An important question that must be confronted early in the process of any corporate merger is what consents must be obtained under the target’s contracts in order to consummate the transaction. Often the contract provisions are not clear, requiring consent for assignments, including “by operation of law or otherwise”. Despite the many mergers that occur involving Delaware corporations, the question of whether a reverse triangular merger1 constitutes an assignment by operation of law under Delaware law was only recently addressed by the Delaware court in the case of Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH. 2
The case involved a dispute between Roche Holding Ltd, the pharmaceutical giant, and Meso Scale Diagnostics, LLC and its affiliates (“MSD”). Bioveris Corp. (“Bioveris”), a subsidiary of Roche acquired in 2007 through a reverse triangular merger, had obtained intellectual property licenses from a former affiliate of Bioveris in a 2003 transaction that also included a global written consent from MSD to the transfer of those licenses (the “Global Consent”) as MSD retained a springing license in the transferred intellectual property.
MSD argued, among other things,3 that the reverse triangular merger violated the non-assignment clause of the Global Consent. The Global Consent provided that “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.”4 The defendants sought summary judgment of this count on several grounds. First, they argued it was time barred by the doctrine of laches since the claim was brought allegedly outside the analogous three-year statute of limitations. Second, they argued consent of MDS was not required either because the non-assignment clause in the Global Consent did not apply to the technology in question or because “as a matter of law, a reverse triangular merger cannot be an assignment by operation of law.”5 The court was not persuaded by the defendants’ laches argument, finding that the date of the Bioveris closing, which was within three years of the filing of the complaint, was the relevant starting date, and not the date the merger agreement was signed, which was outside the three years. On the second point, the Court rejected defendants’ argument that the consent right was intended only to cover an assignment of the rights under the Global Consent, finding the more reasonable interpretation to be the consent right applied to any assignment of the underlying technology. However, the court granted the defendants’ summary judgment on the basis that no consent was required as a result of the Bioveris merger, since a reverse triangular merger did not constitute an “assignment by operation of law or otherwise.”
The Chancery Court began by explaining 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.”6
The Court found reasonable defendants’ position that based on the language of Delaware Code §259(a)7 and the general view of commentators that a reverse triangular merger does not constitute an assignment by operation of law of the contracts of the surviving corporation, the parties would not have intended the language to apply to this form of merger. The Court distinguished other Delaware cases that involved forward triangular mergers where the target did not survive. The Court rejected the analysis of California courts which hold that any form of change of ownership triggers an assignment by operation of law.8 The Chancery Court stated that “under Delaware law, stock purchase transactions, by themselves, do not result in an assignment by operation of law”9 and concluded that “[b]oth stock acquisitions and reverse triangular mergers involve changes in legal ownership, and the law should reflect parallel results.”10 Finally, the Court did not find any ambiguity created by a proviso in the Global Consent that addressed specifically the change in legal ownership from a limited liability company to a corporation, stating that MSD could have negotiated for a change of control but did not. The Court concluded the non-assignment clause was not intended to cover the reverse triangular merger of Bioveris and granted the defendants’ summary judgment on that count.