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Cigna Health & Life Ins. Co. v. Audax Health Solutions, Inc.

Court of Chancery of Delaware

November 26, 2014

CIGNA HEALTH AND LIFE INSURANCE COMPANY, a Connecticut corporation, Plaintiff,
v.
AUDAX HEALTH SOLUTIONS, INC., a Delaware corporation, AUDAX HOLDINGS INC., a Delaware corporation, OPTUM SERVICES, INC., a Delaware corporation, and SHAREHOLDER REPRESENTATIVE SERVICES, LLC, a Colorado limited liability company, Defendants

Submitted July 29, 2014.

Page 1083

Editorial Note:

This opinion is subject to revision or withdrawal till it released for publication in the permanent law reports.

Michael P. Kelly, Esq., Daniel M. Silver, Esq., Benjamin A. Smyth, Esq., McCARTER & ENGLISH, LLP, Wilmington, Delaware; Gregory J. Hindy, Esq., McCARTER & ENGLISH, LLP, Newark, New Jersey; Attorneys for Plaintiff Cigna Health and Life Insurance Co.

R. Judson Scaggs, Jr., Esq., Kevin M. Coen, Esq., Frank R. Martin, Esq., Lindsay M. Kwoka, Esq., MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Attorneys for Defendants Audax Health Solutions, Inc., Audax Holdings, Inc., Optum Services, Inc., and Shareholder Representative Services, LLC.

OPINION

Page 1084

PARSONS, Vice Chancellor.

In this declaratory judgment action, the plaintiff has moved for judgment on the pleadings, arguing that certain provisions of a merger agreement are contrary to the Delaware General Corporation Law (" DGCL" ). Those provisions relate to a release of claims against the acquirer, an indemnification requirement, and the appointment of a stockholder representative. The questions presented are purely legal.

For the reasons that follow, I conclude that the release lacks any force because the buyer attempted to impose that obligation in a contract lacking consideration. I also conclude that the indemnification obligation, which is structured in a manner with few, if any, parallels in the precedent of this Court, violates 8 Del. C. § 251. As to the stockholder representative issue, however, I find that the plaintiff failed to brief that issue sufficiently to support its request for judgment as a matter of law.

Accordingly, the plaintiff's motion for judgment on the pleadings is granted in part and denied in part.

I. BACKGROUND[1]

A. The Parties

All the parties in this case are involved in the healthcare industry. Plaintiff, Cigna

Page 1085

Health and Life Insurance Co. (" Cigna" ), a Connecticut corporation, offers group health benefits to corporations and their employees. Cigna is part of the Cigna family of companies.

Defendant Optum Services, Inc. (" Optum" ), a Delaware corporation, offers group health benefits to corporations and their employees. Optum is part of the UnitedHealth Group family of companies, which directly compete with the Cigna companies.

Defendant Audax Health Solutions, Inc. (" Audax" or the " Company" ), a Delaware corporation, develops digital health improvement products. Defendant Audax Holdings, Inc. (" Holdings" and, together with Optum, " United" ) is a Delaware corporation that was formed as an acquisition vehicle. The dispute in this case involves Optum's acquisition by merger--via Holdings--of Audax. Before the merger, Cigna owned 23,105,430 shares of Audax's Series B Preferred Stock.

Defendant Shareholder Representative Services, LLC (" SRS" ), a Colorado limited liability company, specializes in distributing merger proceeds and administering escrow accounts. Under the terms of the merger, SRS was designated as the stockholders' representative.

Together, Optum, Audax, Holdings, and SRS comprise the " Defendants" in this case.

B. The Merger Agreement

A majority of the Audax board of directors approved the merger with Optum on February 10, 2014 (the " Merger" ). On or around February 14, 2014, the Merger was approved by written consent of 66.9% of Audax stockholders entitled to vote. Cigna did not vote in favor of the Merger. Defendants consummated the Merger on February 14 pursuant to 8 Del. C. § 251.

