In a reverse triangular merger, the acquiring company forms a subsidiary that merges with and into the target with the outstanding shares of the target being converted into securities of the acquiring corporation or some other consideration. Does a reverse triangular merger constitute an assignment of a target corporation’s contracts? Because the reverse triangular merger is an exceedingly common acquisition technique, one would expect that this question was answered long ago. Surprisingly, however, this isn’t the case.
Earlier this year, Vice Chancellor Donald F. Parsons analyzed whether a reverse triangular merger violated an anti-assignment clause that read as follows: “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 . . .”. He concluded:
In sum, Meso could have negotiated for a “change of control provision.” They did not. Instead, they negotiated for a term that prohibits “assignments by operation of law or otherwise.” Roche has provided a reasonable interpretation of Section 5.08 that is consistent with the general understanding that a reverse triangular merger is not an assignment by operation of law. On the other hand, I find Meso’s arguments as to why language that prohibits “assignments by operation of law or otherwise” should be construed to encompass reverse triangular mergers unpersuasive and its related construction of Section 5.08 to be unreasonable.
Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 62 A.3d 62, 88 (Del. Ch. 2013). See I’ve Been Thinking About Conversion, But I Haven’t Decided To Convert.
Here in California, U.S. District Court Judge Samuel Conti recently addressed the issue even more recently as follows:
No California state court has resolved this matter, and the Court is not inclined to guess at possible conclusions. The Court therefore begins from the presumption that a reverse triangular merger, which leaves intact the acquired corporation, does not effect a transfer of rights from the wholly owned subsidiary to its acquirer as a matter of law. What little applicable law there is could be analogized from California cases on stock sales, like Farmland Irrigation Co. v. Dopplmaier, 48 Cal. 2d 208, 223, 308 P.2d 732 (Cal. 1957), which suggested that if a plaintiff had sold all of his stock in a corporation, there could be no contention that the corporation’s licenses would be extinguished as a matter of law, since the two contracting parties were still extant and in privity.
Florey Inst. of Neuroscience & Mental Health v. Kleiner Perkins Caufield & Byers, 2013 U.S. Dist. LEXIS 138904 (N.D. Cal. Sept. 26, 2013).
Both jurists confronted, and declined to follow, Judge Marilyn Hall Patel’s earlier decision in SQL Solutions v. Oracle Corp., 1991 U.S. Dist. LEXIS 21097 (N.D. Cal. Dec. 18, 1991) with Vice Chancellor Parsons saying: “I decline to adopt the approach outlined in SQL Solutions, however, because doing so would conflict with Delaware’s jurisprudence surrounding stock acquisitions, among other things. Under Delaware law, stock purchase transactions, by themselves, do not result in an assignment by operation of law.” Judge Conti said “Plaintiff relies solely on SQL Solutions to argue that assignment occurred as a matter of law when an acquired corporation became another corporation’s wholly owned subsidiary. That case did not analyze nonassignment clauses and also found that federal copyright law forbid transfer.”
Hollywood, Somali Pirates and Homer
Over the weekend, I saw the recently released film, Captain Phillips. The movie tells the story of the takeover of the MV Maersk by Somali pirates. When the Navy uses a Somali speaker to communicate with the pirates, one of the pirates asks “Who’s this?”. The translator answers “nemo”, the Latin word for “no one”. The interchange, of course, is an echo of the famous encounter of Odysseus and the Cyclops, Polyphemus in Homer’s Odyssey:
Κύκλωψ, εἰρωτᾷς μ᾽ ὄνομα κλυτόν, αὐτὰρ ἐγώ τοι ἐξερέω: σὺ δέ μοι δὸς ξείνιον, ὥς περ ὑπέστης. Οὖτις ἐμοί γ᾽ ὄνομα: Οὖτιν δέ με κικλήσκουσι μήτηρ ἠδὲ πατὴρ ἠδ᾽ ἄλλοι πάντες ἑταῖροι.
Cyclops, you are asking my renowned name, nevertheless I will declare: “Give to me the hospitality, you were promising. My name is no one: no one is what my mother, father and all my comrades call me.”
Home, Odyssey Book 9, lines 364 -367 (my translation). Matters went downhill from there for both Polyphemus and the pirates.