United States: Merger Consideration Explained – Section 251 Of The DGCL

Last Updated: December 1 2014
Article by Carl D. Neff

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.


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 received, for breaches of certain of the company's representations and warranties.  Many of the warranties survived the closing of the merger, with most terminating 18 months after the closing date.  However certain warranties survive longer, up to 36 months post-closing, and the indemnification agreement survives indefinitely.


Cigna argued that the obligations imposed by the Acquirer ran afoul of 8 Del. C. § 251, which Cigna interprets as requiring the merger consideration be paid upon consummation of the Merger and cancellation of shares. The additional obligations, Cigna contended, are barred by the language of Section 251.  In addition, Cigna argued that the indemnification agreement violated the certificate of incorporation of Audax in that it made stockholders liable for corporate debts.  Generally, stockholders are not personally liable for a corporation's debts absent a piercing of the corporate veil.

The Court agreed with Cigna and found that the release to the Acquirer was unenforceable because it was a term imposed by the buyer in a contract lacking consideration.  Under the express terms of Section 251 of the DGCL, the stockholders must only cancel their shares to receive merger consideration, not provide additional consideration such as indemnification to the buyer.  The Court relied upon Section 251(b)(5) which allows merger consideration to consist of "cash, property, rights or securities of any other corporation or entity." Section 251(b). Under this statutory requirement, indemnification obligations could not be included as consideration.

In addition, the Court found that the indemnification obligation, to the extent it is not subject to any monetary cap or limit and is not limited in temporal duration, violates 8 Del. C. § 251 and is void and unenforceable against Cigna.

Finally, the Court rejected Defendants' "bundle of rights" theory, whereby the rights to receive cash for any cancelled shares is subject to the other provisions of the Merger Agreement.  The Court found this argument to be "on shaky ground", given that the "rights" considered under the DGCL in the context of a merger setting appear in Section 157 which appears in a list with terms like cash, property, and securities, but not obligations imposed upon stockholders.  Moreover, the Court found  convincing Black's Law Dictionary's definition of "rights" as generally benefits, not as obligations.


This decision makes clear that an acquiring party to a merger under Section 251 of the DGCL cannot condition payment for stock in the corporation upon receipt of a release and indemnification obligations by stockholders of the company.  Of note, as discussed in the opinion, if an acquiring company wants to contractually impose obligations upon stockholders, a merger is not the ideal mechanism; instead, if possible the acquiring company should proceed through a stock purchase agreement to obtain such additional obligations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Carl D. Neff
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