February 28, 2020

Letters of Transmittal: What Do They Look Like 5 Years After Cigna v. Audax?

The Delaware Chancery Court’s 2014 decision in Cigna v. Audax, (Del. Ch.; 11/14) was anticipated to result in big changes to the way dealmakers approached efforts to bind no-signatory shareholders to negotiated deal terms. Before the Cigna decision, many buyers just threw releases and joinder language into letters of transmittal (LOTs) that the seller’s shareholders had to sign in order to get the consideration to which they were entitled under the merger agreement.

Cigna called that practice into question, and this SRS Acquiom memo takes a look at how market practice has changed in the 5 years since the decision.  The memo says that LOTs have changed, but maybe not as much as people expected. Here’s the intro:

In 2014, Cigna v. Audax raised at least two very important post-closing issues for M&A deals: (1) how to bind shareholders to post-merger obligations2 and (2) enforceability of provisions in a letter of transmittal. To better understand what effects the latter has had on the M&A market, SRS Acquiom analyzed over 40 merger agreements from the first half of 2019 to determine how deal parties are utilizing LOTs subject to Delaware law post-Cigna.

Cigna left a number of questions regarding how best to bind shareholders to obligations important to the buyer and what options merger parties may have with respect to a shareholder that asserts that it is entitled to the consideration contemplated in the merger agreement without having to agree to any such obligations.

This article examines how frequently LOTs go beyond the basics and include provisions like general releases, withholding of funds such as holdbacks, escrows and expense funds, and dispute resolution terms. It also looks at whether there might be issues with enforceability of such provisions. Our analysis revealed that LOTs continue to include significant blocks of text regarding a shareholder’s obligations in exchange for the merger consideration that it is likely already entitled to receive according to Cigna; these obligations typically are also included in the provisions of the merger agreement, as would be expected after Cigna, a significant amount of the time but not always.

The memo says that the surest way to bind all shareholders to the terms of a merger is to have all them sign the agreement & ensure that the agreement contains all provisions to which the parties want them bound.  Including language in the agreement stating that the receipt of the merger consideration is contingent upon signing a LOT with substantive terms beyond the mechanics of surrendering the shares for payment is a less certain alternative.

The memo says that buyers opting for this latter approach should follow the Cigna Court’s advice and “include the provisions ‘clearly and expressly’ in the merger agreement approved by the shareholders or offer additional consideration for any LOT provisions outside the scope of the merger agreement.”

John Jenkins