Read Delaware Chancery Court Finds a Reverse Triangular Merger May Constitute an "Assignment by Operation of Law" text version



May 4, 2011


Delaware Chancery Court Finds a Reverse Triangular Merger May Constitute an "Assignment by Operation of Law"

............................................................................................................................................................................................. In a recent memorandum opinion in Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH,

Vice Chancellor Parsons of the Delaware Chancery Court denied a motion to dismiss a breach of contract claim, finding that a contract provision prohibiting an "assignment by operation of law" could plausibly apply to reverse triangular mergers.


This breach of contract case arose from the acquisition of BioVeris Corporation ("BioVeris") by Roche Holding Ltd. ("Roche") through a reverse triangular merger. In 1992, IGEN International, Inc. ("IGEN") licensed the exclusive right to use electrochemiluminescence ("ECL") technology in a specified field to an entity that was later acquired by Roche (the "1992 License"). In 1995, IGEN and Meso Scale Technologies LLC ("MST") formed a joint venture, Meso Scale Diagnostics, LLC ("MSD"), in connection with which IGEN licensed to MSD the exclusive right to use ECL technology in all fields that were not at that time granted to any third parties (the "MSD License"). The MSD License provided that its scope could be expanded upon the termination of any such existing third party's license to include such license's field. Roche was later found to have breached the 1992 License and it was thereafter terminated. Shortly after the termination of the 1992 License, Roche acquired IGEN and entered into a number of agreements with IGEN, MSD and MST (collectively, the "IGEN Acquisition"). As part of the IGEN Acquisition, BioVeris was formed for the purpose of holding IGEN's ECL intellectual property, a new ECL license with Roche (the "1997 License"), the MSD License and IGEN's obligations in connection with the MSD joint venture. Roche, IGEN, BioVeris, MSD and MST contemporaneously entered into a Global Consent and Agreement (the "Global Consent"), which granted the consents and waivers needed to complete the IGEN Acquisition, including MSD's and MST's consent to the granting of the 1997 License. The Global Consent contained an anti-assignment provision (the "Anti-Assignment Provision") that prohibited the assignment "by operation of law or otherwise" of any of the rights, interests or obligations under the Global Consent. In 2007, allegations by BioVeris that Roche violated the 1997 License ultimately resulted in Roche acquiring BioVeris through a reverse triangular merger. The effect of the merger between BioVeris and a Roche subsidiary was that BioVeris, as the surviving entity in the merger, possessed all of the rights, preferences, privileges, liabilities, obligations and duties of the two entities. Following its acquisition, BioVeris was "gutted [by Roche] and converted into a shell company" whose only remaining assets related to the ECL intellectual property rights. On June 22, 2010, MST and MSD (collectively, the "Plaintiffs") filed a complaint against Roche, IGEN and BioVeris (collectively, the "Defendants") alleging, among other things, that the Defendants breached the Anti-Assignment Provision in the Global Consent by not obtaining MST's and MSD's consent in connection with Roche's acquisition of BioVeris. The Defendants filed a motion to dismiss this and other of the

Plaintiffs' claims. No Delaware court previously addressed the question of whether a reverse triangular merger constitutes an assignment by operation of law.


In determining whether to grant a motion to dismiss, "the court must determine whether the complaint offers sufficient facts plausibly to suggest that the plaintiff ultimately would be entitled to the relief [it] seeks....Furthermore, on a motion to dismiss a trial court cannot choose between two different reasonable interpretations of an ambiguous [provision in a contract]." The Defendants argued that the acquisition of BioVeris through a reverse triangular merger did not constitute an assignment by operation of law, equating this form of merger to a stock acquisition, which Delaware courts have found does not constitute such an assignment. Reverse triangular mergers, the Defendants argued, are similar to stock acquisitions in that the only effect is that the target company's owners change. Because the Anti-Assignment Provision did not prohibit a change of control, Roche contended that it had not breached the terms of the Global Consent. Although the Court found that Roche's interpretation of the Anti-Assignment Provision was reasonable, it stated that Delaware, like a number of other states, has not addressed whether a reverse triangular merger constitutes an assignment by operation of law. The Court agreed that there are similarities between a stock acquisition and a reverse triangular merger; however, it concluded that the stock acquisition cases, which held generally that a "mere change of ownership, without more, [did] not constitute an assignment as a matter of law," were not controlling. The Court also noted that the Plaintiffs had alleged that more than a mere change of ownership had occurred and that the Anti-Assignment Provision was intended to prohibit mergers that had the same effect as an assignment. In support of this claim, the Plaintiff's alleged that within months of the acquisition, Roche terminated the BioVeris employees, vacated the BioVeris facility and discontinued the BioVeris product lines. The Plaintiffs also argued that all mergers, regardless of their form, constitute an assignment by operation of law, relying on precedent involving forward triangular mergers (which Delaware courts have found constitute an assignment by operation of law) and a California federal court case1 in which a reverse triangular merger was found to constitute an assignment by operation of law. The Court noted that the forward triangular merger cases, like the stock acquisition cases cited by the Defendants, did not address whether an antiassignment provision would be triggered by a reverse triangular merger and, therefore, were not controlling. With respect to the California case, the Court found that it was not binding in Delaware and also observed that the federal court's reasoning "is open to question." Having found that both the Plaintiffs and the Defendants had offered reasonable but competing interpretations of the phrase "by operation of law," rendering the contract ambiguous on that point, the Court declined to grant the motion to dismiss.


SQL Sol'ns, Inc. v. Oracle Corp., 1991 WL 626458 (N.D. Cal. Dec. 18, 1991).


This memorandum is intended only as a general discussion of these issues. It should not be regarded as legal advice. We would be pleased to provide additional details or advice about specific situations if desired. If you wish to receive more information on the topics covered in this publication, you may contact your regular Shearman & Sterling contact person or any of the following:

Stephen M. Besen New York +1.212.848.8902 [email protected] Christa A. D'Alimonte New York +1.212.848.7257 [email protected] W. Jeffrey Lawrence New York +1.212.848.7638 [email protected] Michael J. McGuinness New York +1.212.848.7428 [email protected] Steve L. Camahort San Francisco +1.415.616.1240 [email protected] Michael S. Dorf San Francisco +1.415.616.1246 [email protected] Peter D. Lyons New York +1.212.848.7666 [email protected] Clare O'Brien New York +1.212.848.8966 [email protected] George A. Casey New York +1.212.848.8787 [email protected] Robert M. Katz New York +1.212.848.8008 [email protected] John J. Madden New York +1.212.848.7055 [email protected] Scott Petepiece New York +1.212.848.8576 [email protected] David Connolly New York +1.212.848.4274 [email protected] Michael J. Kennedy San Francisco +1.415.616.1248 [email protected] John A. Marzulli, Jr. New York +1.212.848.8590 [email protected] Eliza W. Swann New York +1.212.848.8073 [email protected]

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Delaware Chancery Court Finds a Reverse Triangular Merger May Constitute an "Assignment by Operation of Law"

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