Cigna Health and Life Insurance Company v. Audax Health Solutions, Inc.
107 A.3d 1082
| Del. Ch. | 2014Background
- Audax Health Solutions merged into an acquisition vehicle (Holdings)/Optum under a Merger Agreement approved by stockholder written consents; Cigna, a preferred holder, did not consent and holds ~$46M in merger consideration currently withheld.
- Letters of Transmittal, required to claim merger consideration, demanded that surrendering stockholders agree to three obligations: a broad release of United (Release Obligation), indemnification to United for breaches of Audax reps and warranties (Indemnification Obligation), and appointment of Shareholder Representative Services (SRS) as stockholder representative (Stockholder Representative Obligation).
- The Release appeared only in the Letter of Transmittal; the Indemnification and SRS terms were in the Merger Agreement. Some reps/warranties survived indefinitely and the Indemnification was uncapped and potentially indefinite.
- Cigna refused to sign the Letter of Transmittal and sued for declaratory relief, moving for judgment on the pleadings that the Obligations violate the DGCL and Audax’s charter.
- The court accepted the undisputed facts and decided purely legal questions under 8 Del. C. § 251 and § 102(b)(6).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Enforceability of Release in Letter of Transmittal | Release is unsupported by consideration because merger payment was a pre-existing duty under §251 | Release is part of the overall merger consideration and/or reasonably required by Buyer via Letter of Transmittal | Release unenforceable — Letter lacked separate consideration (Roam‑Tel principle applies) |
| Validity of Indemnification Obligation (uncapped, indefinite clawback) under §251 | Indemnification makes value of merger consideration unknowable and cannot be forced on nonconsenting stockholders; violates §251(b)(5) | Economically equivalent to an escrow/price adjustment and permissible as part of overall consideration under §251 | Indemnification provision that is uncapped and indefinite violates §251(b)(5) and is void as to Cigna; time‑/cap‑limited portions may stand |
| Stockholder Representative Appointment (SRS) | (Tangential) SRS is tied to Indemnification and impairs stockholder defense rights | SRS is a customary mechanism to administer claims and bind former stockholders | Court denied judgment on the pleadings as to this obligation — briefing inadequate to decide enforceability |
| Claim that Indemnification improperly imposes shareholder liability under §102(b)(6) and charter | Indemnification effectively makes stockholders liable for corporate debts in absence of a charter provision authorizing such liability | §251 is the more specific statute governing mergers; indemnification is a price‑adjustment issue under §251 | Court declined to base decision on §102(b)(6); broader §251 ruling made §102(b)(6) analysis unnecessary |
Key Cases Cited
- Aveta Inc. v. Cavallieri, 23 A.3d 157 (Del. Ch. 2010) (interpreting §251(b) and upholding certain post‑closing price‑adjustment procedures)
- Nagy v. Bistricer, 770 A.2d 43 (Del. Ch. 2000) (condemning arrangements that leave minority stockholders without determinable merger consideration or meaningful alternative to appraisal)
- Oceanport Indus., Inc. v. Wilm. Stevedores, Inc., 636 A.2d 892 (Del. 1994) (statutory‑interpretation principle that specific provisions govern over general ones)
- Doroshow v. Nanticoke Mem. Hosp., Inc., 36 A.3d 336 (Del. 2012) (applying reasonableness in statutory interpretation to avoid absurd results)