Tuesday, December 8, 2020
Several weeks ago, I posted about VC Laster’s opinion in the busted Anthem-Cigna merger. Ever since then, I continued to mull the case and – in particular – I had questions about what might happen if the Cigna shareholders sued Cigna’s management over the deal’s failure. I planned to post about it as a hypothetical thought experiment, but then – what ho! – the Cigna shareholders did in fact file such a lawsuit – though, as I explain below, not quite the one I was contemplating.
Anyhoo, now I am finally getting around to posting my thoughts, though I’m almost hesitant to do so because I’m afraid the answer to my questions may be really obvious and I’m simply splattering my ignorance over the internet, but, well, that’s what blogging is for, so, here goes.
It all starts with Laster’s conclusions after the Anthem-Cigna trial. He found that Cigna’s CEO, David Cordani, intentionally tried to sink the deal by refusing to honor Cigna’s commitments under the merger agreement. And Cordani did so not out of concern for Cigna’s stockholders, but because he was resentful of not being chosen to lead to the combined entity. For example, after an agreement was struck – one that granted Anthem more board members and relegated Cordani to the COO role – Cigna’s chair congratulated Cordani on taking “the right step for our shareholders,” and Cordani responded, “Brain knows yes. Heart is heavy.” Later, Cordani emailed that though the deal was the “correct” outcome, he was “still struggling to accept it all.”
Sadly, that struggle was lost, which – according to Laster’s findings – led Cordani to embark on a campaign of sabotage. But Laster also concluded that the merger was doomed to fail for regulatory reasons regardless of Cordani’s behavior. And that failure was very expensive to Cigna’s stockholders; it cost them a 35% premium over market price.
What I’ve been trying to imagine, then, is what would happen if Cigna’s shareholders tried to sue Cordani for breaching his duty of loyalty, thus costing them valuable merger consideration. Leaving aside any issues about limitations periods, what result?
To begin, we have to determine whether this claim would be direct or derivative. Because if it’s derivative, we next have to ask if the stockholders would be estopped from bringing their claim in the right of the corporation. After all, Cigna litigated the case against Anthem, and took the position – on which it prevailed – that the merger was doomed to fail no matter what Cordani did. So, would Cigna (and thus any derivative plaintiff) now be bound by that finding? (Of course, the case is on appeal to the Delaware Supreme Court, so there could be a reversal, etc etc, but let’s assume the finding stands).
Preclusion would seem awfully unfair under these facts, because when Cigna litigated the Anthem case, its choices were made by its management – including Cordani – whose interests were not aligned with those of the stockholder-plaintiffs in my hypothetical loyalty action. Which really only suggests that perhaps this kind of claim should be direct in nature, because the harm isn’t to the corporate entity, but to shareholders themselves, in that they were unable to collect the merger consideration that should have been their due. But does that really state a direct claim?
In In re Coty Stockholder Litigation, 2020 WL 4743515 (Del. Ch. Aug. 17, 2020), a controlling shareholder increased its stake from 40% to 60% via tender offer, and when stockholders sued directly and derivatively (arguing certain process failures, and breach of a stockholders’ agreement regarding post-tender offer conduct), their claims were sustained. Defendants argued that any non-tendering stockholders were not harmed, since they continued to hold stock in a company with a controlling stockholder both before and after the deal. Chancellor Bouchard rejected that argument, recognizing as a direct harm the fact that the non-tendering stockholders – who held their shares throughout the transaction – “no longer have any expectation of receiving a control premium for their shares in a future buyout” (emphasis added).
Similarly, in Louisiana Municipal Police Employees’ Retirement System v. Fertitta, 2009 WL 2263406 (Del. Ch. July 28, 2009), stockholder plaintiffs were permitted to bring direct claims alleging that the company’s Chairman intentionally sank a merger with an entity that he controlled, which would have netted the shareholders a 41% premium over market price.
On the other hand, VC Zurn just decided Mark Gottlieb, et al., v. Jonathan Duskin, where shareholders alleged that the directors improperly rejected a merger offer with a 33% premium above the trading price. That case was brought directly, but Zurn determined that it should have been filed as a derivative action. See also In re NYMEX Shareholder Litigation, 2009 WL 3206051 (Del. Ch. Sept. 30, 2009) (“A breach of fiduciary duty that works to preclude or undermine the likelihood of an alternative, value-maximizing transaction is treated as a derivative claim because the company suffers the harm…”).
On the third hand, there’s the original Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), where an improper delay in receipt of merger consideration was held to state a direct claim – or would have, if the shareholders had a contractual right to payment, which they didn’t. Is that relevant here? Perhaps once the merger agreement was signed, Cigna shareholders had a contractual right – or something that would ripen into a contractual right – to consideration, which was personal to them, and Cordani interfered with that right by sabotaging the deal.
I don’t know how any of this would play out, and I’d be interested to hear any thoughts – especially if there’s some very obvious answer that I am missing. That said, when it comes to the actually-filed case against Cigna’s management, the plaintiff sidestepped all of these contortions. Instead of seeking damages in the form of lost merger consideration, the plaintiff claims that Cordani’s conduct caused the company to forfeit the reverse termination fee it otherwise would have obtained from Anthem due to the merger’s failure on regulatory grounds. That’s pretty clearly a derivative harm, and the best part is, the plaintiff would presumably be quite happy for estoppel to apply – because it matches up with Laster’s findings in the original trial quite nicely.