new york merger assignment by operation of law

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In a reverse triangular merger, the acquiring company forms a subsidiary that merges with and into the target with the outstanding shares of the target being converted into securities of the acquiring corporation or some other consideration.  Does a reverse triangular merger constitute an assignment of a target corporation’s contracts?  Because the reverse triangular merger is an exceedingly common acquisition technique, one would expect that this question was answered long ago.  Surprisingly, however, this isn’t the case.

Earlier this year, Vice Chancellor  Donald F. Parsons  analyzed whether a reverse triangular merger violated an anti-assignment clause that read as follows: “Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part,  by operation of law or otherwise by any of the parties without the prior written consent of the other parties  . . .”.  He concluded:

In sum, Meso could have negotiated for a “change of control provision.”  They did  not.  Instead, they negotiated for a term that prohibits “assignments by  operation of law or otherwise.” Roche has provided a reasonable interpretation of Section 5.08 that is consistent with the general understanding that a reverse triangular merger is not an assignment by operation of law. On the other hand, I  find Meso’s arguments as to why language that prohibits “assignments by  operation of law or otherwise” should be construed to encompass reverse  triangular mergers unpersuasive and its related construction of Section 5.08 to  be unreasonable.

Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , 62 A.3d 62, 88 (Del. Ch. 2013).  See  I’ve Been Thinking About Conversion, But I Haven’t Decided To Convert .

Here in California, U.S. District Court Judge  Samuel Conti  recently addressed the issue even more recently as follows:

No California state court has resolved this matter, and the Court is not inclined to guess at possible conclusions.  The Court therefore begins from the presumption that a reverse triangular merger, which leaves intact the acquired corporation, does not effect a transfer of rights from the wholly owned subsidiary to its acquirer as a matter of law. What little applicable law there is could be analogized from California cases on stock sales, like  Farmland Irrigation Co. v. Dopplmaier , 48 Cal. 2d 208, 223, 308 P.2d 732 (Cal. 1957), which suggested that if a plaintiff had sold all of his stock in a corporation, there could be no contention that the corporation’s licenses would be extinguished as a matter of law, since the two contracting parties were still extant and in privity.

Florey Inst. of Neuroscience & Mental Health v. Kleiner Perkins Caufield & Byers,  2013 U.S. Dist. LEXIS 138904 (N.D. Cal. Sept. 26, 2013).

Both jurists confronted, and declined to follow, Judge Marilyn Hall Patel’s earlier decision in SQL Solutions v. Oracle Corp. , 1991 U.S. Dist. LEXIS 21097 (N.D. Cal. Dec. 18, 1991) with Vice Chancellor Parsons saying: “I decline to adopt the approach outlined in  SQL Solutions , however, because doing so would conflict with Delaware’s jurisprudence surrounding stock acquisitions, among other things.  Under Delaware law, stock purchase transactions, by themselves, do not result in an assignment by operation of law.”  Judge Conti said “Plaintiff relies solely on  SQL Solutions  to argue that assignment occurred as a matter of law when an acquired corporation became another corporation’s wholly owned subsidiary.  That case did not analyze nonassignment clauses and also found that federal copyright law forbid transfer.”

Hollywood, Somali Pirates and Homer

Over the weekend, I saw the recently released film,  Captain Phillips .  The movie tells the story of the takeover of the MV Maersk by Somali pirates.  When the Navy uses a Somali speaker to communicate with the pirates, one of the pirates asks “Who’s this?”.  The translator answers “nemo”, the Latin word for “no one”.  The interchange, of course, is an echo of the famous encounter of Odysseus and the Cyclops, Polyphemus in Homer’s Odyssey :

Κύκλωψ, εἰρωτᾷς μ᾽ ὄνομα κλυτόν, αὐτὰρ ἐγώ τοι ἐξερέω: σὺ δέ μοι δὸς ξείνιον, ὥς περ ὑπέστης. Οὖτις ἐμοί γ᾽ ὄνομα: Οὖτιν δέ με κικλήσκουσι μήτηρ ἠδὲ πατὴρ ἠδ᾽ ἄλλοι πάντες ἑταῖροι. Cyclops, you are asking my renowned name, nevertheless I will declare: “Give to me the hospitality, you were promising.  My name is no one: no one is what my mother, father and all my comrades call me.”

Home,  Odyssey  Book 9, lines 364 -367 (my translation). Matters went downhill from there for both Polyphemus and the pirates.

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Assignability of Commercial Contracts (NY) | Practical Law

Assignability of Commercial Contracts (NY)

Practical law practice note w-010-1902  (approx. 41 pages).

Do Change of Control Transactions Constitute an Assignment by Operation of Law?

