In Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbHi, the Delaware Court of Chancery held that a reverse triangular merger does not involve the assignment by operation of law or otherwise of assets of the target corporation. Accordingly, the Court determined that a non-assignment provision covering intellectual property rights of the target was not breached by the defendant’s failure to obtain consent in connection with the merger.
From the perspective of M&A practitioners, this decision affirms the effectiveness of the reverse triangular merger structure in avoiding the restrictions of non-assignment provisions in target contracts. From the perspective of drafters of licenses and other commercial contracts, the decision underscores the limitations of non-assignment clauses, and the importance of alternative restrictions such as change of control provisions for those seeking to restrict the rights of the parties with whom they contract when subject to an acquisition.
A reverse triangular merger involves the acquisition of a target through the merger of a wholly-owned subsidiary of the acquirer into the target, with the target as the surviving entity. A forward triangular merger, by contrast, involves the merger of the target into the wholly-owned subsidiary, with the wholly-owned subsidiary as the surviving entity. The result of both structures is that the target becomes a wholly-owned subsidiary of the acquirer.
The Law Before Meso Scale
Prior case law in Delaware and other jurisdictions had established that a forward triangular merger involves an assignment by operation of law of the target corporation’s assets to the surviving corporation. Less well-settled was the question of whether a reverse triangular merger also involves an assignment. The prevailing view among commentators and practitioners before Meso Scale was that it did not, and this feature was viewed as a significant advantage of the acquisition structure: a reverse triangular merger was generally thought not to trigger third-party consent requirements under non-assignment provisions in target contracts. However, in April 2011 the Chancery Court had denied a motion to dismiss brought by the defendants in Meso Scaleii, ruling that the plaintiffs and defendants had both asserted reasonable, though competing, constructions of the non-assignment provision at issue—and thereby creating additional uncertainty about Delaware law.
In another notable case, SQL Solutions v. Oracleiii, a U.S. district court in the Northern District of California in 1991 held that a non-assignment provision in a license agreement did, in fact, apply to a reverse triangular merger where a third-party licensor would have been adversely impacted by the transaction—although that decision has not generally been followed and various commentators have questioned its analysis and validity.
The non-assignment provision at issue in Meso Scale read, in relevant part, as follows:
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 provision was included in a “global consent” instrument entered into as part of a 2003 transaction among defendant Roche Holding Ltd. (Roche), plaintiffs Meso Scale Diagnostics, LLC (MSD) and Meso Scale Technologies, LLC (MST), IGEN International, Inc. (IGEN) and several other parties. Although there was some dispute over the scope of the non-assignment clause, the Court determined that it could reasonably apply to certain intellectual property (IP) rights held by IGEN, including under agreements with MST and MSD. IGEN would later spin-off those IP rights to BioVeris Corporation (BioVeris), which was acquired by Roche in 2007 through a reverse triangular merger. Plaintiffs MSD and MST, who had previously been in a series of disputes with Roche over the IP, alleged that the merger constituted an assignment of BioVeris’ IP rights without their consent in breach of the non-assignment provision.
The Court held that there was no breach of the non-assignment provision because the reverse triangular merger did not involve an assignment of the IP rights. The Court further stated 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.”
In reaching its decision, the Court focused on the language of Section 259(a) of the Delaware General Corporation Law which states that, upon the effectiveness of a merger, the separate corporate existence of all constituent corporations, except the one into which the other(s) have merged (i.e., the surviving corporation), shall cease. Without delving too deeply into the metaphysics of a merger, the Court determined that the statutory language does not imply a transfer by the surviving corporation of its own rights and obligations in a merger. The Court distinguished a reverse triangular merger from a forward triangular merger, where the target corporation is not the surviving entity and may, therefore, be thought to transfer its rights and obligations to the surviving corporation by operation of law.
The Court considered but did not find persuasive the SQL Solutions decision because it was based on the proposition that a mere change in the legal form of ownership of a corporation (such as through a stock purchase) can result in an assignment by operation of law, which ran contrary to Delaware jurisprudence. The Court also rejected plaintiff’s argument that, regardless of form, the transaction effectively involved an assignment of BioVeris’ IP rights to Roche, holding such a theory to be contrary to Delaware’s longstanding doctrine of independent legal significance.
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iMeso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 2013 WL 655021 (Del. Ch. Feb. 22, 2013)
iiMeso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 2011 WL 1348438 (Del. Ch. Apr. 8, 2011)
iiiSQL Solutions, Inc. v. Oracle Corp., 1991 WL 626458 (N.D. Cal. Dec. 18, 1991)