The call was coming from inside the house. Or at least the Cigna C-suite. In May 2016, The Wall Street Journal wrote an explosive story about a brewing but, up until then, private fight between multi billion dollar health insurers, Anthem and Cigna. Anthem had announced in 2015 that it would acquire Cigna in a $53bn cash-and-stock deal. Naturally, the merger had attracted the attention of the Department of Justice’s antitrust division. And, under ordinary circumstances when facing a hostile regulator, both buyer and seller would do all they could to please the powers that be.

Yet, according to the letters seen by the WSJ, Cigna had soured on the tie-up. In one message the Cigna general counsel, Nicole Jones, tartly wrote to her counterpart at Anthem, “Suffice it to say that we disagree with just about every characterisation and assertion that you make with respect to the matters raised in your letters — other than your suggestion not to continue a correspondence”.

After the article, Anthem had hoped Cigna would agree to a joint statement that would convey a message of unity to counteract the simmering bad blood. Cigna, however, refused. Anthem, convinced that it was Cigna which had leaked the letters, then asked it to investigate.

Jones, the top Cigna lawyer, asked her deputy to launch a probe. The investigation was to examine the emails of executives in hopes of finding the loose-lipped party. Jones, however, failed to mention one crucial detail to her colleague: she was behind the leak.

The Cigna/Anthem merger never closed. The Department of Justice convinced a federal judge, and then an appellate court, to block the deal on competition grounds in early 2017. The federal appeals court affirmed that ruling and both sides terminated the merger agreement. But the fireworks were only beginning.

Cut to two years later, and both parties went to court in Delaware accusing the other of breaching their merger agreement with each demanding billions in damages and/or termination fees. A lengthy trial was conducted in 2019. And last year the Delaware Court of Chancery issued its ruling, a record-setting 319 page opinion from Vice Chancellor Travis Laster.

In what should have been a straightforward set of events for Cigna — Anthem would owe a $1.85bn break-up fee to Cigna if the deal failed on regulatory grounds — has instead turned into a monumental disaster. The Delaware court let Anthem off the hook for the termination fee. And earlier this year, the Delaware Supreme Court unanimously affirmed the ruling.

The dense nature of the legal ruling however, belies a salacious tale of corporate treachery. Vice Chancellor Laster scorched Cigna management along with its high-priced law firm, Wachtell Lipton, and its public relations adviser, Teneo, for what he described as a “covert communications campaign” to doom the transaction. As it turns out, despite Cigna’s contractual obligation to put forth its “best efforts” to get the deal done, it and its advisers were sabotaging the deal.

The effort involved a dirty tricks campaign, including a search for an unflattering photo and media leaks to the likes of the WSJ, all in a concerted effort to undermine Anthem and, ultimately, to save the jobs of Cigna’s top brass.

As Laster said in his opinion, “to state the obvious Cigna had a contractual obligation not to run a covert communication campaign against the merger”. Now Cigna is missing a near $2bn termination fee that it and its shareholders had already chalked up. Its executives and advisers have been humiliated in open court. And to make matters worse, its legal problems related to the failed deal are not even over.

The court revelations have also added to woes of PR firm Teneo, which has been hobbled by the unceremonious departure of its co-founder, Declan Kelly.

In January 2016, six months after the Cigna/ Anthem deal was announced, senior executives met to discuss integrating the two companies. Since 45 per cent of the consideration was in stock, Cigna was to own a third of the new company and get a handful of board seats. The expectation was that the Cigna chief executive, David Cordani, would join Anthem and, eventually, replace then Anthem chief executive Joe Swedish. In this meeting however, Swedish passed out papers which gave the impression that Cordani would be sidelined. Cordani was upset enough to leave the room because they “had nothing else to talk about.”

Despite the unchanged terms for shareholders, Cigna executives felt like they were the victim of a bait-and-switch. In their view, Anthem was now executing what was described as a “hostile takeover” which was not only inconsistent with the deal but where Anthem was also fumbling the regulatory approval process.

Cigna had plenty of expensive help on the deal including from Morgan Stanley, Cravath, Swaine & Moore and Cadwalader. But that January meeting proved to be a turning point. Cigna decided it needed special forces. It hired Wachtell Lipton, the ace law firm.

(As an aside at one point in the 2019 trial the Cigna general counsel Nicole Jones “testified that she did not know that Wachtell Lipton had experience with hostile deals”. The firm made its pre-eminent reputation in takeover defence after it invented the shareholder rights plan better known as the “poison pill” in the 1980s. Laster went on to rule that, on this point, Jones’ “testimony was not credible”.)

