Meso Scale Diagnostics, LLC, v. Roche Diagnostics GMBH: Reverse Triangular Merger Did Not Result in an Assignment by Operation of Law
March 11, 2013
Publication| Corporate Transactions| Corporate & Chancery Litigation
In Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, 2013 WL 655021 (Del. Ch. Feb. 22, 2013), Vice Chancellor Parsons of the Court of Chancery, ruling on a motion for summary judgment, held that a reverse triangular merger did not constitute an assignment by operation of law on the part of the surviving corporation. This ruling clarified a question left open in an earlier ruling on a motion to dismiss in the same case, 2011 WL 1348438 (Del. Ch. Apr. 8, 2011).
In 2003, a foreign holding company, Roche, entered into a series of agreements that, among other things, granted it a non-exclusive license to certain patented technology. Plaintiffs, two Delaware limited liability companies involved in the 2003 transactions, had disputed springing rights to that patented technology. In connection with the 2003 transactions, the licensed intellectual property assets were transferred to BioVeris. In 2007, Roche acquired BioVeris through a reverse triangular merger. Three years later, plaintiffs initiated this action claiming that Roche and its affiliates, by effecting the merger, breached two agreements related to the 2003 transactions. One of those agreements was a global consent with provision that prevented assignment of the assets by operation of law without consent of the other parties. Plaintiffs claimed that the 2007 reverse triangular merger was an assignment by operation of law that required their consent.
Defendants moved for summary judgment on multiple grounds, including laches, that the anti-assignment clause in the global consent provision did not apply to the assets at issue, and that a reverse triangular merger cannot be an assignment by operation of law. The Court rejected the laches argument and found that the anti-assignment clause did in fact apply to the intellectual property rights. The Court sided with defendants on their third argument, however, and held that because a reverse triangular merger is not an assignment by operation of law, the global consent provision was not intended to cover the merger. The Court began its analysis by noting that “[g]enerally, mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger.” The Court also noted that under 8 Del. C. § 259, only the non-surviving corporation’s rights and obligations are transferred to the surviving corporation by operation of law. Further, this issue had not previously been before the Court, and thus the Court noted that leading commentators have also concluded that a reverse triangular merger does not constitute an assignment by operation of law.
Plaintiffs advanced three theories in support of their argument that the anti-assignment clause was intended to cover reverse triangular mergers: (1) the acquisition of BioVeris practically resulted in the assignment of its intellectual property rights to Roche; (2) Delaware case law governing forward triangular mergers compels the conclusion that provisions covering assignments by operation of law apply to all mergers; and (3) the Court should adopt the holding of a California case where the court held that a reverse triangular merger did result in an assignment by operation of law.
The Court rejected each of these arguments in turn. As to the first, the Court found that this argument was unavailing because it “ignores Delaware’s longstanding doctrine of independent legal significance,” which posits that actions taken under different provisions of the DGCL have independent legal significance even if the end result may be the same under different sections. The Court found the second argument unpersuasive since the two cases cited by plaintiffs were distinguishable, as they involved forward triangular mergers where the target company was not the surviving entity. Here, BioVeris was the surviving entity and thus there was no assignment or transfer of its assets. The Court then rejected plaintiffs’ assertion that it should adopt the California court’s holding in SQL Solutions, Inc. v. Oracle Corp. In that case, the California court reasoned that a reverse triangular merger is an assignment by operation of law because “an assignment or transfer or rights does occur through a change in the legal form of ownership of a business.” The Court of Chancery found that adopting this reasoning would conflict with Delaware’s jurisprudence regarding stock acquisitions where Delaware courts have consistently held that a corporation may lawfully acquire the stock of another corporation and such a change of ownership is not regarded as assigning the contractual rights or duties of the corporation whose securities are purchased. The Court found that since both stock acquisitions and reverse triangular mergers “involve changes in legal ownership . . . the law should reflect parallel results.”