The written consents were given in the form of Support Agreements.[2] Cigna did not execute a Support Agreement. The Support Agreements included: (1) a release of any claims against United (the " Release Obligation" ); [3] (2) an agreement to be bound by the terms of the Merger Agreement, specifically including the provisions indemnifying United for any breaches of the representations and warranties (the " Indemnification Obligation" ); [4] and (3) an appointment of SRS as the Stockholder Representative (the " Stockholder Representative Obligation" ).[5] The Release Obligation, the Indemnification Obligation, and the Stockholder Representative Obligation (together, the " Obligations" ) form the crux of this dispute and are described in greater detail infra.

Despite the consummation of the Merger, Defendants have refused to pay Cigna its merger consideration. Cigna claims that it is owed slightly more than $46 million.[6] The terms of the Merger Agreement

Page 1086

condition receipt of the merger consideration on (1) surrender of shares and (2) execution of a Letter of Transmittal.[7] The Letter of Transmittal[8] is defined in the relevant part of the Merger Agreement as " a letter of transmittal in form and substance reasonably acceptable to Buyer, pursuant to which, among other things, the Effective Time Holders shall make standard representations and warranties [and] agree with the provisions hereof (including the indemnification provisions set forth in Article VII)." [9] The Letter of Transmittal requires that the Audax stockholder surrendering its shares agree to the Obligations.[10] Cigna's Complaint maintains that the Obligations violate the DGCL and, accordingly, Cigna has refused to execute the Letter of Transmittal. In response, Defendants have refused to pay Cigna its merger consideration.

C. The Obligations

The Indemnification Obligation makes the former Audax stockholders liable to United, up to the pro rata amount of merger consideration they received, for breaches of certain of the Company's representations and warranties.[11] The representations and warranties survive the Closing of the Merger and most of them terminate eighteen months after the Closing Date. Certain of the representations and warranties, however, survive longer: the Select IP Matters remain in effect for thirty-six months after the Closing and, more importantly for purposes of Cigna's motion, the Seller Fundamental Representations and Warranties,[12] along with the Indemnification Obligation, survive indefinitely.[13]

The Stockholder Representative Obligation requires the appointment of SRS to act as the stockholders' representative after the consummation of the Merger.[14] In that capacity, SRS's actions are binding upon the former stockholders. SRS is empowered to take all actions specified or contemplated by the Merger Agreement including, as pertinent here, defending and settling any indemnity claims brought by United.[15] According to Cigna, this condition improperly deprives it of the ability to defend against any indemnity claims.

Unlike the foregoing obligations, the Release Obligation does not appear in the Merger Agreement. In the case of Cigna, the Release Obligation appears only in the Letter of Transmittal and broadly requires Cigna to release any claims against United, as well as its affiliates, employees, and agents. Subject to a few exceptions, such as liabilities specifically contemplated by the Merger Agreement or unrelated contracts the releasing party may have with United, any stockholder signing the Letter of Transmittal " irrevocably and unconditionally releases, acquits and forever discharges" the Releasees from:

Page 1087

any and all Losses, debts or rights, whether fixed or contingent, known or unknown, matured or unmatured, arising out of, relating to, or in any manner connected with any facts, events or circumstances, or any actions taken, at or prior to the consummation of the transactions contemplated by the Merger Agreement that any Releasor ever had or now has against the Releasees, including any right, title and interest in and to the Shares.[16]

D. Procedural History

Cigna filed its initial complaint on February 28, 2014, together with a motion to expedite and a motion for a status quo order. On March 19, the Court granted a stipulated order that gave Cigna ten days following resolution of this action to withdraw its appraisal demand and instead accept the merger consideration. Cigna filed the currently operative Complaint on April 1, 2014. Defendants answered on April 24 and Cigna promptly moved for judgment on the pleadings. Briefing on Cigna's motion concluded July ...


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