The retention of additional advisers was authorised by the Cigna board but Wachtell’s hiring would become a closely guarded secret among the handful of Cigna executives who would cryptically refer to the law firm as “the Tea company” (eg. Lipton Iced Tea).

Wachtell’s advice would, however, extend beyond corporate law. Cigna went on to hire the high-powered public relations firm, Teneo, on Wachtell’s recommendation according to Laster’s decision. Teneo and Wachtell had worked together in another case where a client wanted to wriggle their way out of a deal. (The court ruling did not name that transaction but it was the similarly troubled 2017 Abbott/ Alere merger, according to a person familiar with the matter.)

As Laster wrote, Teneo is “skilled in the darker arts of influencing the media and public discourse”. Teneo even said on its website that a “well-run communications strategy can dramatically change the outcome of high-stakes litigation . .. ” (our emphasis. After this line came up in the trial, the firm quickly softened that language, according to the ruling).

So what exactly were Wachtell and Teneo hired to do? The Cigna management claimed in depositions and testimony that the two were to help close the deal something Laster later concluded was “inaccurate” and “misleading”. In fact, they were hired to do the exact opposite, the court decided.

To potentially mitigate any legal messiness later, Wachtell became the party to hire Teneo so there’d be an attorney-client privilege over the PR firm’s work. (This ploy failed as Anthem sued to compel discovery. Cigna eventually relented and turned over a pile of unflattering documents.)

Throughout 2016, as Cigna became increasingly convinced it wanted out, Teneo launched a stealth influence campaign, in particular to “ . . . document flaws in Anthem’s approach to the regulatory process so that Cigna later could argue that Anthem’s incompetence — rather than Cigna’s opposition — led to the deal’s demise.”

In early May 2016 the WSJ’s Liz Hoffman was speaking with an outside Cigna lawyer about another transaction. Hoffman mentioned that she had heard Cigna was “dragging its feet” and the relationship between the Cigna and Anthem CEO had frayed. (A few months earlier, Cigna had worried that Anthem itself would begin to leak unfavourable details about Cigna’s attitude towards the deal.)

Cigna’s official public stance wouldn’t give anything away. A Teneo executive, Stephen Cohen, had developed a “leak strategy”, as the court described it, where Cigna would officially remain positive on the deal. However, at the same time, it would feed reporters the message that Anthem was fumbling the process to close and integrate the deal, and that Cigna would be in fine shape as a standalone company should the merger collapse.

On May 23 2016, the WSJ published its story with the damning excerpts from the letters. As the story landed, Anthem asked Cigna to sign on a joint statement supporting the deal. Cigna refused.

In the 2019 Delaware trial, Cigna awkwardly tried to deny that it was not behind the leak to the WSJ. Nicole Jones, the Cigna general counsel, had given the letters to a Teneo underling. That underling then gave the letters to the Teneo’s Stephen Cohen, who then passed them along to the WSJ.

This charade allowed Jones to plausibly deny knowledge of how the letters ended up with the WSJ. Laster wrote, “‘[b]ased on the contemporaneous documents, it is difficult to credit Jones’s denials as anything other than the product as wilful blindness . . . Cohen [the Teneo executive] understood what he was supposed to do.”

A consultant from Bain & Co, a firm also secretly working with Cigna, wrote in an email after the WSJ story came out, “They [Cigna] must be leaking this shit. Yikes.”

The follow-up investigation into the leak was conducted by Cigna lawyer John Bogan. Yet he was never told by Nicole Jones, his boss, about the Teneo and Wachtell’s involvement. Laster would note in his opinion, “ . . . Jones admitted at trial, she had material information, central to Bogan’s investigation, and kept it to herself”. Later writing that Cigna, in the discovery process had, been “materially misleading and incomplete”.

After the WSJ story ran, Cigna accelerated its efforts to criticise Anthem and its CEO. Cigna used Teneo and Wachtell to undermine the deal once it got to the federal antitrust trial, in particular having the two research and then disseminate information to the media about how Anthem had been engaged in anti-competitive behaviour before.

Laster said that Teneo “had no factual basis” for the arguments it was sharing on Anthem’s separate regulatory litigation problems and was simply collecting text from legal pleadings. “Teneo provided reporters with draft language, quotations, and other material that reflected poorly on Anthem for the reporters” while Wachtell assisted Teneo’s Cohen by “assembling information that he could provide to reporters . . . Wachtell Lipton also connected Cohen with reporters”.

