Two cases before the Delaware Court of Chancery couldn’t be more different, but together they will clarify when and why parties to a failed merger are entitled to a termination fee.
In Vintage Rodeo v. Rent-A-Center, the litigants agree on all important facts except whether the target, Rent-A-Center—having terminated the merger agreement without a breach by purchaser—is entitled to the contractually provided termination fee.
By contrast, in Anthem v. Cigna, the parties agree on neither the facts nor the law. They have repeatedly sparred since signing the merger agreement—each asserting entitlement to billions of dollars in damages due to the other’s behavior—and Cigna demands a $1.85 billion reverse termination fee to boot.
In Anthem v. Cigna, the merger agreement’s clear antitrust language makes it unlikely that Chancellor J. Travis Laster will rule that Cigna caused the transaction to fail antitrust clearance. We predict that Cigna will be awarded the $1.85 billion termination fee. Both sides claimed damages against the other, but, given the mutual bad behavior, we expect the court to decide that neither party is entitled to damages, other than the termination fee.
In Vintage Rodeo v. Rent-A-Center, Chancellor Sam Glasscock III signaled his misgivings about the size and equities of the terminating party’s award of an “enormous” termination fee. Rent-A-Center’s strong brief, which painted a picture of the equities and underscored the legal shortcomings of Vintage’s case, may win the day. Glasscock would be more comfortable with a smaller number, but based on the airtight contract and the allocated risk, we predict that Rent-A-Center will be awarded the contracted-for $125 million termination fee.
Both cases are factually complex, so we highlight facts only as necessary to illustrate lessons we expect from the pending decisions.
Anthem v. Cigna
As the second- and third-largest medical health insurance carriers, Anthem and Cigna understood that antitrust clearance would be a challenge. The merger agreement contained a mutual hell-or-high-water closing obligation, but provided that Anthem would owe the termination fee unless a material breach by Cigna caused the transaction to fail antitrust clearance.
The Department of Justice blocked the proposed merger on anti-competitive grounds, winning at trial and on appeal.
Anthem blamed Cigna and its CEO David Cordani for the loss, alleging—among many allegations of ugly behavior—that Cordani had sabotaged the deal by waging a stealth publicity campaign against Anthem and not supporting Anthem’s antitrust theories in his testimony.
The district court cited Cordani’s testimony in its opinion blocking the merger; however, the D.C. Circuit Court held that Anthem failed to establish any defenses to the antitrust claim, specifically noting that adverse publicity was immaterial to its decision.
Cigna’s brief masterfully focused on Anthem’s failed antitrust strategy and cited Anthem’s formidable burden of proof requiring Anthem to show that but-for Cigna’s failure to cooperate, the merger would have been cleared.
The D.C. Circuit Court ruled that the question was not even close, noting that no merger party had ever successfully challenged the DOJ by relying on a theory of merger efficiencies. The merger agreement obligated Anthem to pay the termination fee to Cigna if the merger failed antitrust clearance, which is what occurred.
Further, both parties asserted claims for damages whereby questions arise: Does Cigna’s commitment to undertake commercially reasonable efforts to support the merger require a party and its officers to sign on to legal theories it believes are ill advised and testify to matters it believes are untrue? If not, does a hell-or-high-water provision change the answer?
Cordani was unquestionably difficult to work with, but Anthem’s most strident complaints stem from what appears to be Cigna’s principled disagreement with Anthem’s strategy and evidence. For example, one of Anthem’s central contentions was that Anthem was the innovator while Cigna was simply another market participant—an argument that simultaneously undermined the rationale for the deal and denigrated its merger partner’s business.
Vintage Rodeo v. Rent-A-Center
After a year of pursuit, Vintage Capital—a private equity fund that owned Buddy’s Home Furnishings, a nearly-300-store rent-to-own chain—persuaded Rent-A-Center to accept its $15 per-share bid, a 47 percent premium to Rent-A-Center’s pre-deal price.
Since Buddy’s and Rent-A-Center are competitors with geographic overlap, they anticipated antitrust clearance negotiations with the Federal Trade Commission.
Six months after signing the merger agreement, as they jointly worked with the FTC, Rent-A-Center unexpectedly terminated the merger on expiration of its term. Vintage had neglected to exercise its unilateral right to extend the term under the merger agreement, so it sued to block the termination.
The court’s decision methodically discarded Vintage’s excuses, inferring that Vintage simply forgot to extend as required; however, the court was uncomfortable with the unusually large termination fee in its decision and directed the parties to brief the matter. Vintage’s post-trial brief rehashed its pretrial arguments to urge the court to rewrite the merger agreement and asserted that, viewed retrospectively, a fee equal to 15.75 percent of the deal’s equity value is an unenforceable penalty.
Rent-A-Center stuck to the facts in its briefing, demonstrating that Vintage’s ability to close the merger was uncertain and the termination fee was a risk that Vintage and its lender-guarantor B. Riley Financial understood and assumed. Rent-A-Center underscored Vintage’s failure to prove the necessary legal elements and undermined Vintage’s unsupported assertions that the merger would have closed but-for Rent-A-Center’s termination.
Vintage faced a funding gap even before factoring in the store divestures that the FTC certainly would have required before approving the deal—the types of risk against which the termination fee was to protect Rent-A-Center.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Kristen Baracy, counsel in the Los Angeles office of Tucker Ellis LLP, has represented both privately held and public companies in connection with offerings of securities, compliance with federal and state securities laws, mergers and acquisitions, and general corporate governance matters.
Tod Northman, a partner in the Cleveland office of Tucker Ellis LLP, has practiced transactional law for 25 years. In addition to mergers and acquisitions, his practice focuses on aviation and emerging technology, including autonomous vehicles.