Delaware Chancery Court Finds Reverse Triangular Merger Under Delaware Law Does Not Effect an Assignment of Rights of the Surviving Corporation, Pratt's Journal of Bankruptcy Law
June 2013
On February 22, 2013, in a case titled Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH,1 Vice Chancellor Parsons of the Delaware Chancery Court granted summary judgment for the defendants in a dispute over an intellectual property license, concluding that a reverse triangular merger is not an assignment “by operation of law or otherwise” insofar as the surviving corporation is concerned and does not result in a violation of an anti-assignment provision in an agreement of the surviving corporation that was a party to a merger under Delaware law. The Court thus removed concerns and uncertainty that had first arisen in connection with an earlier ruling in the same case that had declined to dismiss the plaintiffs’ claim that a reverse triangular merger breached that anti-assignment provision.2
Prior to the Court’s first Meso Scale memorandum opinion in 2011, M&A practitioners were reasonably confident that a reverse triangular merger under Delaware law did not result in an assignment of the contractual rights of the surviving corporation. Such mergers were often used as the mechanism to accomplish an acquisition where there were otherwise concerns about the assignability of particular agreements. However, there was no Delaware precedent directly on point. In his 2011 Meso Scale opinion, Vice Chancellor Parsons created concerns among many M&A practitioners when he found that whether the parties intended that a reverse triangular merger resulted in an assignment of the surviving corporation’s rights presented a question of fact that could not be resolved at the motion to dismiss stage. Vice Chancellor Parsons’ 2013 decision rejecting plaintiffs’ claims that a reverse triangular merger resulted in an assignment is the first Delaware decision squarely addressing this important issue.
This client alert summarizes certain key components of the 2013 Meso Scale decision. The full text of the Court’s decision is available here.
Background
The history of the disputes between the parties to the Meso Scale case is long and complicated, dating back to 1992. In an effort to be (relatively) brief here, we have tried as much as possible to confine this alert to the facts as they existed in 2006 and 2007.
As 2006 began, Roche Diagnostics GmbH and/or certain of its affiliates (Roche) held an irrevocable, perpetual, non-exclusive, worldwide and fully-paid license to certain electrochemiluminescent (ECL) technology in a narrowly-defined field of use (the Roche License). The Roche License had originally been granted in 2003 by IGEN International, Inc. (IGEN) though it got to Roche by a circuitous route. The Roche License was part of a series of transactions that were intended to settle significant intellectual property disputes between IGEN and Roche relating to an earlier license: first, IGEN created two new subsidiaries – IGEN LS and Newco; second, IGEN granted the Roche License to IGEN LS as licensee; third, IGEN assigned to Newco all of its business and operations (including its rights and obligations under the Roche License as licensor); fourth, IGEN spun off Newco as a new public company called BioVeris Corp. (BioVeris); and fifth, Roche acquired IGEN (including IGEN LS and the rights in the Roche License as licensee) for a total of $1.4 billion.
Meso Scale Diagnostics, LLC (MSD) and Meso Scale Technologies, LLC (MST) – the plaintiffs – are relevant because they were prior licensees of certain ECL technology from IGEN.3 Although the Roche License was signed by IGEN and IGEN LS (and they were designated as the sole “parties” to the license), a separate page (the Meso Consent) signed by MSD and MST, and attached to the Roche License, stated that MSD and MST:
consent to the [Roche License] … and … consent to and join in the license granted to [Roche] in the [Roche License]…. Furthermore, MSD and MST … represent and warrant to [Roche] that each of them … waive any right that either of them may have to in any way restrict or limit [Roche’s] exercise of the licenses granted in the [Roche License] during the term thereof.4
In addition to the Meso Consent, MSD and MST (and various other parties including Roche) signed a further document (the Global Consent), which contained the following anti-assignment language:
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; provided, however, that the parties acknowledge and agree that the conversion of Newco in accordance with Section 2.01 of the Restructuring Agreement and the continuation of Newco as a result thereof shall be deemed not to be an assignment and shall not require any consent of any party. Any purported assignment without such consent shall be void. Subject to the preceding sentences, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns.5
Also at the start of 2006, Roche found itself in dispute with BioVeris over Roche’s alleged non-compliance with the Roche License. In order to resolve the ongoing disputes, Roche again sought to acquire the owner of the ECL technology, this time for approximately $600 million. According to the merger proxy filed by BioVeris with respect to the proposed merger, Roche had initially demanded a formal agreement with MSD in connection with the proposed transaction, spelling out the scope of MSD’s remaining rights in the ECL technology. MSD was brought into the negotiations and demanded significant financial concessions from BioVeris. BioVeris “advised Roche that it did not believe that the proposed merger transaction should be conditioned upon obtaining any modifications from MSD and, in view of Roche’s concerns about the concessions being requested by MSD, suggested that Roche conduct further due diligence so that it could become comfortable with the extent of the Company’s existing obligations to MSD.”6 Ultimately, Roche determined that it was prepared to proceed with the proposed transaction without any modifications or agreements regarding the Roche License from MSD.7
The acquisition of BioVeris was structured as a reverse triangular merger whereby a newly created subsidiary of Roche would merge with and into BioVeris, with BioVeris surviving the merger. The holders of stock in BioVeris would receive the merger consideration and their stock would be cancelled. The stock of the merger subsidiary would become the stock of the surviving corporation. Roche, as holder of that stock, would thus become the sole owner of BioVeris after the merger closed in July 2007.
