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Delaware Court of Chancery Holds that Reverse Triangular Mergers Do Not Trigger "Assignment by Operation of Law" Provisions
Practical Law Legal Update 7-524-4725 (Approx. 5 pages)
Delaware Court of Chancery Holds that Reverse Triangular Mergers Do Not Trigger "Assignment by Operation of Law" Provisions
by PLC Corporate & Securities
| Published on 28 Feb 2013 • Delaware |
The Delaware Court of Chancery held in Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH that a reverse triangular merger does not trigger an "assignment by operation of law" provision.
On February 22, 2013, the Delaware Court of Chancery granted defendants' motion for summary judgment in Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, holding that a reverse triangular merger (RTM) does not qualify as an "assignment by operation of law" under Delaware law. This decision contrasts with the Court of Chancery's own 2011 ruling in this case on a motion to dismiss, where the Court had held that an RTM may trigger an "assignment by operation of law" provision (see Legal Update, Delaware Chancery Court Finds Reverse Triangular Mergers May Trigger "Assignment by Operation of Law" Provisions).
Background
The plaintiffs, Meso Scale Diagnostics, LLC and Meso Scale Technologies, LLC (collectively, Meso Scale), and defendants, Roche and certain of its affiliates, including BioVeris Corporation (BioVeris), were parties to a series of agreements providing for the license of certain patents owned by BioVeris. One of these agreements prohibited assignment "by operation of law or otherwise" without Meso Scale's prior written consent, but did not require Meso Scale's consent for changes in ownership. In 2007, Roche acquired BioVeris through an RTM without first seeking consent from Meso Scale. The merger prompted Meso Scale to bring a claim for breach of contract, alleging that the RTM constituted an assignment by operation of law, and therefore required plaintiff's consent.
The defendants brought a motion to dismiss in 2011, which the Court of Chancery denied, finding that an RTM may trigger an "assignment by operation of law" provision if the acquiring company goes on to treat the target company as a mere shell. The Court had stated that plaintiffs could plausibly argue that "by operation of law" was intended to cover mergers that effectively operated like an assignment, even if it might not apply to mergers merely involving changes of control.
Key Litigated Issues
In 2012, after the trial date was set, the defendants filed a motion for summary judgment on the same issue. At issue was whether an RTM, where the surviving entity of the merger is the same entity that originally held the rights before the merger, can constitute an assignment by operation of law.
Decision
The Court of Chancery granted the defendants' motion for summary judgment, finding the defendants' interpretation of the disputed agreement reasonable on two grounds:
- Application of Section 259 of the Delaware General Corporation Law (DGCL).
- Consistency with the reasonable expectations of the parties.
DGCL Section 259
The Court analyzed Section 259 of the DGCL, which covers the effects of a merger, and noted that mergers under this section result in the transfer of the non-surviving corporation's rights to the surviving corporation by operation of law. The language of the statute suggests that the surviving corporation, by contrast, does not effect any assignment, by operation of law or otherwise, by virtue of its participation in the merger. The Court therefore found that the phrase "by operation of law" in the license agreement was not intended to cover RTMs.
Reasonable Expectations of the Parties
In determining the reasonable expectations of the parties, the Court looked to discussions by leading commentators on mergers and determined that the vast majority of commentary indicates that RTMs do not constitute an assignment by operation of law. The Court also cited its decision in Lewis v. Ward, stating that:
"If a reverse triangular structure is used, the rights and obligations of the target are not transferred, assumed or affected. Because of these and other advantages to using a triangular structure, it is the preferred method of acquisition for a wide range of transactions." (No. 15255, (Del. Ch. Oct. 29, 2003).)
Forward Mergers Distinguished
The plaintiffs cited two cases that held that an "assignment by operation of law" provision could contemplate any merger. However, the Court found them distinguishable from the present case because in those instances, the rights alleged to have been assigned were held by the non-surviving entities, rather than here, where the rights were held by the surviving entity.
California Law Distinguished
The Court of Chancery also refused to follow a California district court's holding that an RTM results in an assignment by operation of law (SQL Solutions, Inc. v. Oracle Corp., (N.D. Cal. Dec. 18, 1991)). As the Court of Chancery explained, the California court's reasoning was based on California law, which holds that an assignment occurs as a result of a change in the legal form of ownership of the business. This, however, conflicts with Delaware law, where a mere change in legal ownership of a business, such as a stock acquisition, does not result in an assignment by operation of law.
Practical Implications
This decision restores the general understanding that, under Delaware law, assignment provisions are not triggered by RTMs, despite the implication from the Court of Chancery's 2011 decision that it might. For contractual parties who want an RTM to require their consent, the Court of Chancery here suggests that they negotiate for a "change of control" provision, rather than rely on the "assignment by operation of law" provision.