

In the Cigna-Anthem case, the parties could have solved another issue in advance by incorporating the “human factor” into their deal. Id. After Cigna breached its obligations and the CEO was accused of sabotaging the deal and leaking “unflattering information” to the public, observers following the merger noted that corporate executives can act in unexpected and non-routine manners, such as battling for executive control and attempting to sabotage the deal, when their livelihoods are at stake. Id. Also, it may be unconventional for executives to trade accusations of deceit when the executives would end up working together should the merger succeed. A way to protect against self-serving executive actions that are detrimental to the company is to quantify executive actions in M&A deals, such as the financial impact of management succession. Id. Byron Egan, a corporate lawyer at Jackson Walker, LLP, notes the Cigna-Anthem executive battles contributed to the deal’s failure because the companies started the deal on different pages and led to subverted merger efforts and complicated antitrust concerns. Id.

Second, this failed merger emphasizes that in order for a party to recover damages in a merger lawsuit, there must be actual, tangible damages. Id. Cigna proved that there were no damages and Judge Laster agreed, holding that the breached merger provisions did not result in tangible damages. Id. Had the court found that damages were tied to the merger agreement being broken, one of the entities likely could have been awarded damages. Id. Moreover, the DOJ enjoining both parties produced non-recoverable, non-tangible damages. Id. Judge Laster stated that if the enjoinment had not occurred, Anthem may have been entitled to damages because it was able to prove that Cigna’s breaches were material contributions to the “failure of the condition to closing that there not be an injunction to the merger.” Id.