The M&A community is abuzz about Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, a recent Delaware Chancery Court opinion in an ongoing breach of contract dispute involving a reverse triangular merger (an “RTM”). In the opinion, Vice Chancellor Parsons denied defendants’ motion to dismiss plaintiffs’ breach of contract claim, because the court determined that an anti-assignment provision in a contract between the parties was ambiguous as to whether consent was required in the context of an RTM. This potentially far-reaching opinion may impact the way parties structure future deals as well as conduct business and legal due diligence during transactions. This case may also encourage parties to seek legal redress for potential breaches of anti-assignment provisions of contracts resulting from RTMs.

The facts of the Meso case involve a complex series of intellectual property licenses, a joint venture and related disputes that began in the early 1990s and is detailed in the court’s opinion. The current case arose out of the most recent transaction in this series, when Roche Holding Ltd. acquired a company called BioVeris Corporation in 2007 via an RTM. BioVeris owned certain technology rights subject to a Global Consent and Agreement that had been entered into in 1997 by Roche, BioVeris, IGEN International Inc., Meso Scale Diagnostics, LLC and Meso Scale Technologies LLC. The consent agreement contained language prohibiting the assignment of assets of BioVeris by operation of law, without the consent of the Meso entities. Roche did not seek or obtain Meso’s consent to the RTM, and Meso brought suit.

Specifically, the anti-assignment provision at issue states: “Neither this Agreement nor any 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.” In considering defendants’ motion to dismiss the breach of contract claim on the grounds that the RTM did not constitute an assignment “by operation of law,” the court considered whether the anti-assignment provision at issue was susceptible to “different interpretations or may have two or more different meanings.” The court’s decision turned on whether or not an RTM could reasonably be viewed as an assignment by operation of law, which no Delaware court had previously directly addressed before.

Defendants argued that the RTM (i.e., a merger in which a subsidiary of the acquirer merges into the target company, resulting in the target becoming a subsidiary of the acquirer) was not an “assignment by operation of law” because, unlike in a forward merger (i.e., one in which the target company merges out of existence into the acquirer or a subsidiary of the acquirer), the target’s form and contractual responsibilities were preserved through the merger. In other words, there was no assignment but instead a mere change in ownership of the target. Defendants analogized the RTM to a “change of control” transaction (a stock acquisition, e.g.) whereby the identity of the owner changes, but none of the target’s contractual obligations are assigned.

The court disagreed with defendants on the basis that (1) a stock acquisition, while analogous to an RTM, is not the same as an RTM (and thus the stock acquisition case law is not controlling) and (2) Roche’s acquisition of BioVeris did not amount to a mere “ownership change.” The court found defendants’ interpretation of the anti-assignment language “reasonable,” but “not necessarily the only reasonable interpretation.”

In finding the anti-assignment provision sufficiently ambiguous to deny defendants’ motion to dismiss, the court noted that there was no clear law on point, as no Delaware case has directly addressed whether “an RTM violates a contractual provision preventing the unauthorized assignment ‘by operation of law’ of an asset held by the target.” The court also focused on the particular facts in the Roche-BioVeris RTM as constituting something more than a “mere change of legal ownership.” Meso alleged that, after the merger, Roche terminated all BioVeris employees, vacated its premises and discontinued its product lines. The court concluded that Roche’s post-merger actions “gutted and converted [BioVeris] into a shell company for Roche’s benefit,” creating a possible “issue of fact as to whether the parties intended to require Plaintiffs’ consent in” the context of an RTM. Thus, the court denied defendants’ motion to dismiss.

The court’s opinion may permit distinguishing this decision on the basis of the particular facts involved. Nevertheless, this decision flies in the face of the previously held and widespread belief that an RTM does not constitute an assignment by operation of law, and the case merits close attention as it proceeds to trial and through an appeal process. Unless overturned, this decision should caution parties structuring deals as RTMs to consider the anti-assignment provisions of the target’s material contracts and the potential liability that may result from not obtaining the consent of the relevant counterparties. Additionally, parties drafting contracts with anti-assignment provisions may wish to include clauses explicitly permitting RTMs and/or “change of control” transactions without consent.