Does Cigna’s suit against Anthem signal the end of the billion-dollar breakup fee?

February 22, 2017

Billion-dollar termination fees could be on their way out as corporate dealmakers change merger negotiation tactics based on recent deal disasters, evidenced by a $15 billion lawsuit filed by health insurer Cigna Corp. against jilted suitor Anthem Inc.

Cigna filed the suit in Delaware state court Feb. 14, about a week after a federal judge blocked the $54 billion transaction on anti-competition grounds. United States et al. v. Anthem Inc. et al., No. 16-cv-1493, 2017 WL 527923 (D.D.C. Feb. 8, 2017). Anthem is appealing the decision.

Cigna’s lawsuit seeks payment by Anthem of the nearly $2 billion “reverse termination fee” the companies previously agreed upon in their merger agreement, according to a Feb. 14 securities filing.

It also seeks at least $13 billion in additional damages, including “lost premium value to Cigna’s shareholders caused by Anthem’s willful breaches of the merger agreement,” the filing said.

Anthem so far has refused to accept the deal’s demise and has filed its own lawsuit against Cigna seeking specific performance of the agreement, according to a Feb. 15 securities filing. Anthem Inc. Form 8-K, 2017 WL 00590846 (Feb. 15, 2017).

The Delaware Chancery Court has already issued an order in that action temporarily restraining Cigna from terminating the agreement, Reuters reported Feb. 15.

Compensation or windfall?

Unlike termination fees, which typically are paid by a target company that backs out of a deal, reverse termination fees are payable by the prospective purchaser, often after a deal fails to obtain governmental approval or adequate financing.

Typically, reverse termination fees range between 3 and 5 percent of a transaction’s total value and are intended to compensate the target for lost opportunity costs and expenses incurred in anticipation of the proposed transaction.

In the case of a multibillion-dollar transaction, even that relatively small percentage can result in a windfall to the target, and a gaping hole in the suitor’s balance sheet.

For example, in another recently stymied health insurer deal, Aetna Inc. agreed to pay Humana Inc. a $1 billion breakup fee after a court blocked their $34 billion merger on anti-competition grounds. Aetna Inc. Form 8-K, 2017 WL 00583212 (Feb. 14, 2017).

Humana intends to apply the payment toward the repurchase of at least $2 billion worth of shares in 2017 and increased dividends, according to Reuters.

Oil field service provider Baker Hughes Inc. also announced plans to boost its bottom line after its intended acquisition by Halliburton Co. was terminated last year. In a document outlining the company’s “path for the future,” Baker Hughes said it would use Halliburton’s $3.5 billion termination fee to buy back $1.5 billion of common stock and repay $1 billion in debt.

Corporate executives undoubtedly will take note of these high-profile terminations when negotiating breakup fees in future transactions.

Cigna Corp. Form 8-K, 2017 WL 00580453 (Feb. 14. 2015).