delaware merger assignment by operation of law

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Delaware Court holds anti-assignment clause prevents enforcement of contract after merger

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On September 16, 2020, the Superior Court of Delaware issued an order with potential implications for companies contemplating acquisitions of businesses or assets.  In MTA Can. Royalty Corp. v. Compania Minera Pangea , S.A. De C.V. , No. N19C-11-228 AML CCLD, 2020 Del. Super. LEXIS 2780 (Sept. 16, 2020), Judge Abigail M. LeGrow held that, following a merger,[1] the surviving company lacked standing to enforce a contract entered into by its predecessor (the non-surviving company in the merger) because the contract’s anti-assignment clause prohibited assignment “by operation of law”. 

Companies considering acquisitions should carefully review their target’s contracts for anti-assignment clauses that prohibit assignment “by operation of law”, which Delaware courts interpret to include certain mergers.  In addition, where a target’s key contracts contain anti-assignment clauses with such language, companies should carefully consider the preferred transaction structure.  In a reverse triangular merger, the acquirer’s newly formed subsidiary is merged into the target, with the result being that the target survives and becomes the acquirer’s subsidiary.  By contrast, in a forward triangular merger, the target does not “survive” and its rights are transferred to the existing subsidiary, which may implicate anti-assignment clauses.  Reverse triangular mergers do not face the same issue because the target continues its corporate existence as a subsidiary of the acquirer.

Background of the contract and subsequent merger

In 2016, Compania Minera Pangea, S.A. de C.V. (“CMP”) purchased mineral rights in the El Gallo Mine from 1570926 Alberta Ltd. (“Alberta”).  In exchange, CMP paid Alberta $5.25m in cash at closing and agreed to pay Alberta an additional $1m in 2018 subject to certain conditions.  Of note, the agreement contained the following anti-assignment clause (the “Anti-Assignment Clause”):

Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise, by [Alberta] without the prior written consent of each other party, and any such assignment without such prior written consent shall be null and void. . . . [T]his Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns.

In July 2017, Alberta merged with Global Royalty Corp. (“Global”), a subsidiary of Metalla Royalty & Streaming Ltd., and Global was the surviving entity.  Following that transaction, Global changed its name to MTA Canada Royalty Corp. (“MTA”).  In November 2019, MTA brought a breach of contract claim against CMP based on CMP’s alleged failure to pay the $1m in consideration due in 2018.

Superior Court holds that anti-assignment clause extends to certain mergers

CMP argued that MTA lacked standing to enforce Alberta’s contract with CMP because, per the Anti-Assignment Clause, Alberta was required to obtain CMP’s written consent before assigning its rights to MTA.  MTA argued that the Anti-Assignment Clause was meant to prevent third-party assignments, not “successor assignments” like Alberta’s merger.   Id. at *11-12.  To make this argument, it relied on a 1993 Chancery decision, in which then-Vice Chancellor Jacobs had held that, subject to certain conditions, anti-assignment clauses do not apply to mergers unless mergers are explicitly prohibited.   Star Cellular Tel. Co. v. Baton Rouge CGSA ., 1993 Del. Ch. LEXIS 158, at *25 (July 30, 1993).  According to MTA, because the last sentence of the Anti-Assignment Clause referred to “successors”, it was clearly not intended to extend to mergers.

The Superior Court disagreed.  It explained that, as a result of the merger, Alberta had ceased to exist, so MTA could only enforce the contract if it showed that the Anti-Assignment Clause did not apply.   MTA , at *6.  It then held that the Anti-Assignment Clause clearly barred Alberta’s transfer of rights through a merger because the clause prevented assignment “by operation of law”, which Delaware case law had interpreted as referring to forward triangular mergers.   Id.  at *7-14.  In light of what it regarded as a straightforward application of the Anti-Assignment Clause, the Superior Court did not engage in the  Star Cellular analysis.  The Superior Court found that the reference to “successors” in the Anti-Assignment Clause meant only that “valid successors” had the right to enforce the contract.   Id. at *13.

Potentially at odds with Chancery precedent?

Of special relevance is the Superior Court’s treatment of existing Delaware case law on anti-assignment clauses and forward triangular mergers.  Existing precedent from the Court of Chancery held that anti-assignment clauses containing both a prohibition on assignment “by operation of law” and a reference to “successors” were ambiguous.  Under the Star Cellular test, this ambiguity was construed against the application of the anti-assignment clause. 

Specifically, MTA  appears at odds with the Chancery ruling in Tenneco Auto. Inc. v. El Paso Corp. , which also involved the impact of an anti-assignment clause following a forward triangular merger.  C.A. No. 18810-NC, 2002 Del. Ch. LEXIS 26 (Mar. 20, 2002).  The language of the anti-assignment clause in Tenneco  was similar to that in MTA :  both clauses prohibited assignment “by operation of law” while also referencing “successors”.  In Tenneco , Vice Chancellor Noble found that those conflicting references made the anti-assignment clause ambiguous, meaning that, under the Star Cellular test, the successor company could enforce the contract.   Id. at *7-10.  The MTA Court did not explain why it reached the opposite result.

Similarly, in ClubCorp, Inc. v. Pinehurst, LLC , Vice Chancellor Parsons held that, following a forward triangular merger, an anti-assignment clause with language like that in Tenneco was ambiguous because the agreement both referenced “successors” and prohibited assignment “by operation of law”.  No. 5120-VCP, 2011 Del. Ch. LEXIS 176, at *26-29 (Nov. 15, 2011).  Again, the ambiguity militated in favor of finding that the anti-assignment clauses did not apply to the merger.   MTA did not address Pinehurst.

