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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. 

Client Update on Recent Decision That May Affect Enforceability of Non-Competition Agreements in California

In a recent decision, the federal appeals court for the circuit including California released an opinion (Ruiz v. Affinity Logistics Corp., 2012 WL 388171 (9th Cir. February 8, 2012)) regarding the enforceability of choice of law provisions.  Though this case had to do with wage claims, the decision will likely have a significant impact on, among other things, non-competes and injunctive relief for trade secret matters.

In the Ruiz case a Georgia corporation hired a contractor in California for work that was to take place in California. The contractor agreement specified that the agreement would be governed by Georgia law. The 9th Circuit Court of Appeals held that even though the employer was a Georgia corporation and the parties had agreed that Georgia law would govern, California’s interest in the issues and its choice of law rules required the court to apply California law. 

California law generally makes it very difficult to enforce non-compete covenants (the general exception being a narrow one for non-competes by principals related to the sale of a business).

Furthermore, with regard to protecting trade secrets, many jurisdictions follow the “inevitable disclosure doctrine”, which provides for injunctive relief to prevent a former employee from working for a company’s direct competitors, even if there is no demonstrated threat of trade secret disclosure, so long as it can be shown that the former employee’s new job will ultimately require him/her to rely on trade secrets obtained from the previous employer.  California does not follow this doctrine, finding it, like non-competes, to be an unacceptable burden on the right of a person to seek employment.

As a result of this recent decision, any time there is a nexus to California (especially where an employee is physically present in California) and a desire for a non-compete type of restriction in an acquisition or employment agreement, even if the applicable agreement specifies a non-California choice of law and involves a non-California entity, one should assume that California law will apply, rendering the non-compete unenforceable in most cases and eliminating the possibility of obtaining injunctive relief for trade secret disclosure.

Tri Valley Law would be happy to discuss this with you if you have any questions or concerns.