Delaware Court Finds Reverse Triangular Merger May Violate Contractual Prohibition on Assignments by Operation of Law

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The Delaware Chancery Court, in Meso Scale Diagnostics v. Roche Diagnostics (Apr. 8, 2011), held recently that the acquisition of a company in a reverse triangular merger may constitute an assignment of an agreement by that company and, as such, violate a restriction in the agreement prohibiting assignments by operation of law.

The opinion calls into question the traditional assumption that, in most circumstances, the acquisition of a company through a reverse triangular merger, in which the acquiror forms a shell company and merges the shell company into the target company, with the target company surviving as a wholly-owned subsidiary of the acquiror, by itself is unlikely to violate a typical anti-assignment provision. Delaware courts had not directly addressed the question, but many practitioners assumed that for these purposes Delaware courts were likely to treat a reverse triangular merger as similar to a stock purchase, which the courts had held by itself did not generally constitute an assignment, since the identity of the shareholders would change but there would be no change to the entity.

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