Insights from MTA

MTA has several significant implications for practitioners.  The first is a reminder to carefully review a target’s contracts for anti-assignment clauses.  Such clauses in important contracts should be flagged and thoughtfully evaluated. 

In addition, practitioners should remain aware that Delaware courts interpret the phrase “by operation of law” in assignment clauses to refer to mergers in which the target company does not survive.  The presence of this language in anti-assignment clauses in a target’s important contracts (if those contracts are governed by Delaware law) should prompt a discussion about the appropriate transaction structure.  For example, in MTA , the Court suggested that MTA would have had standing to enforce the contract with CMP if it had been merged through a reverse triangular merger rather than a forward triangular merger.  The Superior Court cited a 2013 Chancery decision, Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , in which Vice Chancellor Parsons found that “a reverse triangular merger does not constitute an assignment by operation of law”.  62 A.3d 62, 83 (Del. Ch. 2013). 

If dealing with similar language in anti-assignment clauses in important agreements, practitioners should consider alternative transaction structures that would allow the target to retain its corporate existence.  According to MTA , such alternatives should allow successor companies to enforce agreements without running afoul of anti-assignment clauses prohibiting “assignment by operation of law”.[2]

[1] The transaction was an amalgamation under Canadian law, which the parties and the Court agreed was the equivalent of a merger under Delaware law.  The transaction structure was equivalent to a forward triangular merger. 

[2] This may not be true in other jurisdictions.  For example, under California law, a reverse triangular merger has been found to be a transfer of rights by operation of law .  See SQL Sols. v. Oracle Corp. , 1991 U.S. Dist. LEXIS 21097, at *8-12 (N.D. Cal. Dec. 18, 1991). 

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Delaware Clarifies Impact of Common Merger Structure on Contractual Anti-Assignment Clauses

In a long-awaited decision, the Delaware Court of Chancery recently held in Meso Scale Diagnostics v. Roche Diagnostics [1] that the acquisition of a company by reverse triangular merger does not result in an assignment (whether by operation of law or otherwise) of the target company’s agreements. Thus, the Court put to rest the uncertainty that it created two years ago in the same case.

Reverse Triangular Mergers

A reverse triangular merger is a common form of merger in which the acquirer creates a wholly-owned subsidiary that then merges into the acquisition target. As a result, the target entity remains intact, while the “merger subsidiary” ceases to exist. The net effect is the same as a stock sale of the target, but with the advantage that a merger does not require action by all target stockholders as in a stock sale – a majority vote is typically sufficient. The reverse triangular merger is often used because of its relative simplicity and its ability to allow acquiring companies to obtain control of the target’s non-assignable contracts… or so everyone thought until April 2011.

Transaction Background… and Uncertainty

In 2007, Roche Diagnostics GmbH acquired BioVeris Corp. through a reverse triangular merger. BioVeris had previously licensed certain intellectual property from Meso Scale under an agreement that contained the following anti-assignment language:

“Neither this Agreement nor any of the rights, interests or obligations under [it] shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties . . .”

In 2010, Meso Scale filed a complaint against Roche alleging that Roche’s acquisition of BioVeris caused a de facto assignment of BioVeris’ intellectual property rights, and that, as a result of the above prohibition on assignment, a breach of contract occurred when BioVeris merged into the Roche merger subsidiary. Roche moved to dismiss the complaint.

In a surprise April 2011 ruling, the Delaware Court of Chancery denied Roche’s motion to dismiss. The Court’s opinion injected uncertainty into the realm of Delaware corporate law by indicating that, for purposes of interpreting an anti-assignment clause, there may be circumstances in which a reverse triangular merger should be considered an assignment “by operation of law.” [2]

Order is Restored

In its motion for summary judgment, Roche analogized reverse triangular mergers to transactions in which all target company shares are acquired. In both transactions, Roche argued, the target company remains intact and continues to own its assets. Accordingly, BioVeris did not assign any of its assets at the time of the merger. As Roche made clear, Delaware courts have long held that the stock sale of a company does not violate anti-assignment provisions that do not expressly prohibit a change of control.

Drawing upon Delaware case law regarding forward triangular mergers, Meso Scale countered that the BioVeris reverse triangular merger constituted an assignment “by operation of law,” urging the Court to embrace an unreported 1991 decision by the U.S. District Court for the Northern District of California, SQL Solutions v. Oracle Corp. [3] SQL Solutions also involved a reverse triangular merger and anti-assignment language in the target company’s inbound license agreement. The SQL Solutions court found, in that case, that the third-party licensor would have been “adversely impacted” because the acquiring company was one of the licensor’s direct competitors. The court suggested that third-party consents should be obtained even in the reverse triangular merger context, especially when the intellectual property licensed to the target company is an essential part of its business.

The Delaware Court of Chancery granted Roche’s motion for summary judgment, concluding that Section 259 of the Delaware General Corporation Law supported Roche’s position that a reverse triangular merger does not result in an assignment by operation of law or otherwise. [4] Specifically, the Court held that “mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger.”

In response to Meso Scale’s argument that the merger constituted a de facto assignment, the Court held that, under Delaware’s doctrine of “legal significance,” the fact that a forward triangular merger would have triggered the plaintiff’s consent rights did not have any bearing on the reverse triangular merger at issue.

