In Meso Scale Diagnostics v. Roche Diagnostics, C.A. No. 5589-VCP (Del. Ch. Apr. 8, 2011), the Delaware Chancery Court recently handed down a decision that could significantly affect mergers and acquisitions practice, taking a broad view of contractual assignment restrictions that could cause them to be violated by typical M&A transactions. Although the law on assignability of inbound intellectual property licenses in the context of a reverse triangular merger has long been inconsistent, this case follows a minority (and criticized) view that a typical contractual assignment restriction — prohibiting assignments by operation of law — would be violated by the most common form of merger transaction: a reverse triangular merger.
In 2007, Roche acquired a target company called BioVeris by means of a reverse triangular merger. In 2003, BioVeris had received a non-exclusive license to electrochmiluminescence (ECL) technology from a licensee of Meso, which was a holder of exclusive rights in the ECL technology. That license agreement contained a provision prohibiting assignment “in whole or in part, by operation of law or otherwise....” Meso claimed the merger violated that restriction. The court addressed the issue in response to Roche’s motion to dismiss for failure to state a claim. Roche argued that no assignment had occurred because (1) the clause in question did not expressly provide that a change in control or ownership could constitute an assignment and (2) the target entity survived the transaction, and thus did not constitute an assignment.
Meso argued that the anti-assignment clause applied to all mergers regardless of their structure. However, the two primary cases that Meso cited dealt only with forward mergers — a form of transaction in which the target entity does not survive. Tenneco Auto Inc. v. El Paso Corp., 2002 WL 453930 (Del. Ch. 2002) and Star Cellular Telephone Co. v, Baton Rouge CGSA, Inc., 19 Del J Corp. L. 875 (Del. Ch. 1993). Meso also cited an unreported California opinion, SQL Solutions Inc. v. Oracle Corp., 1991 WL 626458 (N.D. Cal Dec 19, 1991), holding that a reverse triangular merger had triggered an anti-assignment provision in an inbound software licensing agreement. However, the Meso court did not find SQL Solutions Inc. dispositive, as it was an unreported decision from another jurisdiction and the court’s reasoning was “open to question.” SQL Solutions Inc. has long been considered a case that prevented clarity on this issue in the M&A practice.
The Meso court held that both Roche’s and Meso’s interpretations of the anti-assignment clause were reasonable and, as a result, did not grant Roche’s motion to dismiss. The court’s reluctance to come to a definitive conclusion in this case may have been due to an extraordinarily complicated set of facts that composed the 2003 transaction — to which Meso gave its consent. In arriving at its conclusion, the court stressed that no Delaware court had ever considered the issue of whether a reverse triangular merger triggers an anti-assignment clause. While the court recognized that the provision did not mention change of control or ownership, it held that this did not necessarily mean that the anti-assignment clause could not be triggered. Although the court agreed with Roche that reverse triangular mergers are more similar to stock acquisitions than to forward mergers, it held that a reverse merger is not the same as a stock acquisition and that therefore the analogy was not persuasive. Notably, the court pointed to Roche’s post-acquisition restructuring of BioVeris, “leaving BioVeris as nothing more than a holding company” to emphasize this point. The court suggested that the post-acquisition layoffs of BioVeris employees, discontinuation of product lines, and closure of the target’s Maryland facility might trigger an anti-assignment provision, as the merger functioned as a traditional assignment.
Because of the procedural posture of the case — a motion to dismiss that was denied — this opinion does not establish a clear rule that a reverse triangular merger always violates a contractual restriction against an assignment by operation of law. However, because the court would not clearly rule otherwise, this case joins SQL Solutions Inc. to muddy the legal waters on this issue. The court’s ruling may be limited to similar facts because the court looked to the acquirer’s actions after the acquisition to interpret the provision. Plaintiffs had alleged that “Roche purchased BioVeris solely to obtain the latter’s ECL-related … rights under … the [Meso] Licenses,” and the court apparently was receptive to this interpretation of the facts. Accordingly, companies should consider the nature and scope of the changes they plan to make to a target after acquisition when they analyze transferability issues in M&A. Furthermore, companies that are parties to contracts that have antiassignment provisions should strive to clarify these provisions to reflect their intent.