On February 22, 2013, the Delaware Court of Chancery held in Meso Scale v. Roche1 that the acquisition of a company through a reverse triangular merger does not result in the assignment—by operation of law or otherwise—of an acquired company's in-bound licenses.2
Reverse Triangular Mergers
In a reverse triangular merger, a wholly owned subsidiary of an acquirer merges into an acquisition target, resulting in the survival of the acquired company as a wholly owned subsidiary of the acquirer. The acquired company does not typically transfer assets or change its internal structure in connection with the merger. The net result is equivalent to the acquisition of all of the stock of the acquired company.
There has been considerable uncertainty as to whether an inbound IP license that either expressly prohibits assignment or is silent (implying a restriction on the assignment of inbound IP licenses as a matter of law) would be violated as a result of a reverse triangular merger of the licensee.
In an unpublished 1991 decision in the matter of SQL Solutions v. Oracle Corp., the U.S. District Court for the Northern District of California found that a reverse triangular merger constituted an assignment of the target company's license agreements in violation of an anti-assignment clause.3 The court held that a third-party licensor of the target corporation in that case would have been "adversely impacted" since the acquirer was one of the licensor's direct competitors.4 SQL Solutions suggests that consents from third-party licensors should be obtained in reverse triangular mergers, especially when the technology licensed to the target is important to the target company's business. Other courts have held that a reverse triangular merger or stock sale is not an assignment.5
Meso Scale v. Roche
In 2007, Roche Diagnostics GmbH acquired BioVeris Corp. in a transaction structured as a reverse triangular merger, resulting in BioVeris becoming a wholly owned subsidiary of Roche. Plaintiff Meso Scale Diagnostics alleged that the transaction violated an anti-assignment provision in a consent agreement to which it, Roche, and BioVeris were parties, because BioVeris's licenses were transferred or assigned to Roche without Meso's consent. Meso subsequently filed suit for breach of the consent agreement and Roche moved for summary judgment.
Notably, Meso argued that the reverse triangular merger constituted an assignment "by operation of law or otherwise" under the consent agreement. Meso asserted that the acquisition of BioVeris was a de facto assignment of BioVeris's intellectual property rights to Roche and that Delaware should embrace the decision by the California federal court in SQL Solutions.
The Court's Holding
The Delaware Court of Chancery rejected Meso's arguments and granted summary judgment to Roche. First, in addressing Meso's argument that the acquisition was a de facto assignment, the court held that under Delaware's longstanding doctrine of independent legal significance, the fact that a different deal structure would have triggered the plaintiff's consent rights did not have any bearing on the reverse triangular merger at issue.
Second, the court, under the "objective theory" of contract interpretation, held that the parties would not have expected the negotiated language to trigger non-assignment clauses, as "the vast majority of commentary discussing reverse triangular mergers indicates that a reverse triangular merger does not constitute an assignment by operation of law as to the nonsurviving entity."6
Finally, the court refused to adopt the approach outlined in SQL Solutions, holding that doing so would conflict with Delaware's jurisprudence surrounding stock acquisitions, as well as Section 259 of the Delaware General Corporate Law.7 On this point, the court distinguished the view of the Delaware courts from those in California, pointing out that the SQL Solutions decision specifically noted that "California courts have consistently recognized that an assignment or transfer of rights does occur through a change in the legal form of a business."8
This case is of particular importance to companies and practitioners that regularly participate in merger and acquisition activities. It has reaffirmed that, under Delaware law, a reverse triangular merger does not trigger non-assignment restrictions in agreements and licenses held by a target company.
While the decision goes a long way to providing certainty as to the survival of inbound IP licenses in a reverse triangular merger, it does not necessarily mean that acquirers should no longer be concerned about anti-assignment clauses in inbound IP licenses. Despite its decision, the court's reasoning relies heavily on Delaware law and leaves open the possibility that other jurisdictions may come to a different outcome. Even in cases where Delaware law clearly applies, if the acquirer ultimately intends to have the inbound license apply to its products and activities or otherwise intends to access the technology of the acquired entity that is the subject of the inbound license, it will have to obtain consent or an amendment to the license terms.
Moreover, consent to an assignment still would be necessary if, subsequent to the reverse triangular merger, the acquired entity is to be merged into the acquiring entity, or an affiliate or its assets are to be transferred to the acquiring entity or an affiliate.9 Accordingly, even in reverse triangular mergers, acquirers still must consider the implications of anti-assignment provisions in key agreements.
Finally, the Meso Scale opinion also provides an important reminder to drafters and negotiators of license agreements to be clear about the consent and assignment language chosen for such agreements. The court specifically noted that the plaintiffs in this case "could have negotiated for a change of control provision" and failed to do so. Practitioners should include a provision detailing the consequences of a change of control when appropriate in order to avoid having a court determine the parties' intent after the fact. Thus, for example, if the licensor wants to prevent the license from being assumed in a change of control of the licensee, it should include specific language to that effect, regardless of the form in the transaction.10
Wilson Sonsini Goodrich & Rosati's technology transactions practice regularly advises clients on issues relating to the drafting, negotiation, and due diligence of IP licenses and other key agreements, and we will continue to follow the jurisprudence surrounding this line of case law. Please contact Suzanne Bell, James Clessuras, Selwyn Goldberg, Robert Ishii, Kira Kimhi, Martin Korman, Denny Kwon, or another member of the firm's technology transactions practice or mergers and acquisitions practice to discuss any questions that you may have regarding this important decision.