The Court also found that the parties did not intend for the negotiated language to require third-party consent upon a change of control, since “the vast majority of commentary discussing reverse triangular mergers indicates that a reverse triangular merger does not constitute an assignment by operation of law as to the surviving entity.”

Finally, the Court rejected the approach suggested by SQL Solutions , stating simply that such an approach conflicted with Delaware’s jurisprudence regarding stock acquisitions, as well as Section 259.

Implications

The Court’s ruling confirms that, under Delaware law, reverse triangular mergers do not result in the assignment, by operation of law or otherwise, of agreements held by a target company. The decision offers comfort to practitioners and would-be acquirers that regularly engage in M&A transactions governed by Delaware law that they can structure deals in a manner that ensures that consents will not be required with respect to target company agreements that do not contain language expressly prohibiting a change of control.

The decision also highlights the fact that it is limited to transactions and agreements governed by Delaware law. There is still uncertainty as to the risks associated with contractual anti-assignment clauses in certain jurisdictions. As a result, it would be prudent in situations where Delaware is not the governing law (and there is ambiguity in the applicable jurisdiction) to obtain all third-party consents to the assignment of material agreements.

Finally, the decision also serves as a reminder to practitioners to include clear consent and assignment language when drafting licenses and other agreements to avoid a court having to infer the intent of the parties after the fact. The Meso Scale court specifically noted that the plaintiffs “could have negotiated for a change of control provision” but failed to do so.

[1] Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , No. 5589-VCP (Del. Ch. Feb. 22, 2013).

[2] Reading the factual allegations in Meso Scale’s favor (as all courts must at the motion to dismiss stage), the Court found that Meso Scale had alleged sufficient facts to withstand Roche’s motion to dismiss. Meso Scale alleged that, within months of the merger, all of BioVeris’ employees were laid off, its Maryland facility was shut down and it was slated to cease all production. The Court found that these circumstances created a plausible argument “that ‘by operation of law’ was intended to cover mergers that effectively operated like an assignment, even if it might not apply to mergers merely involving changes of control.”

[3] SQL Solutions v. Oracle Corp. , 1991 WL 626458 (N.D. Cal. Dec. 18, 1991).

[4] Section 259 provides that: “When any merger or consolidation shall have become effective under this chapter, for all purposes of the laws of this State the separate existence of all the constituent corporations, or of all such constituent corporations except the one into which the other or others of such constituent corporations have been merged, as the case may be, shall cease and the constituent corporations shall become a new corporation, or be merged into 1 of such corporations . . . the rights, privileges, powers and franchises of each of said corporations, and all property, real, personal and mixed, and all debts due to any of said constituent corporations on whatever account . . . shall be vested in the corporation surviving or resulting from such merger or consolidation; and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation as they were of the several and respective constituent corporations.”

• Advisory Deleware Clarifies Impact of Common Merger Structure.pdf

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Delaware Court Rules on Reverse Triangular Mergers and Anti-Assignment Provisions

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn alert by David H. Kennedy , Brian M. Gingold ,  Phil Kenny ,  Travis P. Davis , and  James D. Lee . This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here .

On February 22, 2013, in Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A . No. 5589-VCP (Del. Ch. 2013), Vice Chancellor Parsons of the Delaware Court of Chancery ruled that a provision in a license agreement prohibiting an assignment by operation of law did not apply to a reverse triangular merger. This ruling eliminates the uncertainty Vice Chancellor Parsons created in his April 2011 motion to dismiss decision in which he indicated that there may be circumstances where a reverse triangular merger could be considered an assignment by operation of law for purposes of an anti-assignment clause.

On June 22, 2010, the plaintiffs filed a complaint alleging that the acquisition by Roche Diagnostics GmbH, C.A. (“Roche”) of BioVeris Corporation (“BioVeris”) through a reverse triangular merger violated the anti-assignment clause found in a 2003 agreement between the plaintiffs and the predecessor entity to BioVeris, among others. The anti-assignment clause that the plaintiffs alleged was breached stated as follows:

Neither this Agreement nor any of the rights, interests or obligations under [it] shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties . . .

The Court, in its earlier Memorandum Opinion dated April 8, 2011, denying a motion to dismiss, ruled that there may be circumstances where a provision prohibiting assignment of an agreement by operation of law could be triggered by a reverse triangular merger. [1]

In support of its summary judgment motion, Roche argued that, because the target entity in a reverse triangular merger remains intact and continues to own its own assets, BioVeris did not assign anything at the time it was acquired through a reverse triangular merger. Roche further argued that a reverse triangular merger structure is analogous to a sale of the stock of a target corporation, and Delaware courts had repeatedly held that such a stock sale would not violate an anti-assignment provision that did not expressly prohibit a change in control.

