United States: Delaware Chancery Court Holds That A Reverse Triangular Merger Is Not An Assignment By Operation Of Law

On February 22, 2013, the Delaware Chancery Court in Meso Scale v. Roche1 restored a degree of certainty to M&A planning by holding that the acquisition of a company through a reverse triangular merger (RTM) did not constitute an assignment by operation of law. The plaintiff, Meso Scale, had argued that the merger of Roche's acquisition subsidiary into target company BioVeris Corporation violated an anti-assignment clause in an agreement between BioVeris and Meso Scale. The Court's decision reaffirmed the traditional understanding of practitioners and commentators that an RTM does not involve an assignment, but the opinion also confirms that the parties' intent will be part of the analysis where the anti-assignment clause at issue is ambiguous.

Anti-Assignment Clauses and Change of Control Provisions

Anti-assignment provisions prohibit a party from assigning its rights and obligations under a contract without the consent of the other party. Change of control provisions give one party to a contract certain rights (e.g., the right of consent, the right to additional payment, or the right of termination) in the event that ownership or control of the other changes hands. Agreements sometimes contain both provisions or may combine both concepts into a single clause. A key consideration for any acquisition is whether the preferred choice of transaction structure will trigger any such restrictions found in the target company's contracts. Legal analysis of the issue depends on the transaction structure to be used in the acquisition and the specific language of the relevant contractual provision(s).

Choice of Acquisition Structure

The three basic acquisition structures are asset purchases, stock purchases and mergers. Asset purchases, by definition, require assignment of any contract included in the sale. Stock purchases do not involve an assignment (the target company remains the contract party post-acquisition) but do involve a change of control. Mergers, on the other hand, are governed by state corporation law and are less straightforward. The operative language of most statutes provides that the property and rights of the non-surviving entity seamlessly "vest" in the survivor, which courts have generally held to be a transfer by operation of law and not an assignment. Interpretive issues arise, however, when contractual anti-assignment language appears intended to cover something broader than traditional assignment, such as clauses prohibiting "assignment by operation of law or otherwise." Practitioners have traditionally assumed that reverse triangular mergers—in which the acquirer forms a new shell subsidiary and merges it into the target company, with the shell disappearing and the target surviving—would not violate such language because the target at all times remains the contract party, as is the case in a stock sale.2 As a result, reverse triangular mergers have historically been one of the most popular acquisition structures.

The Meso Scale Case

This traditional assumption, however, was upended in a 2011 preliminary ruling by the Chancery Court in Meso Scale. The case involved certain BioVeris intellectual property in which Meso Scale had an interest and a related consent agreement prohibiting assignment by BioVeris "in whole or in part, by operation of law or otherwise" without Meso Scale's consent. Roche acquired BioVeris in 2007 through an RTM, apparently for the primary purpose of obtaining these and other intellectual property rights, and promptly shut down BioVeris's operations post-merger, effectively leaving it an IP holding company. In denying Roche's 2011 motion to dismiss, the Court found that the "by operation of law" language could reasonably have been intended to cover reverse mergers in which the surviving target was treated as a mere shell.

The Chancery Court took up the issue again in Roche's 2012 motion for summary judgment, but this time held that an RTM does not amount to an assignment under Delaware law. Its holding began with an examination of Section 259 of the Delaware General Corporation Law, which sets forth the effects of a merger:

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 such constituent corporations except the one into which the other or others of such constituent corporations have been merged...shall cease....

The Court found the italicized portion to suggest that the surviving corporation does not effect any assignment. The Court also determined that such an interpretation of the anti-assignment provision in the BioVeris agreement was consistent with the reasonable expectations of the parties, because leading commentators had long stated that RTMs do not constitute assignments by operation of law. The Court distinguished two Delaware cases finding that the phrase "assignment by operation of law" would commonly be understood to include a merger, because those cases had involved forward mergers, in which the rights at issue transferred from the non-surviving party to the surviving entity. The Court also refused to follow the approach adopted by a California district court in the 1991 case SQL Solutions, Inc. v. Oracle Corp3 (which held that an RTM constituted a transfer of rights under a software license), because it turned on a California law principle that a mere change in the legal form of ownership of a business could result in an assignment depending upon whether it affects the parties protected by the anti-assignment provision. The Chancery Court noted this principle would extend to stock acquisitions, which Delaware jurisprudence firmly established did not involve an assignment. Finally, the Court noted that Meso Scale could have negotiated for a change of control provision, but had failed to do so.

Some Practical Guidance

The chief significance of the Meso Scale decision is its reestablishment of the general understanding that an RTM does not constitute an assignment in Delaware. This means that M&A attorneys may continue to utilize the RTM under Delaware law to avoid obtaining consents in the case of non-assignment provisions in the target's contracts. The case has a number of additional practical implications:

  • Importance of Careful Drafting:  In noting that Meso Scale had failed to negotiate for a change of control provision, the Court's decision validated the distinction between assignment versus change of control. When negotiating agreements, each contract party should therefore make sure it understands the scope of any proposed anti-assignment language and consider its impact on choice of transaction structure in any potential future sale of its or the counterparty's business. The parties may wish to set forth a separate change of control provision if such restriction is desired.

  • Intent of the Parties:  The Court's reasoning included an analysis of the intent of the parties under Delaware's "objective theory" of contract interpretation. Therefore, while the Meso Scale case stands for the general proposition that RTMs do not violate anti-assignment provisions, the intent of the parties will still be relevant. A contract provision that more strongly blurs the line between assignment and change of control could yield a different result.

  • Applicable LawMeso Scale establishes the rule for RTMs in Delaware, but it should be noted that the Chancery Court's analysis focused specifically on the language in DGCL Section 259 and Delaware's line of cases on stock acquisitions. Though Delaware corporate jurisprudence is often persuasive in other jurisdictions, other courts could reach different results, particularly in light of cases such as SQL Solutions. Acquisition planning (and contract drafting) should therefore always involve an analysis of the effects of mergers under all relevant laws.

Footnotes

1 Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, C.A. No. 5589-VCP (Del. Ch. Feb. 22, 2013).

2 By contrast, forward mergers—in which the target disappears and the acquirer or its shell subsidiary survives—could clearly be implicated by such a provision.

3 1991 WL 626458 (N.D. Cal. Dec. 18, 1991).

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.