In April the Delaware Chancery Court refused to grant plaintiff’s motion to dismiss in Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A. No. 5589-VCP (Del. Ch. Apr. 8, 2011), finding that, as a matter of law, a reverse triangular merger may trigger anti-assignment provisions. The decision casts doubt on the widely held belief amongst practitioners that a reverse triangular merger is not a form of assignment, and thus does not trigger anti-assignment provisions in contracts. The decision is likely to add uncertainty as to the implications of a reverse triangular mergers.
In a reverse triangular merger, a subsidiary of the acquiring corporation mergers with the target and the target becomes a wholly owned subsidiary of the acquirer. Practitioners generally assume that this type of merger does not trigger anti-assignment provisions as the target’s identity is preserved.
In 2007, Roche acquired BioVeris by means of a reverse triangular merger. Prior to the merger, BioVeris had acquired a non-exclusive license for electrochmiluminescence (ECL) technology. The license agreement included a provision prohibiting assignments, “in whole or in part, by operation of law or otherwise.” The plaintiff (Meso) argued that Roche’s acquisition of BioVeris triggered this provision of the contract and, as a result, that Roche should not be entitled to use the ECL license.
The court confronted this issue in response to Roche’s motion to dismiss for failure to state a claim. Roche analogized the takeover to a typical stock acquisition, arguing that the reverse triangular merger was not an assignment, as all that changed after the transaction was ownership. However, the court pointed to Roche’s “gutting” of BioVeris (firing employees, shutting down product lines, and closing facilities) within months of the transaction as evidence that this was not a mere change of ownership but rather a play for the ECL technology.
Meso argued that the language “by operation of law” in the agreement should apply to all mergers. However, the two cases that Meso cited were primarily examples of forward mergers rather than reverse triangular mergers. Meso did cite one Northern District of California decision, SQL Solutions Inc. v. Oracle Corp., 1991 WL 626458 (N.D. Cal Dec 19, 1991), that held that a reverse triangular merger triggered an anti-assignment clause. However, like much of the legal community, the Meso Court did not place much weight on this opinion, suggesting that the California court’s reasoning might be flawed.
Ultimately the court dismissed Roche’s motion, holding that both Meso’s and Roche’s understandings of the anti-assignment clause from the ECL license were plausible.
The import of this decision is likely the added uncertainty surrounding reverse triangular mergers. Risk averse corporations may begin to look to other ways of acquiring targets in situations where the target has valuable licenses. Furthermore, parties granting licenses may rewrite the anti-assignment clauses they use in their agreements so as to further mitigate the possibility that the licenses can be acquired by third parties through a reverse triangular merger. Finally, acquirers will need to be mindful of their management of targets after acquisitions, as the Meso court focused heavily on Roche’s “gutting” of BioVeris as grounds for finding that the anti-assignment provision may have been triggered. This focus on the management actions of the acquirer may result in inefficient behavior on the part of acquirers in order to achieve the legal outcomes they desire.