The plaintiffs countered that Delaware case law regarding forward triangular mergers compels the conclusion that a provision covering assignment “by operation of law” extends to all mergers, regardless of their form. [2] The plaintiffs further argued that the Court should embrace an unreported California federal court decision, SQL Solutions Inc. v. Oracle Corporation , 1991 WL 626458 (N.D. Cal. Dec. 19, 1991), that held that an anti-assignment provision in a software license agreement that did not contain a change of ownership or control provision was triggered by a reverse triangular merger. [3]

The Court concluded that Delaware law, and specifically Section 259 of the Delaware General Corporation Law (the “DGCL”), supported Roche’s position that a reverse triangular merger generally is not an assignment by operation of law or otherwise. Section 259 provides that:

When any merger or consolidation shall have become effective under this chapter, for all purposes of the laws of this State the separate existence of all the constituent corporations, or of all such constituent corporations except the one into which the other or others of such constituent corporations have been merged , as the case may be, shall cease and the constituent corporations shall become a new corporation, or be merged into 1 of such corporations . . . the rights, privileges, powers and franchises of each of said corporations, and all property, real, personal and mixed, and all debts due to any of said constituent corporations on whatever account . . . shall be vested in the corporation surviving or resulting from such merger or consolidation ; and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation as they were of the several and respective constituent corporations. (emphasis added)

The Court pointed to cases holding that Section 259 results in only the transfer of the non-surviving corporation’s rights and obligations to the surviving corporation by operation of law. On the other hand, the language “except the one into which the other or others of such constituent corporations have been merged” in Section 259 implies that the surviving corporation would not have effected any assignment.

As to the plaintiffs’ arguments, the Court distinguished Tenneco and Star Cellular as cases involving forward triangular mergers where the target company was not the surviving entity, whereas in this case BioVeris was the surviving entity in a reverse triangular merger. Further, the Court declined to follow SQL Solutions because doing so would conflict with Delaware’s well-settled law that stock acquisitions, by themselves, do not result in an assignment by operation of law.

The Court also observed that its interpretation of the anti-assignment clause is consistent with the reasonable expectations of the parties, noting that the vast majority of commentary discussing reverse triangular mergers indicates that a reverse triangular merger does not constitute an assignment by operation of law.

This ruling is noteworthy because it confirms the view that, until the first Meso Scale Diagnostics ruling, practitioners had long taken for granted: a reverse triangular merger does not result in an assignment by operation of law of the acquired corporation’s contracts or other assets. The decision should provide comfort to would-be acquirors that they can structure transactions to which the DGCL is applicable in a manner that ensures that consents to assignment do not need to be obtained where there is no change of ownership or control language in the relevant anti-assignment clause. However, the decision also serves as a reminder that, outside of the confines of the DGCL, there remains uncertainty as to the risks associated with anti-assignment clauses–it may be prudent to require that consents be obtained from applicable third parties where a license or other agreement containing such a clause is important to the target’s business.

[1] At this earlier motion to dismiss stage the Vice Chancellor was required to assume the truthfulness of the plaintiff’s allegation and afford the plaintiff the benefit of all reasonable inferences. The Court declared that it could grant Roche’s motion to dismiss only if Roche’s interpretation of the anti-assignment clause was the only reasonable construction as a matter of law. Although noting that stock acquisitions do not, in and of themselves, constitute an assignment, the Court noted that the plaintiffs had alleged that the transaction in question involved more than just a change of ownership because the plaintiffs had alleged that, within months of the merger, all of BioVeris’s 200 employees were laid off, its Maryland facility was closed and its existing customers were notified that its product lines were being discontinued. These additional circumstances, in the Court’s view, created a plausible argument “that ‘by operation of law’ was intended to cover mergers that effectively operated like an assignment, even if it might not apply to mergers merely involving changes of control.” (go back)

[2] See Tenneco Automotive Inc. v. El Paso Corporation , 2002 WL 453930 (Del. Ch. 2002) and Star Cellular Telephone Company, Inc. v. Baton Rouge CGSA, Inc. , 19 Del. J. Corp. L. 875 (Del. Ch. 1993) ruling that forward mergers do trigger anti-assignment provisions prohibiting assignments by operation of law. (go back)

[3] Since Vice Chancellor Parson’s motion to dismiss ruling in April 2011, a New Jersey federal court decision, DBA Distribution Services, Inc. v. All Source Freight Solutions, Inc. , 2012 WL 845929 (D.N.J. Mar. 13, 2012), cited SQL Solutions in support of its holding that, under New Jersey law, a reverse triangular merger does constitute an assignment by operation of law. The issue was one of first impression in New Jersey. No other court appears to have cited with approval the SQL Solutions holding that the acquisition of a licensee under a license agreement through a reverse triangular merger results in an assignment of the license agreement. (go back)

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Delaware Court Finds That a Reverse Triangular Merger Does Not Result in an Assignment by Operation of Law

In Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, the Delaware Court of Chancery confirmed that a reverse triangular merger did not result in an assignment by operation of law. This affirms the traditional view often taken by practitioners that was called into question by an April 2011 ruling on a motion to dismiss where the Court implied that in some circumstances a reverse triangular merger may violate contractual language prohibiting assignment by operation of law.

Reverse Triangular Mergers and Anti-Assignment Language

Parties to acquisitions often review key contracts of the target company to determine whether the terms of a target’s key contracts prohibit the acquisition or require a third-party’s consent in connection with the acquisition. The requirement to obtain a waiver or third-party consent can be affected by the acquisition structure.

Practitioners have traditionally taken the view (at least until the first Meso Scale ruling in April 2011) that contractual language prohibiting an assignment by operation of law is not triggered by a reverse triangular merger because a reverse triangular merger does not involve a transfer or assignment of a target’s contracts, but instead involves a change in ownership of the target. In a reverse triangular merger, an acquiring company forms a subsidiary that is then merged into the target company, which results in the subsidiary formed by the acquiring company disappearing and the target company surviving the merger as a wholly-owned subsidiary of the acquiring company. Because obtaining third-party consents or waivers can be difficult and time-consuming, practitioners often view avoiding the application of contractual requirements or prohibitions regarding assignments as one of the benefits of the reverse triangular merger structure.

