March 10, 2017
Termination Fees: Lessons From Anthem-Cigna Suit
After a DC federal court blocked the proposed merger between health insurance giants Cigna & Anthem, Cigna gave notice of termination of the merger agreement and filed a declaratory judgment action in the Delaware Chancery Court seeking a determination that its termination of the deal was lawful. Cigna is also seeking payment of a $1.85 billion reverse termination fee and $13 billion in damages to its stockholders resulting from Anthem’s alleged breaches of the merger agreement.
This Gibson Dunn memo discusses the case and some of lessons about termination fees & their interplay with contractual termination rights that can already be drawn from it. Here are some of the memo’s conclusions:
– Exceptions to a termination fee for “willful breach” can easily lead to litigation, regardless of how “willful breach” is defined. This diminishes the utility of the termination fee, which is often included to minimize the possibility of litigation.
– If a willful breach exception is included, it is a good idea to include a specific definition of willful breach.
– If a willful breach exception is included, consider adding provisions that encourage the parties to take the termination fee, rather than suing for damages. For example, consider providing that (a) a party is not entitled to recover both the termination fee and also damages on top of the fee, (b) if a party sues for damages, that party cannot later recover the termination fee if its lawsuit is unsuccessful, and (c) the loser pays the winner’s legal fees in any suit for damages.
– Provisions that condition a party’s right to terminate on that party’s compliance with its covenants can inject significant uncertainty as to whether or not a party actually has the right to terminate. Thus, consider whether it is preferable to allow the parties to terminate (even if in breach), and then sue each other for damages post termination. Such a construct would not avoid litigation, but would avoid the uncertainty as to whether or not the parties were still obligated to complete the transaction.
– John Jenkins