The Delaware chancery court recently restored some clarity to its jurisprudence regarding the effect of a reverse triangular merger (RTM) on contracts of the target company that contain anti-assignment clauses. An April 2011 ruling on a motion to dismiss had hinted that, in some circumstances, an RTM could be construed as an assignment by operation of law even though the assets of the surviving corporation remain titled with the surviving corporation. In a summary judgment decision, the chancery court has now clarified that an RTM does not result in an assignment by operation of law with respect to the surviving corporation.
In an RTM, the buyer forms a subsidiary company that is then merged with and into the target company, with the target company surviving. The merger subsidiary formed by the buyer ceases to exist as a result of the merger. Meanwhile, the target company assumes all of the assets and liabilities formerly of the merger subsidiary.
In the transaction at issue, Roche Diagnostics (Roche) sought to acquire BioVeris Corporation (BioVeris) in a reverse triangular merger. BioVeris held some key intellectual property rights pursuant to an agreement with Meso Scale Diagnostics (Meso Scale). The Meso Scale agreement contained an anti-assignment provision that prohibited BioVeris from assigning the agreement “by operation of law or otherwise” without the prior written consent of Meso Scale.
To complete the acquisition, Roche created a new subsidiary (merger sub), and then merged the merger sub with and into BioVeris. The BioVeris stockholders were paid out in cash, leaving Roche the sole stockholder of BioVeris after the transaction. In the merger between merger sub and BioVeris, BioVeris was the surviving corporation. According to Meso Scale, “within months of the BioVeris Merger, Roche laid off all of its approximately 200 employees, vacated the BioVeris facility in Maryland, and notified existing customers that BioVeris’s product lines were being discontinued, leaving BioVeris as nothing more than a holding company for its intellectual property and license rights.” Even though the intellectual property rights remained titled in BioVeris after the RTM, Meso Scale brought suit claiming that, under the circumstances (i.e., a situation in which the target company is retained only as a shell holding company after the transaction), the RTM constituted an assignment by operation of law without Meso Scale’s prior written consent, in violation of the agreement.
Roche moved to dismiss the lawsuit by Meso Scale under Rule 12(b)(6) for failure to state a claim. In December of 2010, the Delaware chancery court heard arguments on Roche’s motion to dismiss. In its ruling dated April 8, 2011, the chancery court refused to dismiss the complaint, finding that Meso Scale’s argument was a reasonable interpretation that could not be dismissed at the 12(b)(6) stage.
Even though the chancery court’s decision in refusing to dismiss the Meso Scale complaint in April of 2011 was not a decision on the merits, commentators took it as a hint that the chancery court may be willing to find that an anti-assignment clause applicable to the target could be triggered by an RTM, especially in a situation in which the buyer treats the target company as a mere shell and operates as if it (the buyer) had directly acquired the rights of the target company. A finding like that would be contrary to the traditional understanding that an RTM does not trigger anti-assignment provisions in contracts of the surviving corporation because the contractual rights of the target in the RTM are never transferred.
On February 22, 2013, the chancery court issued its decision on Roche’s motion for summary judgment, which had made the same arguments present in its prior motion to dismiss. This time, though, the chancery court agreed with Roche that the anti-assignment clause was not triggered. The court pointed to Section 259(a) of the Delaware General Corporation Law, which provides that the effect of an RTM is the transfer of the assets and liabilities of the non-surviving corporation to the surviving corporation, and therefore does not result in a transfer of the assets and liabilities of the surviving corporation. The court also noted that, since the great weight of commentary and case law relating to RTMs states that they do not trigger anti-assignment clauses with respect to contracts of the surviving corporation, it was unlikely that the parties intended a different result to apply when they entered into the agreement in question.
As for Meso Scale’s argument that this RTM had the same effect as an assignment of the intellectual property rights of BioVeris directly to Roche regardless of the technical form of the transaction, the court pointed to the doctrine of independent legal significance under Delaware law, which provides that “The mere fact that the result of actions taken under one section [of the DGCL] may be the same as the result of action taken under another section does not require that the legality of the result must be tested by the requirements of the section.” (pp. 39-40 of the opinion).