Delaware Court Of Chancery Holds Reverse Triangular Mergers Do Not Trigger ‘Assignment By Operation Of Law’ Provisions

by Pepper Hamilton LLP
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On February 22, 2013, in Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, C.A. No. 5589, 2013 WL 655021 (Del. Ch. Feb. 22, 2012), Delaware Court of Chancery Vice Chancellor Donald F. Parsons, Jr. granted the defendants’ motion for summary judgment and issued an opinion holding that a reverse triangular merger does not qualify as an “assignment by operation of law” under Delaware law.

Background

In 2007, Roche Diagnostics GmbH (Roche Diagnostics) structured its acquisition of BioVeris Corp. (BioVeris) as a reverse triangular merger. This is a very common acquisition structure, under which the acquiror forms a new wholly-owned subsidiary that merges with and into the target company, resulting in the target becoming a wholly-owned subsidiary of the acquiror.

At the time of the merger, BioVeris was bound to a technology licensing agreement with Meso Scale Diagnostics LLC (Meso Scale), which included an anti-assignment provision that stated the agreement may not be assigned “in whole or in part, by operation of law or otherwise.” Meso Scale filed a complaint that averred, among other things, that Roche Diagnostics breached the assignment provision of its license agreement by not obtaining the prior written consent of Meso Scale before the consummation of the merger. After denying Roche Diagnostics’ motion to dismiss that argued Meso Scale’s complaint failed to state a claim, Vice Chancellor Parsons awarded Roche Diagnostics summary judgment.

The Court of Chancery’s Holding

The Court of Chancery ruled in favor of Roche Diagnostics because it held that a reverse triangular merger does not constitute an “assignment by operation of law” under Delaware law. The court noted that the language at issue, on its face, covered “assignments” and did not expressly prohibit a change of “control” or “ownership” of BioVeris. However, the court found that, unlike the forward merger that does result in an assignment “by operation of law” because the target corporation is not the surviving entity, a reverse triangular merger (similar to a stock acquisition) does not result in a change in the corporate form of the surviving corporation and the assets of the target in a reverse triangular merger are still the assets of the target after the merger. The court reasoned that BioVeris could have, but did not, negotiate for a “change of control” provision and consequently the court declined to read beyond the text of the provision that the parties had negotiated.

Analysis

The court’s previous opinion that denied Roche Diagnostics’ motion to dismiss cast doubt as to whether a reverse triangular merger violates a provision prohibiting “assignment by operation of law” under Delaware law. Vice Chancellor Parsons’ ruling on Roche Diagnostics’ motion for summary judgment restored clarity as to whether such an assignment provision would be triggered in a reverse triangular merger as the court clearly and unequivocally stated that a reverse triangular merger does not trigger an “assignment by operation of law.” In order for a provision to be triggered upon the consummation of a reverse triangular merger under Delaware law, parties will need to negotiate for the inclusion of a “change of control” or “change of ownership” provision in an agreement; otherwise, the Court of Chancery will not read such words into a provision that merely prohibits assignment “by operation of law.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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