Background of Meso Scale

  In Meso Scale v. Roche , the plaintiffs alleged that the acquisition of BioVeris Corporation (“BioVeris”) by Roche Diagnostics GmbH, C.A. (“Roche”) via a reverse triangular merger violated the anti-assignment terms of a contract between the plaintiffs and a predecessor to BioVeris. The contract that the plaintiffs alleged was breached by the reverse triangular merger set forth that, “Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties…” The Court, in an April 2011 ruling, denied Roche’s motion to dismiss because it noted that there may be circumstances where a reverse triangular merger violates a provision prohibiting assignment by operation by law or otherwise.

Analysis in Meso Scale

In Meso Scale v. Roche , the Court concluded that Section 259(a) of the Delaware General Corporation Law, which provides that the effect of a merger is the transfer of the assets and liabilities of the non-surviving corporation to the surviving corporation, supports the conclusion that a reverse triangular merger is generally not an assignment of the target’s contracts by operation of law or otherwise because the target is the surviving corporation.

Further, the Court declined to follow a California case, SQL Solutions Inc. v. Oracle Corporation , that held that an anti-assignment provision in a software license agreement similar to the provision in the contract between Roche and BioVeris was triggered by a reverse triangular merger.  

Finally, the Court noted that its interpretation of the anti-assignment clause was consistent with a view of the parties’ reasonable expectation regarding the contractual term at the time the parties entered into the contract. In doing so, the Court noted that a large majority of commentary and case law discussing reverse triangular mergers indicate that a reverse triangular merger does not constitute an assignment by operation of law with respect to the surviving company’s contracts.

Practical Implications of Meso Scale

There are several practical implications for companies and practitioners to remember as a result of the Court’s ruling.

Greater Certainty for Reverse Triangular Mergers but the Parties’ Intent is Still Relevant : Meso Scale v. Roche generally confirms the conclusion that, under Delaware law, a reverse triangular merger does not result in an assignment by operation of law. However, given the Court’s reasoning, which included a review of the parties’ intent, companies and practitioners should still consider the intent of the contractual parties to the target company’s agreements, particularly if the relevant terms are ambiguous and the contract is important.

Companies Should Carefully Consider “Boilerplate” Language in Key Contracts : Meso Scale v. Roche is a reminder of the potential importance of boilerplate language, particularly in a company’s key contracts. In Meso Scale v. Roche, the Court noted that the plaintiff could have negotiated for a provision prohibiting a change in control of its counterparty that would have provided the plaintiff with consent rights in connection with a reverse triangular merger, but instead agreed to a term that merely prohibited an assignment of the contract by operation of law or otherwise. In light of this, drafters and negotiators of commercial agreements should carefully consider a contractual party’s desired rights and attendant obligations in the event of an acquisition, regardless of the form of the acquisition structure and in order to ensure that the contractual language clearly reflects the parties’ intent in this regard.

Applicable Law is Relevant : While many jurisdictions view Delaware corporate case law as persuasive, the effect of a reverse triangular merger on anti-assignment language when the applicable law is not Delaware should be confirmed, especially if a contract is important. This is particularly true in light of cases such as SQL Solutions Inc. v. Oracle Corporation , where courts in some non-Delaware jurisdictions have indicated that a reverse triangular merger can trigger prohibitions on assignments by operation of law in certain circumstances.

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Delaware Court of Chancery Confirms that a Reverse Triangular Merger Is Not an Assignment by Operation of Law

• Mergers & Acquisitions
• Lamb, Stephen P.
• Marell, Jeffrey D.
• Reisner, Carl L.
• Mi, Frances F.

February 27, 2013 download PDF

• Stephen P. Lamb
• Jeffrey D. Marell
• Carl L. Reisner
• Frances F. Mi

In Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH. , the Delaware Court of Chancery confirmed, for the first time, that a reverse triangular merger was not an assignment by operation of law.  The decision has particular significance for determining whether anti-assignment provisions in contracts governed by Delaware law have been triggered. 

In prior decisions in this case, the Court had reserved judgment on whether a reverse triangular merger could constitute an assignment by operation of law - a reservation that presented considerable implications for Delaware law governed anti-assignment clauses in the context of M&A transactions, which are often structured using reverse triangular mergers.

In 2007, Roche agreed to acquire BioVeris Corp. for the purpose of obtaining BioVeris's intellectual property rights.  The BioVeris intellectual property rights, however, were subject to an agreement pursuant to which BioVeris could not assign "its rights, interests, or obligations . . . by operation of law or otherwise" without the prior consent of plaintiff Meso Scale.  The Roche acquisition of Bioveris was structured as a reverse triangular merger in which a Roche subsidiary would merge with and into BioVeris with BioVeris remaining as the surviving corporation. 

Plaintiff Meso Scale alleged that a breach of contract occurred when the Roche subsidiary merged with and into BioVeris because the merger constituted an assignment of BioVeris's rights and obligations without Meso Scale's consent.  Roche moved for summary judgment, arguing that Roche's acquisition of BioVeris through a reverse triangular merger was not an assignment by operation of law and therefore did not require Meso Scale's consent.  The Court granted Roche's motion for summary judgment and found that under Delaware law the entity surviving a merger remains intact and therefore no assignment occurs.  The Court stated that "mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger."  This result may differ from a forward or forward triangular merger where the acquired corporation would be the non-surviving entity and there may be a transfer of its rights and obligations to the acquiror or the acquiror's subsidiary, as applicable, by operation of law. 