The Delaware Case
MSD and MST filed a complaint against Roche in Delaware Chancery Court in 2010. For the purposes of this alert, only one of the two counts in the complaint is relevant: the one asserting that the reverse triangular merger in 2007 constituted an assignment by operation of law and required their consent under the Global Consent.8
Relying largely on the statutory text of Section 259 of the Delaware General Corporation Law (DGCL), Vice Chancellor Parsons concluded 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.”9 In particular, Section 259 provides:
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 . . . 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 . . . shall be vested in the corporation surviving or resulting from such merger or consolidation; and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation as they were of the several and respective constituent corporations.10
Relying on a substantial amount of legal scholarship and commentary in support of the proposition that reverse triangular mergers do not constitute an assignment by operation of law as it relates to the surviving corporation, the Court also observed that the foregoing interpretation was “consistent with the reasonable expectations of the parties.”11 Furthermore, the Court noted that the principal effect of a reverse triangular merger on the surviving corporation is to effect a change in legal ownership of the survivor, which would not of itself result in an assignment by operation of law of the rights of the survivor.12
Finally, the Court distinguished a handful of Delaware cases that plaintiffs claimed supported their position and rejected plaintiffs’ invitation to follow a California case that held that a reverse triangular merger effected an assignment by operation of law. The Delaware cases cited by plaintiffs involved forward mergers and – in that situation unlike in the case of a reverse merger – the party to the contracts in question is merged out of existence.13 In the California case, SQL Solutions, Inc. v. Oracle Corp., 1991 WL 626458 (N.D. Cal. Dec. 18, 1991), the U.S. District Court had found that a reverse triangular merger constituted an assignment for purposes of California law applying a line of California cases holding that whether “an assignment results merely from a change in the legal form of ownership of a business . . . depends on whether it affects the interests of the parties protected by the nonassignability of the contract.”14 However, Vice Chancellor Parsons concluded that this line of cases (and thus the holding in SQL Solutions) conflicted with Delaware’s jurisprudence surrounding stock acquisitions. Under Delaware law, stock purchases generally do not result in an assignment by operation of law of the assets of the target corporation because – despite changes in the identity of stockholders of the target corporation – the target corporation itself remains the same.15
Conclusion
Although the Court’s 2013 decision in the Meso Scale case does not represent a major departure from prior Delaware case law, it is a useful judicial confirmation of the principle that a reverse triangular merger does not result in the assignment (by operation of law or otherwise) of the surviving corporation’s contracts.16 In particular, it removes the uncertainty created by Vice Chancellor Parsons in his 2011 Meso Scale opinion. Lastly, parties intending that a reverse merger be treated as an assignment in violation of an anti-assignment provision should address that issue head on in their agreement (whether by specifying as a matter of contract that a reverse merger is an “assignment” or by including an express change of control provision that triggers the forfeiture of certain rights).
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1. C.A. No. 5589-VCP, 2013 WL 911118 (Del. Ch. Feb. 22, 2013, revised Mar. 8, 2013).
2. C.A. No. 5589-VCP, 2011 WL 1348438 (Del. Ch. Apr. 8, 2011).
3. MST was founded by Jacob Wohlstadter, the son of Samuel Wohlstadter, the founder, chairman and chief executive officer of IGEN (and later of BioVeris). MSD was a joint venture of MST and IGEN.
4. Meso Scale, slip op. at 13.
5. Id. at 14-15.
6. BioVeris Corp., Definitive Proxy Statement (DEFM14A) at 20 (May 21, 2007).
7. Id. at 22.
8. The second count asserted that Roche breached the Roche License by selling products and services outside of the authorized field. The Court denied summary judgment on the second count. Trial was scheduled to begin on that count on February 25, 2013.
9. Meso Scale, slip op. at 35.
10. DGCL § 259 (emphasis in slip opinion). Interestingly, in reaching the decision that the merger in question did not result in an assignment “by operation of law or otherwise” under the Roche License, the Court reached a second important, but unstated, holding. Elsewhere in the opinion, the Court noted that the Roche License was governed by New York law. Thus, in applying DGCL § 259 to the question of whether a New York law-governed contract underwent “an assignment by operation of law or otherwise,” the Court implicitly concluded that – at least in the context of a merger between two Delaware corporations – this question was a matter of Delaware law.
11. Meso Scale, slip op. at 37.
12. The Court noted that “Delaware courts have refused to hold that a mere change in the legal ownership of a business results in an assignment by operation of law…. In sum, Meso could have negotiated for a ‘change of control provision.’ They did not.” Id. at 48.
13. Id. at 41-44 (citing Tenneco Automotive Inc. v. El Paso Corp., 2002 WL 453930 (Del. Ch. Mar. 20, 2002); and Star Cellular Telephone Co. v. Baton Rouge CGSA, Inc., 647 A.2d 382 (Del. 1994)).
14. Id. at 46-47 (citations omitted).
15. Id. at 47-48 (citing Baxter Pharm. Prods., Inc. v. ESI Lederle Inc., 1999 WL 160148 (Del. Ch. Mar. 11, 1999); and Branmar Theatre Co. v. Branmar, Inc., 264 A.2d 526 (Del. Ch. 1970)).
16. It is also worth noting that Texas reaches even further than Delaware law in protecting mergers from anti-assignment provisions. Under the Texas Business Organizations Code, neither a forward nor a reverse merger involving Texas corporations would result in an “assignment by operation of law.” It provides: “[A]ll rights, title, and interests to all real estate and other property owned by each organization that is a party to the merger is allocated to and vested, subject to any existing liens or other encumbrances on the property, in one or more of the surviving or new organizations as provided in the plan of merger without: (A) reversion or impairment; (B) any further act or deed; or (C) any transfer or assignment having occurred.” Tex. Bus. Org. Code § 10.008(a)(2). See also Philip M. Haines, The Efficient Merger: When and Why Courts Interpret Business Transactions to Trigger Anti-Assignment and Anti-Transfer Provisions, 61 Baylor L. Rev. 683 (2009).