Client Update on Reverse Triangular Mergers and Anti-Assignment Clauses
On February 22, 2013 the Delaware Court of Chancery ruled in a case that has significant importance for merger and acquisition transactions. In the pertinent issue of the case, Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, C.A. No. 5589-VCP (Del. Ch. Feb. 22, 2013), the Court of Chancery granted summary judgment and ruled that a reverse triangular merger is NOT an assignment, by operation of law or otherwise.
For merger and acquisition purposes, this case confirms an important, yet heretofore ambiguous, assumption regarding the rationale for structuring a transaction as a reverse triangular merger (where the target company becomes a subsidiary of the acquirer): Contracts between the target company and third parties that contain anti-assignment clauses will not be in breach, and thus terminable, solely by reason of the acquisition of the target by the acquirer via a reverse triangular merger.
The details of this case were fairly routine-the target company (BioVeris Corporation) was the licensee of certain technology pursuant to a license with that required the consent of the licensor for any assignment, including an assignment by operation of law. Roche Diagnostics acquired BioVeris by way of a reverse triangular merger: Roche Diagnostics formed an acquisition subsidiary that BioVeris merged into, with BioVeris being the surviving corporation and a wholly owned subsidiary of Roche Diagnostics.
This transaction certainly would have been in violation of a change in control provision, but the license only had an anti-assignment clause and not a change in control clause.
The Court of Chancery found, as a matter of law, that a reverse triangular merger is not an assignment. In particular, the Court of Chancery found that based on prevailing expert opinions on the topic reasonable parties at the time of contracting would not have expected the anti-assignment clause to apply to a reverse triangular merger.
It is important to note that this rule can only be relied upon in Delaware. California, in particular, is less settled when it comes to the question of a reverse triangular merger constituting an assignment of contract rights. The 1991 case of SQL Solutions, Inc. v. Oracle Corp. held that a reverse triangular merger results in an assignment as a matter of law since “it affects the interests of the parties protected by the nonassignability of the contract.”
Consequently, for purchasers in particular, it is critically important to structure reverse triangular merger transactions so that they are governed by Delaware law.