Importantly, the Court's holding that a reverse triangular merger is not an assignment by operation of law is limited to transactions and agreements governed by Delaware law and is not necessarily applicable to transactions and agreements evaluated under the law of other jurisdictions.       

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Delaware Court of Chancery Confirms that a Reverse Triangular Merger Does Not Constitute an Assignment by Operation of Law

Client Alerts | April 10, 2013 | Mergers & Acquisitions

On April 8, 2011, the Delaware Court of Chancery (“Court”) sent preliminary tremors through the M&A community when it denied a motion to dismiss a breach of contract claim in a case of first impression for the Court. In denying the motion to dismiss, the Court indicated a willingness to consider the possibility that a reverse triangular merger could, under Delaware law, constitute an assignment “by operation of law.” Practitioners had long believed that reverse triangular mergers did not operate as assignments “by operation of law” in Delaware. In a grant of summary judgment issued on February 23, 2013, Vice Chancellor Parsons restored that belief when the Court held that a reverse triangular merger is not an assignment by operation of law.

What is a Reverse Triangular Merger?

A buyer acquires a target company by forming a subsidiary to merge with and into a target company in a reverse triangular merger. The target company assumes all of the merger subsidiary’s assets, rights and liabilities by operation of law, and the merger subsidiary ceases to exist as a separate entity while the target company survives the merger and becomes a subsidiary of the buyer.

Impact of Transaction Structure on Target’s Contracts

During the due diligence phase of any acquisition transaction, business and legal teams will analyze the target’s contracts to determine what, if any, consents are needed to consummate the transaction. As many contracts contain ambiguous anti-assignment provisions (e.g., requiring consent for assignments “by operation of law or otherwise”), it is critical to know whether the structure of the proposed transaction would trigger an assignment “by operation of law.” For example, Delaware law views transactions structured as forward mergers to result in an assignment of the target company’s assets by operation of law and views transactions structured as stock acquisitions not to result in such an assignment. While no Delaware court had previously addressed the treatment of a reverse triangular merger, practitioners and legal commentators have viewed reverse triangular mergers as analogous to stock acquisitions in not constituting an assignment by operation of law as to the surviving entity.

Meso Scale vs. Roche

In 2007, BioVeris Corp. (“BioVeris”) was acquired by Roche Diagnostics GmbH (“Roche”) as a means for Roche to acquire BioVeris’s intellectual property rights. Under the terms of these intellectual property rights, the consent of Meso Scale was required to assign such rights “by operation of law or otherwise.” The transaction was structured as a reverse triangular merger with Roche forming an acquisition subsidiary to merge with and into BioVeris, as the surviving corporation.

In 2010, Meso Scale filed a complaint with the Court alleging, among other things, that Roche’s 2007 acquisition of BioVeris, without the consent of Meso Scale, resulted in a breach of BioVeris’s intellectual property rights because the acquisition constituted an assignment of BioVeris’s intellectual property rights by operation of law.

In its recent decision granting summary judgment in favor of Roche, the Court relied heavily on an examination of the intent of the parties when drafting the anti-assignment provision at issue, and how they may have been informed by statutory, juridical and practical precedent. For the reasons set forth below, the Court did not find Meso Scale’s arguments to be persuasive nor Meso Scale’s interpretation of the anti-assignment provision to be reasonable.

The Court began its analysis by stating that “[g]enerally, mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger.” It found that Section 259(a) of the Delaware General Corporation Law and case law precedent support the proposition that it is the non-surviving corporation’s rights and obligations that are transferred to the surviving corporation by operation of law and that the “surviving corporation would not have effected any assignment.” Vice Chancellor Parsons also considered that the leading commentators and the “vast majority of commentary” do not consider reverse triangular mergers to constitute an assignment by operation of law.

Additionally, the Court was not persuaded by Meso Scale’s claim that Roche’s acquisition was essentially nothing more than an assignment of BioVeris’s intellectual property rights to Roche. The Court noted that Meso Scale’s claim ignores Delaware’s longstanding doctrine of independent legal significance which, the Court wrote, has been applied in situations where deals were structured so as to avoid consent rights. That doctrine holds that the “mere fact that the result of actions taken under one section may be the same as the result of action taken under another section does not require that the legality of the result must be tested by the requirements of the second section.”

As a final argument, Meso Scale cited an unpublished 1991 decision of the United States District Court for the Northern District of California in SQL Solutions, Inc. v. Oracle Corp. that did conclude that a reverse triangular merger resulted in an assignment by operation of law. The SQL Solutions court further stated, more generally, that “an assignment or transfer of rights does occur through a change in the legal form of ownership of a business.” In declining to adopt the approach taken by the SQL Solutions court, the Court noted that this approach would upset Delaware’s well-settled law regarding stock acquisitions. The Court stated that “[b]oth stock acquisitions and reverse triangular mergers involve changes in legal ownership, and the law should reflect parallel results.”

Implications

Under Delaware law, transactions structured as reverse triangular mergers, will generally not require that the surviving entity obtain the consents from the counterpartys to contracts that contain a general prohibition against an assignment by operation of law.

In its decision, the Court noted that Meso Scale could have negotiated for a “change of control provision.” When negotiating commercial agreements, carefully consider the impact of any change in control and whether an explicit prohibition is desirable rather than relying on mere boilerplate.

