Merger Consideration Explained – Section 251 Of The DGCL

In the recent decision of Cigna Health & Life Ins. Co. v. Audax Health Solutions, Inc., et al., C.A. No. 9405-VCP (Del. Ch. Nov. 26, 2014), the Court of Chancery considered whether merger consideration under 8 Del. C. § 251 can include additional obligations imposed upon stockholders to the company being acquired. This decision is a recommended read for any party to a corporate merger under Delaware law.

The key takeaway is that in the context of a statutory merger of a Delaware corporation under Section 251 of the Delaware General Corporation Law ("DGCL"), an acquiring company cannot condition payment for shares through the imposition of additional terms upon stockholders—such as indemnification obligations and releases—given that such obligations are not contemplated under the express terms of Section 251.

Background

Plaintiff Cigna Health & Life Ins. Co. ("Cigna") moved for judgment on the pleadings in this declaratory judgment action, asserting that certain provisions of a merger agreement are contrary to the DGCL. Those provisions relate to a release of claims against the acquiring company, an indemnification requirement, and the appointment of a stockholder representative.

The dispute in this case involves Defendant Optum's acquisition by merger, via Defendant Audax Holdings, Inc. (the "Acquirer") of Defendant Audax Health Solutions, Inc. Before the merger, Cigna owned 23,105,430 shares of Audax's Series B Preferred Stock.

A majority of the Audax board of directors approved the merger with Optum on February 10, 2014 (the "Merger"). On 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. Cigna did not execute a Support Agreement. The Support Agreements included: (1) a release of any claims against the Acquirer (the "Release Obligation"); (2) an agreement to be bound by the terms of the Merger Agreement, specifically including the provisions indemnifying Acquirer for any breaches of the representations and warranties (the "Indemnification Obligation"); and (3) an appointment of SRS as the Stockholder Representative (the "Stockholder Representative Obligation").

The indemnification makes the former Audax stockholders liable to the Acquirer, up to the pro-rata amount of merger consideration they...