Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH: Court of Chancery Considers Whether a Reverse Triangular Merger is an Assignment by Operation of Law
April 28, 2011
Publication| Corporate Transactions| Corporate & Chancery Litigation
In Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A. No. 5589-VCP (Del. Ch. Apr. 8, 2011), the Court of Chancery considered whether a reverse triangular merger would result in an assignment by operation of law—an issue of first impression under Delaware law. The Court did not resolve the question at the motion to dismiss stage, instead finding two competing, reasonable interpretations as to whether the merger resulted in a breach of an anti-assignment clause.
In 2007, Roche Holding Ltd. (“Roche”) acquired BioVeris Corporation (“BioVeris”) in a reverse triangular merger whereby a wholly-owned subsidiary of Roche merged with and into BioVeris with BioVeris as the surviving entity. As a result of the merger, existing BioVeris stockholders were cashed out and Roche became the sole stockholder of BioVeris. At the time of the merger, Roche and BioVeris were also parties to a Global Consent and Agreement with the plaintiffs that contained an anti-assignment clause prohibiting the assignment of certain intellectual property rights “by operation of law or otherwise” without the consent of the plaintiffs. In their complaint, the plaintiffs asserted that Roche and BioVeris had breached the anti-assignment provision because the plaintiffs had not consented to the merger—a transaction that they contended constituted an assignment of BioVeris’s intellectual property by operation of law. Roche moved to dismiss the claims, contending that the plaintiffs’ consent was not required because, although ownership of BioVeris had changed as a result of the merger, no property was assigned from BioVeris to Roche.
At the outset, 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. Nevertheless, the absence of a change of control provision in the Global Consent and Agreement did not necessarily mean that the merger fell outside the scope of the assignment “by operation of law” language. The Court, in addressing whether a reverse triangular merger would result in an assignment by operation of law, considered cases involving both stock acquisitions and forward triangular mergers. In the stock acquisition context, Delaware courts have held that the change of ownership in a corporation’s securities, without more, is not an “assignment” of the corporation’s contractual rights where none of the corporation’s contractual responsibilities are varied or assigned. On the other hand, Delaware courts have held that a forward triangular merger does result in an assignment “by operation of law” because the target corporation is not the surviving entity and its rights, interests, and obligations vest in the surviving entity.
The Court concluded that neither line of cases was controlling. Although the Court stated that stock acquisitions do exemplify situations where a mere change in ownership does not constitute an assignment as a matter of law, the Court also noted that stock acquisitions are not mergers, and in any event, the stock acquisition cases were arguably distinguishable from the dispute before it. Specifically, the plaintiffs had alleged more than a mere change of BioVeris’s ownership—that is, the plaintiffs alleged that BioVeris was essentially converted into a holding corporation for the intellectual property assets after the merger. The Court concluded that, as alleged, there could be an issue of fact regarding whether the parties intended an assignment “by operation of law” to cover mergers that operate as an assignment, thus the Court found the term “by operation of law” to be ambiguous and denied the motion to dismiss.