The Court decision is applicable to reverse triangular mergers governed by Delaware law. As the SQL Solutions decision demonstrates, different jurisdictions may reach a different conclusion on the issue and consideration to the laws of other jurisdictions must be given in the planning and structuring of any acquisition.

Federal intellectual property principles generally restrict assignments. While the Court did not discuss the federal intellectual property principles involved, due consideration should be given to such principles to the extent implicated in any transaction.

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Delaware Chancery Court Considers Whether a Reverse Triangular Merger Constitutes an Assignment by Operation of Law

In Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A. No. 5589-VCP (Del. Ch. Apr. 8, 2011), the Delaware Court of Chancery denied a motion to dismiss a breach of contract claim, holding that a reverse triangular merger may constitute an assignment by operation of law. In the first Delaware case to address this issue, the Court found plausible plaintiff’s argument that an assignment “by operation of law” covers mergers that effectively operate like an assignment. The Court held that Delaware’s stock acquisition jurisprudence is not controlling with respect to reverse triangular mergers. In its decision, the Court indicated that the actions a buyer takes after a reverse triangular merger with respect to the target company are relevant to whether an anti-assignment clause is triggered.

In 2007, Roche Holdings Ltd. acquired BioVeris Corporation through a reverse triangular merger whereby a wholly-owned subsidiary of Roche merged with and into BioVeris, with BioVeris as the surviving entity.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Do Change of Control Transactions Constitute an Assignment by Operation of Law?

Commercial l andlords  often  rely on  anti-assignment provisions  to  restrict the ability of tenants to assign their interest in  a  lease to a third party .  Such provisions will often explicitly restrict assignments by  “ operation of law, ”  which are generally considered involuntary assignments  mandated via a  court order. Commercial landlords may assume that a change of control transaction violates a basic anti – assignment cla use, but clear drafting is necessary for Landlords to protect their interests .  Landlords  wishing to restrict change of control of a tenant entity ,  should  have clear  anti-assignment provision s in their leases that   expressly restrict such transaction s  and characterize such “changes of control” as assignments .   

A change of control is a significant change in the equity, ownership, or management of a business entity. This can occur through a merger, consolidation or acquisition.   

The general rule is that change of control of a corporate entity  is  not  an assignment by operation of law ,  and therefore  does not violate a basic  anti- assignment provision. Courts have reasoned that a landlord entering into a lease with a corporate tenant should be aware that a corporation, or limited liability company, is an entity which exists separate and apart from its ownership, and that a change in ownership of the corporate entity does not change the tenant entity under the lease.   

Courts in many states including Florida, New York and Delaware have held that a change of control is not an assignment by operation of law. I n  Sears Termite & Pest Control, Inc. v. Arnold ,  a Florida court held ,  “ [t] he fact that there is a change in the ownership of corporate stock does not affect the corporation’s existence or its contract rights, or liabilities. ”  Further,   i n  Meso Scale Diagnostics LLC v. Roche Diagnostics GMBH , a Delaware court ruled, “ [ g ] enerally  mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger.”  

Importantly,  the rule is different if the tenant entity does not survive the transaction.   In  MTA Canada Royalty Corp. v.  Compania  Minera Pangea , a  Delaware Superior Court held that a  merger in which the contracting entity does not survive may be held to be an assignment by operation of law.   

If  a  l andlord inten d s for a change of control of a tenant to violate the anti-assignment clause  in its lease, the landlord should ensure that its  lease expressly state s   that a change of control constitutes an assignment .

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IS REVERSE TRIANGULAR MERGER AN ASSIGNMENT OF TARGET'S ASSETS ‘BY OPERATION OF LAW’? | Secondary Sources | Westlaw

IS REVERSE TRIANGULAR MERGER AN ASSIGNMENT OF TARGET'S ASSETS ‘BY OPERATION OF LAW’?

21 no. 12 wjmrgaq 1 robert s. reder, esq., david s. schwartz, esq., and alison fraser, esq., milbank, tweed, hadley & mccloy westlaw journal mergers & acquisitions  (approx. 3 pages), is reverse triangular merger an assignment of target's assets ‘by operation of law’.

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Does a Reverse Triangular Merger Constitute An Assignment by Operation of Law?

In a Delaware Court of Chancery decision dated February 22, 2013, Vice Chancellor Parsons held that a reverse triangular merger does not constitute an assignment by operation of law under Delaware law. The decision, Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH , C.A. No. 5589-VCP (Del. Ch. 2013) helped to clarify some uncertainty created by the same court in an earlier decision involving the same parties.  As a result of the decision, M&A practitioners should feel more comfortable that Delaware courts will find that a reverse triangular merger will not be considered an assignment by operation of law when interpreting a contract.

A reverse triangular merger is a transaction whereby the acquiring party forms a subsidiary and then merges the subsidiary into the target company with the target company being the surviving entity and a wholly-owned subsidiary of the acquiring party. At issue in theMeso Scale case was whether the reverse triangular merger structure triggered the anti-assignment language in a license agreement being acquired by the acquiring party. The anti-assignment provision in the license agreement provided as follows:

“Neither this Agreement, nor any of the rights, interests or obligations under [it] shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties…”

In an earlier decision involving this matter, Vice Chancellor Parsons had declined to hold that the reverse triangular merger did not result in an assignment of the license agreement at issue. In the summary judgment proceeding, Roche argued that because the target in a reverse triangular merger survives and continues to own its assets, no assignment took place (the rights and obligations of the target are not transferred, assumed or impacted as a result of the structure of the transaction). The plaintiffs argued that mergers, including a reverse triangular merger, as a general proposition, result in an assignment by operation of law.

