Anthem-Cigna Merger Case Study

Question 1:

Article 1: The Mergers

The agreement and plan of merger (the “Agreement”) sets out in detail the rights and obligations of the parties in respect of the proposed transaction. The first section of the Agreement, the Merger clause, sets out the structure of the transaction. The proposed merger between Anthem Incorporated (“Anthem”) and Cigna Corporation (“Cigna”) will be executed in two stages as a “reorganization” for tax reasons. Anthem Merger Sub Corporation (“Merger Sub”), a direct wholly owned subsidiary of Anthem, but effectively a shell company^[1], will merge with and into Cigna. Thereafter this combined corporation will merge with and into Anthem, with Anthem as the surviving corporation. The board of directors of Anthem will consist of 14 members, comprised of nine current members of Anthem’s board and David Cordoni of Cigna as well as four independent directors nominated by Cigna. The Merger clause further indicates the consideration that each holder of Cigna common stock will receive per share held and the manner in which option or consideration rights relating to Cigna common stock will be treated.

The main functions of the Merger provisions are therefore to:

• Set out the structure of the reorganization, including the governance structure;
• Stipulate the effect of the transaction on Cigna’s capital stock;
• Specify the timing of the transaction.

Article 2: Exchange of Certificates

The Exchange of Certificates section regulates the manner in which the consideration to each Cigna shareholder will be paid. An independent exchange agent nominated by Anthem will receive the bulk of the cash consideration from Anthem to be held in trust. The exchange agent will be tasked with managing and recording the exchange of each of Cigna’s common stock for a 0.5152 share of Anthem common stock and $103.40 in cash.

The main functions of the Exchange of Certificates provisions are therefore to:

• Manage the procedural/administrative process and ensure a smooth transfer of shareholding into the combined corporation;
• Keep a record of all shareholders;
• Investment the exchange fund.

Article 3: Representations and Warranties

Extensive representations and warranties are given by Cigna and Anthem and a limited number by the Merger Sub. The limited representations and warranties provided by Merger Sub indicate that the entity is merely a shell to facilitate the “reorganization” structure for tax purposes. The representations and warranties provided by both Cigna and Anthem relate to, among others, corporate standing and authority, adequacy of reporting, information supplied, compliance with all laws, taxes, internal controls and employee benefit plans. The reps and warranties provided by both buyer and seller largely mirror one another, provided that Anthem has warranted the enforceability of the Commitment Letter relating to the debt financing Anthem will obtain to fund the acquisition.^[2] The representations and warranties from the buyer to the seller and visa versa are largely reciprocal as Anthem is issuing shares as part of the purchase price. Cigna is therefore effectively making an investment in Anthem’s securities and requires similar assurances as Anthem.