Reverse Triangular Merger Assignment Submission


With the increasing trend of globalization in the business world, Israeli companies and investors are commonly entering into agreements with U.S.-based entities. One of the most frequently found clauses in U.S. commercial agreements is an anti-assignment provision that prevents either or both of the parties from assigning the agreement to a third party prior to receiving the consent of the non-assigning party. Many transactions will also require the due diligence review of a large number of U.S. commercial agreements that the target has entered into. The following post will provide an overview and general guidance on the proper analysis of anti-assignment clauses.

Silent Provision and Change of Control Provision

In the event that an agreement does not contain an anti-assignment provision, a contract is generally assignable without the consent of the non-assigning party. See Peterson v. District of Columbia Lottery and Charitable Games Control Board, 673 A.2d 664 (D.C. 1996) (“The right to assign is presumed, based upon principles of unhampered transferability of property rights and of business convenience.”) Exceptions include where the assignment affects the duties of the other party to the contract, where the contract is considered to be a personal contract and when the assignment violates public policy (i.e. tort liability).

On the other hand, many contracts contain provisions that not only prevent the assignment of the contract, but also state that a change of control of the target is deemed an assignment or the contract contains a separate clause requiring consent in the event of a change of control. This type of provision will often be triggered in transactions in which a buyer is acquiring the target company. A careful review of change of control clauses is thus especially imperative and often very fact specific to the deal at hand.

Deal Structures

One of the commonly used anti-assignment provisions reads as follows: “No party may assign any of its rights under this Agreement, by operation of law or otherwise, to a third party without the prior written consent of the non-assigning party.” In the situation where the target has entered into agreements that contain this clause, whether or not an assignment is considered to have taken place in the event of the acquisition of the target will largely depend on the specific deal structure of the transaction.

The commonly used deal structures are an asset acquisition, a stock acquisition and a merger.

  • Asset Acquisition: In an asset acquisition the buyer only acquires those assets and liabilities of a target that are specifically listed in the Asset Purchase Agreement. Any agreement that has an anti-assignment clause will be triggered in the event of an asset acquisition. Indeed, one of the disadvantages of structuring a corporate acquisition as an asset acquisition is that contracts that will be transferred must be assigned
  • Stock Acquisition: In a stock acquisition, a buyer acquires a target’s stock directly from the selling shareholders. After the closing of the Stock Purchase Agreement, the target will continue as it existed prior to the acquisition with respect to its ownership of asset and liabilities. Thus, in essence, the anti-assignment clause was never triggered in the first place. See Baxter Pharm. v. ESI Lederle, 1999 WL 160148 (Del. Ch. 1999).
  • Mergers: Mergers differ from both asset acquisitions and stock acquisitions in that a merger is considered a creature of law, and the specific type of merger that is used will have a direct impact on whether the anti-assignment clause is triggered
    1. A direct merger occurs when the target merges with and into the buyer, and the buyer continues as the surviving entity. In a similar fashion to an asset acquisition, this type of merger will trigger the anti-assignment clause
    2. A forward triangular merger occurs when the target merges with and into the buyer’s merger subsidiary, with the merger subsidiary surviving the merger. This type of merger will trigger the anti-assignment clause. See Tenneco Automotive Inc. v. El Paso Corporation, 2002 WL 45930 (Del. Ch. 2002) and Star Cellular Telephone Company, Inc. v. Baton Rouge CGSA, Inc., 19 Del.  J.  Corp. L. 875 (Del. Ch. 1993).
    3. A reverse triangular merger occurs when the buyer’s subsidiary merges with and into the target, with the target surviving as a wholly owned subsidiary of the buyer. In effect, the target continues to exist after the closing. The Delaware Chancery Court in Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 2013 WL 655021 (Del. Ch. Feb. 22, 2013) held that the acquisition of a target in a reverse triangular merger did not violate an existing agreement of the target that prohibited assignments by operation of law. The court noted that generally, 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. Thus there is a significant difference between a reverse triangular merger and both a direct merger and forward triangular merger, as in those cases the target was not the surviving company of the merger. Note, however, that the matter is not uniformly resolved. In SQL Solutions, Inc. v. Oracle Corp. (N.D. Cal. 1991), a United States District Court in the Northern District of California applied California law and federal IP principles to hold that a reverse triangular merger constitutes an assignment by operation of law.

Additional Considerations

Damages and Termination: Some courts have held that a contractual provision prohibiting assignment operates only to limit the parties’ right to assign the contract (for which the remedy would be damages for breach of a covenant not to assign) but the provision does not limit the power to actually assign the contract (which would invalidate the assignment), unless the contract explicitly states that a non-conforming assignment shall be “void” or “invalid.” See, e.g., Bel-Ray Co v. Chemrite (Pty.) Ltd., 181 F. 3d 435 (3d Cir. 1999).  It is also imperative to review the termination section of an agreement, as certain agreements contain a provision by which the non-assigning party has the right to terminate the agreement in the event of an assignment.


