By Mark Tarallo
A recent opinion issued by the Delaware Chancery Court may have a significant impact on the way acquisition transactions are structured. The opinion considers a merger between a company called Audax Health Solutions (Target) and UnitedHealth/Optum (Buyer). Cigna Insurance was a large shareholder of Target. The merger between Target and Buyer was approved by written consent of 66.9% of the Target shareholders, and the certificates of Merger were filed, consummating the merger. Cigna did not vote in favor of the merger. The written consents incorporated a “Support Agreement,” pursuant to which the shareholders of Target granted a release and agreed to certain indemnity obligations. Some of the indemnity obligations included an indefinite indemnity period with respect to some of the fundamental representations in the merger agreement between Buyer and Target.
After the consummation of the merger, Cigna requested in writing that it be paid its merger consideration. Buyer refused, indicating that Cigna would be paid only upon executing and submitting the Written Consent/Support Agreement to Buyer. Cigna refused to sign the Written Consent/Support Agreement and sued Buyer. After hearing arguments from both Cigna and Buyer, the court issued its decision. The two most significant components of the court’s ruling are as follows:
- Once the merger has been consummated, shareholders are entitled to their merger consideration, without the requirement of having to execute and deliver any sort of consent, waiver, Support Agreement, etc. The court specifically ruled that the release is ineffective (so Cigna has the right to receive the merger consideration it is owed AND sue for some sort of breach that resulted in a reduced price) because no additional consideration is being offered for it. The court ruled that with respect to a shareholder who has not voted in favor of the merger, once the merger is consummated all other obligations are extinguished and the shareholder is entitled to be paid the merger consideration without any further action by such shareholder.
- Because some of the indemnification obligations are indefinite as to time and amount, the court struck them down, taking the position that they violate Section 251 of the DGCL, since the shareholders cannot know with any degree of certainty how much of the merger consideration they will ultimately retain.
The name of the case is Cigna Insurance v. Audax Health Solutions, Inc., and the full text can be found here .