Tuesday, December 8, 2020

Still thinking about Anthem-Cigna

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.

https://lawprofessors.typepad.com/business_law/2020/12/still-thinking-about-anthem-cigna.html

Ann Lipton | Permalink

Comments

Such a good question! You are not showing ignorance. Rather, you are exposing difficulties in the application of Tooley in context. Keep in mind as you read this that I have not spent any significant time with Laster's opinion or anything else (other than your blog posts!) relating to this matter.

Using the Tooley framework, the nature of the alleged wrong is a breach of fiduciary duty. (It looks like, from the Bloomberg article you linked to, the suit is against the board as a whole.) But to whom are the fiduciary duties owed in this context? Ordinarily, I would say that those duties are owed to the corporation. But in an M&A context in Delaware, the courts often characterize the duties as being owed to the corporation and its stockholders. Does it seem here that, like in Tooley, the Massachusetts Laborers’ Annuity Fund “can prevail without showing an injury to the corporation”?

To do so, it would seem that the fund would need to prove that the alleged wrongful conduct proximately caused its harm, and that seems like a stretch to me. First off, this may be problematic given the Laster opinion, as you point out. Also, I note that the Bloomberg article you linked to classifies the suit as derivative—based on assertions (again, according to the article) that the directors “placed Cordani’s personal interests over the best interests of the company.” That appears to be right to me. The wrongful conduct of the fiduciaries (as alleged and to be proven) led to Cigna’s breach of the merger agreement, to which the corporation was a party. The corporation, and through it, all shareholders were harmed by that breach. All lose the benefit of that bargain together. Any benefit (including, e.g., delay, negotiation, or termination rights) inuring to the corporation has been lost, and the merger price was not available to the stockholders. Seems like a derivative suit to me, based on the nature of the wrong.

For all of the foregoing reasons any relief seemingly also should go to the corporation, for the indirect benefit of all shareholders. This is not perfect, since (with the passage of time) the shareholders at the time of judgment may well be vastly different from those at the time the proposed merger would have become effective. Unless there is a direct injury to stockholders for which the fund could assert harm, any damages should, again, go to the corporation.

Just my two (maybe only 1.5) cents. Your comments on my transactionalist's analysis are always appreciated. Also, I may be missing facts that are important . . . .

Posted by: joanheminway | Dec 9, 2020 7:00:26 AM

Thanks Joan! I don't think you're missing facts that are important - just, the suit that was actually filed is derivative, true, but because it's alleging a very specific harm - failure to collect a reverse termination fee from Anthem to Cigna. For me the more difficult question is what would happen if the lawsuit was instead about the failure of the merger to be consummated. And you may be right in how you're thinking about it - that a merger failure is a corporate harm, which means the stockholders can't prevail without showing the corporate harm! But if so, that's kind of hard to square with a case like Fertitta though (IIRC) the court didn't spend a lot of time on the direct/derivative distinction in that case.

Posted by: Ann Lipton | Dec 9, 2020 7:09:30 AM

Thanks for this. Yes, I should have noted the distinction you drew in the post between the action brought and one that more generally alleges harm due to merger failure. But my analysis was intended to cover both (as you seem to recognize in your comment).

Fertitta involved claims against Fertitta directly for interference as an officer who attained majority stockholder status and against the board for facilitating/allowing that conduct. So, there was a majority/minority issue rolled up in the direct claims that may be important to the discretion exercised by VC Lamb to find direct claims in that case. But I may be reading too much into that . . . .

Of course, another factor in the direct/derivative distinction in merger cases also is timing. Merger failure cases should generally be derivative for the reasons I note, absent a more specifically targeted harm (like to minority stockholders). But post-cash-out merger actions brought by target stockholders are more typically direct actions. Stock merger cases are another story. That's where we get into double-derivatives and the like . . . . Messy stuff, all around!

Posted by: joanheminway | Dec 9, 2020 8:23:39 AM

Yeah, I did wonder if the controller issue was relevant in Fertitta - but the court didn't seem to single it out or cite Gentile and he wasn't a controller when he began the course of conduct. But Coty also involved a controller (and also didn't cite Gentile) so maybe that is the theme...

Posted by: Ann Lipton | Dec 9, 2020 9:12:31 AM

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