In another instance, Teneo led a search for a back issue of Cigar Aficionado magazine where Anthem chief executive Swedish appeared on the cover smoking a stogy. Cigna and Teneo believed that when the picture was shared it would “hurt his credibility as a healthcare CEO”, as Laster wrote.

In 2017, the US District Court blocked the deal on competition grounds, a decision later upheld by the appeals court. But Teneo was not done. As Anthem tried to ingratiate itself to the new Trump administration, “Teneo’s CEO instructed Cohen to work with contacts at a lobbying firm to ‘kill this immediately’”. (Teneo’s CEO is firm co-founder Declan Kelly who, according to the ruling, was in contact with Cigna’s chief, David Cordani, during the assignment.)

Both Anthem and Cigna would seek to terminate the merger agreement which led to the Delaware litigation over who was responsible for the deal’s demise. Laster ruled that Cigna, not Anthem, was in the wrong. Laster noted that Anthem had also played hardball — it too had its own set of pricey advisers — but the difference was that it had lived up to its obligations to help close the deal.

However, Laster determined that the DoJ would likely have been able to block the deal even if Cigna had not tried to sabotage it and as such Cigna then could not be held liable. Laster wrote, “[e]ach party must bear the losses it suffered as a result of their star-crossed venture”.

The antics of Cigna and its advisers look cartoonish in retrospect. But they also have proved legally foolish. As Laster would find in his opinion, “to state the obvious Cigna had a contractual obligation not to run a covert communication campaign against the merger. The two Cigna directors who testified at trial understood this fact”.

In its recently denied appeal Cigna, still represented by Wachtell, argued even if it was responsible for a “wilful breach” of the merger agreement through its sabotage campaign, it was not decisive since the merger would have been stopped by the DoJ anyway. Perhaps not wanting Cigna to get away with its apparent bad behaviour by receiving the $1.85bn termination fee, the Delaware Supreme Court simply chose to affirm Laster’s decision while providing no additional commentary.

Cigna clearly failed to sign a merger agreement that ensured that its post-deal priorities were achieved. But regardless, the contract it signed compelled them to get the deal done.

One adviser involved in the transaction said it was perhaps the ugliest professional experience they had been through, noting that both company’s management teams actively hated each other. Another adviser likened the experience “to being aboard a doomed flight” with no escape.

Cigna and Teneo did not respond to requests for comment. Wachtell declined to comment.

Observers note that the judge in the case, Vice Chancellor Travis Laster, has a longstanding reputation for harsh rulings that have excoriated lawyers and bankers in such seminal cases as Rural-Metro, Del Monte and, most recently, Mirae/Anbang.

The Cigna CEO Joe Cordani and General Counsel Nicole Jones have kept their jobs. (According to the latest Cigna proxy, Cordani’s pay in 2020 was $20m, while Jones made $5m.)

Cigna’s problems, however, continue. The Massachusetts Laborers Annuity Fund, a Cigna shareholder, seized on the Chancery ruling on the termination fee. Its prominent plaintiff’s law firm has sued Cigna for breaches of fiduciary duty and unjust enrichment. Its argument is Cordani and the Board’s allegedly “disloyal conduct” has denied shareholders both the merger premium and, subsequently, the termination fee.

Separately, the lawsuit alleges Teneo “aided and abetted” the breach of fiduciary duty. It describes the PR firm as “black ops style consultants” hired to “derail the deal”. Cigna and Teneo are contesting these claims.

As for Wachtell, it has managed, perhaps surprisingly, to avoid its own “aiding and abetting” allegation from jilted Cigna shareholders. Regardless, its involvement in the affair remains a blight to the firm. Wachtell is easily the most prominent player in Delaware corporate litigation, and its lawyers are chummy with the judges often appearing alongside them at legal conferences. The outspoken former chief justice of the Delaware Supreme Court Leo Strine (himself never afraid as a judge to rebuke wayward deal advisers) has recently joined the firm to advise clients on ESG matters no less.

Advisory firms never want to become the story themselves. But the Cigna/Anthem fracas has, perhaps fittingly, allowed the ignominy to be shared across both principal and agent.

Related links:In Re Anthem-Cigna Merger Litigation — Delaware Court of Chancery decision August 31 2020How Teneo’s master of the dark arts spun out of control — FT