The Chancery Court concluded that a reverse triangular merger does not trigger the anti-assignment provision based on Delaware corporate law (and in particular Section 259 of the Delaware General Corporation Law) and since it does not result in the transfer of the rights and obligations of the non-surviving corporation to the surviving corporation.

The decision of Vice Chancellor Parsons confirms what most M&A lawyers have believed — that by using the reverse triangular merger structure, parties can avoid triggering anti-assignment clauses in licenses, contracts or other assets. The decision clarifies the state of the law in Delaware. As long as the parties structure the acquisition as a reverse triangular merger, they should not be required to obtain consents from third parties to a contract which contains a standard anti-assignment provision such as the one referenced above. It should be noted that if the anti-assignment provision at issue contains change of control or change of ownership language, this ruling will likely not be applicable. In addition, the ruling of the Chancery Court only addresses Delaware law. Other jurisdictions including California and New Jersey have held that in certain cases a reverse triangular merger does constitute an assignment by operation of law (requiring parties to obtain consents to assignments from third parties).

To discuss the potential benefits of a reverse triangular merger structure, please contact the author Joseph C. Marrow .

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In Meso Scale Diagnostics v. Roche Diagnostics , C.A. No. 5589-VCP (Del. Ch. Apr. 8, 2011), the Delaware Chancery Court recently handed down a decision that could significantly affect mergers and acquisitions practice, taking a broad view of contractual assignment restrictions that could cause them to be violated by typical M&A transactions. Although the law on assignability of inbound intellectual property licenses in the context of a reverse triangular merger has long been inconsistent, this case follows a minority (and criticized) view that a typical contractual assignment restriction — prohibiting assignments by operation of law — would be violated by the most common form of merger transaction: a reverse triangular merger.

In 2007, Roche acquired a target company called BioVeris by means of a reverse triangular merger. In 2003, BioVeris had received a non-exclusive license to electrochmiluminescence (ECL) technology from a licensee of Meso, which was a holder of exclusive rights in the ECL technology. That license agreement contained a provision prohibiting assignment “in whole or in part, by operation of law or otherwise....” Meso claimed the merger violated that restriction. The court addressed the issue in response to Roche’s motion to dismiss for failure to state a claim. Roche argued that no assignment had occurred because (1) the clause in question did not expressly provide that a change in control or ownership could constitute an assignment and (2) the target entity survived the transaction, and thus did not constitute an assignment.

Meso argued that the anti-assignment clause applied to all mergers regardless of their structure. However, the two primary cases that Meso cited dealt only with forward mergers — a form of transaction in which the target entity does not survive. Tenneco Auto Inc. v. El Paso Corp. , 2002 WL 453930 (Del. Ch. 2002) and Star Cellular Telephone Co. v, Baton Rouge CGSA, Inc. , 19 Del J Corp. L. 875 (Del. Ch. 1993). Meso also cited an unreported California opinion, SQL Solutions Inc. v. Oracle Corp. , 1991 WL 626458 (N.D. Cal Dec 19, 1991), holding that a reverse triangular merger had triggered an anti-assignment provision in an inbound software licensing agreement. However, the Meso court did not find SQL Solutions Inc. dispositive, as it was an unreported decision from another jurisdiction and the court’s reasoning was “open to question.” SQL Solutions Inc. has long been considered a case that prevented clarity on this issue in the M&A practice.

The Meso court held that both Roche’s and Meso’s interpretations of the anti-assignment clause were reasonable and, as a result, did not grant Roche’s motion to dismiss. The court’s reluctance to come to a definitive conclusion in this case may have been due to an extraordinarily complicated set of facts that composed the 2003 transaction — to which Meso gave its consent. In arriving at its conclusion, the court stressed that no Delaware court had ever considered the issue of whether a reverse triangular merger triggers an anti-assignment clause. While the court recognized that the provision did not mention change of control or ownership, it held that this did not necessarily mean that the anti-assignment clause could not be triggered. Although the court agreed with Roche that reverse triangular mergers are more similar to stock acquisitions than to forward mergers, it held that a reverse merger is not the same as a stock acquisition and that therefore the analogy was not persuasive. Notably, the court pointed to Roche’s post-acquisition restructuring of BioVeris, “leaving BioVeris as nothing more than a holding company” to emphasize this point. The court suggested that the post-acquisition layoffs of BioVeris employees, discontinuation of product lines, and closure of the target’s Maryland facility might trigger an anti-assignment provision, as the merger functioned as a traditional assignment.

Because of the procedural posture of the case — a motion to dismiss that was denied — this opinion does not establish a clear rule that a reverse triangular merger always violates a contractual restriction against an assignment by operation of law. However, because the court would not clearly rule otherwise, this case joins SQL Solutions Inc. to muddy the legal waters on this issue. The court’s ruling may be limited to similar facts because the court looked to the acquirer’s actions after the acquisition to interpret the provision. Plaintiffs had alleged that “Roche purchased BioVeris solely to obtain the latter’s ECL-related … rights under … the [Meso] Licenses,” and the court apparently was receptive to this interpretation of the facts. Accordingly, companies should consider the nature and scope of the changes they plan to make to a target after acquisition when they analyze transferability issues in M&A. Furthermore, companies that are parties to contracts that have antiassignment provisions should strive to clarify these provisions to reflect their intent. 

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