Effects of Mergers On Non-Assignable Agreements

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Reprinted with permission from the July 14, 2011 edition of the NEW YORK LAW JOURNAL © 2011 ALM Media Properties, LLC.

In 1991, the federal district court for the Northern District of California ruled in SQL Solutions Inc. v. Oracle Corp. that the acquisition of a company pursuant to a reverse triangular merger (RTM) constituted a breach of a non-assignable agreement under which the company licensed certain software. No subsequent reported cases reached a similar conclusion in the context of an RTM (in which the target company survives the merger as the buyer’s subsidiary), leading many M&A and IP practitioners to view SQL Solutions as an outlier. However, the Delaware Chancery Court’s recent denial of a motion to dismiss in Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH2 casts new doubt on whether M&A lawyers can rely on an RTM acquisition structure to avoid violating prohibitions on assignment contained in the target company’s contracts.

Mergers and Assignments

In general, a buyer can acquire a target company in one of three ways: asset purchase, stock purchase or merger. Asset acquisitions by definition constitute an assignment of the target company’s contracts to the buyer. Stock acquisitions do not violate anti-assignment provisions because the target company remains the same legal entity — and a party to the non-assignable agreement — before and after the sale...

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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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