Notorious RBEs: Flouting M&A 'Reasonable Best Efforts' Provisions Can Cost Companies Billions  

National Security vs. Investment: Are we striking the right balance?

Trial started this week in Delaware Chancery Court in a colossal dispute that followed the thunderous collapse of what would have been a $48.9 billion merger of health insurance titans Anthem Inc. and Cigna Corp. Each insurer accuses the other of tanking the deal. As with many legal disputes, the case rests largely on the definition of a single phrase. In this instance it is three words: "reasonable best efforts." And, as with many legal questions, the answer is "it depends."

Cigna claims Anthem was required under the merger agreement to lead the regulatory approval process and to use its "reasonable best efforts” to secure that approval. Because Anthem “willfully breached those obligations,” Cigna asserts, the transaction was not approved. Anthem says Cigna breached its duties of the merger agreement as well, and "successfully sabotaged" the transaction. Specifically, Anthem says Cigna refused to provide the DOJ with data supporting the merger's value to customers. As reported by Bloomberg, Anthem says one individual helped turn the deal sour. Cigna's CEO reportedly was not happy with what his new position would have been at the new company.

MoginRubin's Jodie M. Williams wrote in a 2017 issue of the ABA Antitrust Section's Mergers & Acquisitions Committee publication The Threshold that the RBE provision requires parties to act in "good faith in the context of the contract" and to do things that are "objectively reasonable" to support the objectives of the contract. "In other words," she said, "they require the parties to act in good faith to close a deal." She said that while RBEs do not require a party to make "every conceivable effort," they cannot sit on their hands and do nothing either.

Lack of Clarity, Consistency

"Although a seemingly intuitive provision, how far a party must go to comply with an RBE has not been conclusively defined," she wrote, adding that the courts haven't clarified things much either. To make it more complicated, interpretations vary by state. With this lack of clarity and consistency RBEs can be a “vehicle to haul the parties back into the courtroom following a failed merger attempt."

Which brings us to Delaware with Anthem and Cigna. Among other things, Anthem says Cigna obstructed Anthem's efforts to defend DOJ's merger review; refused to give Anthem information to assess divestiture proposals; refused to sign non-disclosure agreements to share information and facilitate a possible settlement with the DOJ, and failed to help integrate the companies. Anthem also claims Cigna manufactured a false record of breaches by Anthem to undermine an efficiency defense at trial.

"It is important to note the types of behaviors Anthem claims," Williams wrote. "Failing to assist efforts to integrate can be viewed as Anthem's efforts to close the deal prior to obtaining antitrust clearance, also known as gun-jumping. Alleging that Cigna went to such great lengths as to falsify a record suggests that Cigna never believed the deal would survive antitrust review, and that Anthem in reality was trying to acquire its top competitor and subsequently raise prices."

So Sue Me

In another case last year, RBE obligations were implicated when a $3.9 billion merger of Tribune Media Company and Sinclair Broadcast Group, Inc. cratered. As posted by MoginRubin on Aug. 15, 2018, the deal collapsed when, instead of good faith behavior, the Tribune cited Sinclair's "bad behavior," such as misrepresenting or omitting materials facts to the FCC (the relevant regulatory authority) and being "overly aggressive" with the DOJ, going so far as taunting the government to sue.

"Sinclair may have thought it was being a zealous advocate at the time.  But its conduct has subjected the company to a $1 billion lawsuit from Tribune," according to MoginRubin. "The claim:  breach of contract for lack of best efforts.  Tribune contends that Sinclair’s 'belligerent,' 'aggressive'” and 'high risk' tactics betrayed its commitment to use its best efforts to obtain regulatory approval."

Williams wrote in The Threshold that attorneys and companies should be aware that such "seemingly boilerplate merger provisions can result in significant losses" to a company.

MoginRubin’s Jennifer M. Oliver has written about other types of contractual provisions that can protect companies (or be used as a tool) in these types of situations. Read her recent post. The firm's attorneys have extensive experience in M&A-related diligence, counseling and litigation.

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