A recent Delaware Court of Chancery decision examined whether a reverse triangular merger (“RTM”) qualified as a prohibited assignment by operation of law under Delaware law.  In Meso Scale Diagnostics, LLC v. Roche Diagnostics, GMBH,  62 A.3d 62 (Del. Ch. 2013), defendants Roche Diagnostics and its affiliates and subsidiaries, including wholly-owned subsidiary BioVeris Corp., became parties to certain patent licensing agreements involving plaintiffs and their affiliates regarding certain patents owned by BioVeris.  As part of the transactions between the entities, the plaintiffs, Roche Diagnostics, BioVeris and certain other parties entered into a related Global Consent and Agreement under which the parties consented to, among other things, the transactions between certain of the parties and their affiliates and the consummation of those transactions.  The Global Consent contained an anti-assignment clause that 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; provided, however, that the parties acknowledge and agree that the conversion of [BioVeris] in accordance with Section 2.01 of the Restructuring Agreement and the continuation of BioVeris as a result thereof shall not be deemed to be an assignment and shall not require the consent of any party…”

Roche Diagnostics eventually acquired BioVeris through a reverse triangular merger involving a subsidiary of Roche Diagnostics, with BioVeris remaining intact as the surviving entity.  Roche Diagnostics did not seek the consent of plaintiffs prior to consummating the RTM involving BioVeris.  Plaintiffs thereafter commenced suit against Roche Diagnostics, alleging, among other things, that the RTM involving BioVeris constituted a breach of the anti-assignment provisions of the Global Consent.  However, the language at issue in the Global Consent did not expressly prohibit a change of control or ownership of BioVeris.

Roche Diagnostics argued that because BioVeris remained as a surviving entity of the RTM with all of its prior assets, rights and liabilities intact, BioVeris never assigned the license agreements or anything else.  Roche Diagnostics also argued that a RTM was very similar to a stock acquisition, and that Delaware case law generally held that stock acquisitions and other simple changes of ownership generally do not constitute assignments.  Plaintiffs, on the other hand, contended that mergers generally, including RTMs, can result in an assignment by operation of law.  Among other things, plaintiffs argued that Delaware case law on forward triangular mergers (“FTMs”) suggested that a merger could be treated as an assignment by operation of law and cited to a California federal court case holding that a RTM resulted in an assignment by operation of law.

In a 2011 ruling on a preliminary motion to dismiss filed by defendants, the Court of Chancery initially found a lack of clear guidance on the issue under Delaware law.  The Court of Chancery also found that the parties had two competing, but reasonable, constructions of the term assignment “by operation of law” and that there was ambiguity as to whether such terms were intended to apply to RTMs.  The Court of Chancery therefore denied defendants’ preliminary motion to dismiss.

However, in a 2013 ruling on a motion for summary judgment filed by defendants regarding the anti-assignment language, the Court of Chancery, after further examination of the applicable Delaware law and the parties’ arguments, granted Roche Diagnostic’s motion, finding that the language in the Global Consent prohibiting assignment “by operation of law or otherwise” should not be construed to encompass RTMs.  In the 2013 ruling, the Court of Chancery rejected plaintiffs’ arguments regarding the applicability of Delaware cases examining FTMs, finding, among other things, that those cases involved contracts with non-surviving entities that were forward-merged out of existence and into a separate surviving entity.  The Court of Chancery also rejected plaintiffs’ pleas to apply California federal court precedent in this Delaware case.

In support of its determination, the Court of Chancery looked to guidance found in Section 259 of the Delaware General Corporation Law, which provides as follows:

“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, as the case may be, possessing all the rights, privileges, powers and franchises as well of a public as of a private nature, and being subject to all the restrictions, disabilities and duties of each of such corporations so merged or consolidated; and all and singular, 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, as well for stock subscriptions as all other things in action or belonging to each of such corporations shall be vested in the corporation surviving or resulting from such merger or consolidation….

The Court of Chancery also examined existing Delaware case law examining stock acquisitions and mergers and other outside legal commentary indicating (by a vast majority) that a RTM, like other mere changes in ownership of a business, generally does not constitute an assignment by operation of law as to the surviving entity.  Based upon these findings and an examination of the anti-assignment language in the Global Consent, the Court ultimately found that plaintiffs’ assertions that the contracting parties intended the anti-assignment language in the Global Consent regarding assignments “by operation of law” to apply to RTMs was not reasonable.

The Meso Scale Diagnostics decision serves to reaffirm the understanding that under Delaware law, anti-assignment provisions are generally not triggered by RTMs, even when such anti-assignment provisions reference assignments by operation of law.  In light of the ruling in Meso Scale Diagnostics, parties to contracts (whether in Delaware, New Jersey or elsewhere) wanting a right to consent to an RTM involving any of the other contracting parties would be well-served to include change of control provisions in those contracts.

_{This blog update is not considered to be legal advice, and is intended for educational purposes only.}