As described above, any review of U.S. commercial agreements is highly dependent on the structure of the deal and at times, the specific jurisdiction governing the agreement. With offices across the United States, and specifically in Delaware, New York, and California, all states with highly sophisticated and oft-invoked commercial laws, Greenberg Traurig is uniquely situated in a position to offer high value legal services to Israeli clients.

It's tough not being an Alpha male. The anthropologists tell you that you have been at the bottom of the mating pole for millennia; the business press keeps looking for Alpha males with animal spirits to kick-start the economy. And then there is the dreaded cocktail party. "What do you do", they ask? "Intellectual property", you reply. The ensuing yawn is demonstrable. Thanks to the IPKat's friend, Dan Glazer, of Patterson Belknap, Webb & Tyler, of New York, I think that we have found the answer. "What do you do", they ask? "The intellectual property aspects of reverse triangular mergers", you reply. The difference is palpable, you have them eating out of your hand. Read on.

In his recent article, "Effects of Mergers on Non-Assignable Agreements', which appeared in 14 July issue of the New York Law Journal, Glazer discusses the recent decision given by the Delaware Chancery Court in the case of Meso Scale Diagnostics, LLC. v Roche Diagnostics GMBH, here. The issue is whether an acquistion via a reverse triangular merger ("RTM") amounts to a breach of a non-assignability clause of an agreement, such as a software or a patent licence, to which the target company is a party. In this case, the court denied a motion to dismiss and, in so doing, cast doubt on whether an RTM transaction can avoid being in breach of a non-assignment clause with respect to an IP licence.

As described by Glazer, in an RTM transaction, "the buyer effects the merger transaction through a wholly owned acquisition subsidiary, which results in the surviving entity (typically the target) becoming the buyer's subsidiary." As anyone who is involved in mergers is well aware, it is difficult to characterize the legal nature a merger transaction. In particular, does an RTM constitute, or not constitute, an assignment, with all of the contractual consequences that an assignment might have for the various contracts involved in the transaction? Glazer points that there is no agreement by the courts on this question (mergers are a matter of U.S. state law): some say categorically that no assignment has occurred; others examine whether the merger "would adversely impact the contracting party seeking to enforce the provions"; yet others maintain that the merger constitutes an assignment by "operation of law".

With respect to intellectual property licences, the issue become even more thorny.

As Glazer points out, many courts have recognized that the owner of IP (which is almost always a matter of U.S. federal law) has the right to exercise control to whom it grants a licence. When a merger is involved, this sets up the question of how the court needs to take into account that the transfer of the IP right may require the consent of the IP owner to be valid. The article surveys the relevant case law prior to the recent Meso Scale judgment and concludes that M&A practitioners usually took the position that an RTM did not constitute an assignment that might otherwise run afoul of a non-assignment clause.

But then came Meso Scale. The relevant facts, focusing on a non-exclusive licence to Roche to "ECL" diagnostic technology" are a bit involved -- but bear with this Kat. As summarized by Glazer,

"[a]fter losing its original limited-scope license, Roche acquired a new license from the then-patent holder (and co-defendant) IGEN in 2003. As part of that transaction, Roche acquired IGEN, and IGEN transferred its intellectual property assets to a new public company, BioVeris. The parties required plaintiff Meso Scale's consent to complete the transaction because Meso Scale held an exclusive license to exploit ECL technology in areas outside the scope of Roche's license. The Global Consent to which all the parties agreed contained a provision that prohibited both direct assignments and those "by operation of law." Roche, seeking to expand the scope of its use of ECL technology, acquired BioVeris through an RTM. Meso Scale then filed suit, claiming that Roche had breached the non-assignment provision of the Global Consent".
On a motion to dismiss, the court rejected the claim that the RTM arrangement was by its very nature equivalent to a stock acquisition, such that no assignment could be said to have taken place. The court held that the language, "by operation of law", was open to various interpretations and therefore summary dismissal was inappropriate. In particular, the court seemed to express some sympathy with the view that the acquisition was simply a ruse to get around the Global Consent, rather than a bona fide acquistion. In that connection, it was noted that Roche effectively shut down all of BioVeris's operations, reducing it to a mere shell whose only asset were certain IP rights. All of these determinations would be made at a later stage of the case.

The upshot of this decision is that the IP M&A bar, at least in the U.S., now has less certainty about the status of a non-assignment provision in the context of a RTM. This is especially so if there is a non-assignment provision in an IP licence with respect a transfer by "operation of law". As well, the scope of when a consent is required with respect to an assignment needs to be carefully monitored. At the least, attention should be drawn to the terms of the assignment clause and whether to add a specific reference to mergers, in light of the interests of the parties to the agreement. When it is M&A time, these issues certainly need to be highlighted as part of the IP due diligence report.

More on Alpha males here.

0 Thoughts to “Reverse Triangular Merger Assignment Submission

Leave a comment

L'indirizzo email non verrĂ  pubblicato. I campi obbligatori sono contrassegnati *