Commercial landlords often rely on anti-assignment provisions to restrict the ability of tenants to assign their interest in a lease to a third party. Such provisions often restrict assignments by “operation of law,” which are generally considered involuntary assignments mandated via a court order. Commercial landlords may assume that a change of control transaction violates a basic anti–assignment clause. Landlords wishing to restrict change of control of a tenant entity, however, should have clear anti-assignment provisions in their leases that expressly restrict such transactions and characterize such “changes of control” as assignments.  

A change of control is a significant change in the equity, ownership, or management of a business entity. This can occur through a merger, consolidation or acquisition.  

The general rule is that change of control of a corporate entity is not an assignment by operation of law, and therefore does not violate a basic anti-assignment provision. Courts have reasoned that a landlord entering into a lease with a corporate tenant should be aware that a corporation, or limited liability company, is an entity which exists separate and apart from its ownership, and that a change in ownership of the corporate entity does not change the tenant entity under the lease.  

Courts in many states including Florida, New York and Delaware have held that a change of control is not an assignment by operation of law. In  Sears Termite & Pest Control, Inc. v. Arnold , a Florida court held, “[t]he fact that there is a change in the ownership of corporate stock does not affect the corporation’s existence or its contract rights, or liabilities.” Further, in  Meso Scale Diagnostics LLC v. Roche Diagnostics GMBH , a Delaware court ruled, “[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.” 

Importantly, the rule is different if the tenant entity does not survive the transaction. In  MTA Canada Royalty Corp. v.  Compania  Minera Pangea , a Delaware Superior Court held that a merger in which the contracting entity does not survive may be held to be an assignment by operation of law.  

If a landlord intends for a change of control of a tenant to violate the anti-assignment clause in its lease, the landlord should ensure that its lease expressly states that a change of control constitutes an assignment.

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Do Change of Control Transactions Constitute an Assignment by Operation of Law?

Commercial l andlords  often  rely on  anti-assignment provisions  to  restrict the ability of tenants to assign their interest in  a  lease to a third party .  Such provisions will often explicitly restrict assignments by  “ operation of law, ”  which are generally considered involuntary assignments  mandated via a  court order. Commercial landlords may assume that a change of control transaction violates a basic anti – assignment cla use, but clear drafting is necessary for Landlords to protect their interests .  Landlords  wishing to restrict change of control of a tenant entity ,  should  have clear  anti-assignment provision s in their leases that   expressly restrict such transaction s  and characterize such “changes of control” as assignments .   

A change of control is a significant change in the equity, ownership, or management of a business entity. This can occur through a merger, consolidation or acquisition.   

The general rule is that change of control of a corporate entity  is  not  an assignment by operation of law ,  and therefore  does not violate a basic  anti- assignment provision. Courts have reasoned that a landlord entering into a lease with a corporate tenant should be aware that a corporation, or limited liability company, is an entity which exists separate and apart from its ownership, and that a change in ownership of the corporate entity does not change the tenant entity under the lease.   

Courts in many states including Florida, New York and Delaware have held that a change of control is not an assignment by operation of law. I n  Sears Termite & Pest Control, Inc. v. Arnold ,  a Florida court held ,  “ [t] he fact that there is a change in the ownership of corporate stock does not affect the corporation’s existence or its contract rights, or liabilities. ”  Further,   i n  Meso Scale Diagnostics LLC v. Roche Diagnostics GMBH , a Delaware court ruled, “ [ 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.”  

Importantly,  the rule is different if the tenant entity does not survive the transaction.   In  MTA Canada Royalty Corp. v.  Compania  Minera Pangea , a  Delaware Superior Court held that a  merger in which the contracting entity does not survive may be held to be an assignment by operation of law.   

If  a  l andlord inten d s for a change of control of a tenant to violate the anti-assignment clause  in its lease, the landlord should ensure that its  lease expressly state s   that a change of control constitutes an assignment .

This article is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read here. Please review the full disclaimer for more information. Relying on the information provided in this article or communicating with Lowndes through our website does not create an attorney/client relationship.

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Courts Consider Anti-Assignment Clauses And Reverse Triangular Mergers

In a reverse triangular merger, the acquiring company forms a subsidiary that merges with and into the target with the outstanding shares of the target being converted into securities of the acquiring corporation or some other consideration.  Does a reverse triangular merger constitute an assignment of a target corporation's contracts?  Because the reverse triangular merger is an exceedingly common acquisition technique, one would expect that this question was answered long ago.  Surprisingly, however, this isn't the case.

Earlier this year, Vice Chancellor Donald F. Parsons  analyzed whether a reverse triangular merger violated an anti-assignment clause that read as follows: "Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties . . .".  He concluded:

In sum, Meso could have negotiated for a "change of control provision."  They did  not.  Instead, they negotiated for a term that prohibits "assignments by  operation of law or otherwise." Roche has provided a reasonable interpretation of Section 5.08 that is consistent with the general understanding that a reverse triangular merger is not an assignment by operation of law. On the other hand, I  find Meso's arguments as to why language that prohibits "assignments by  operation of law or otherwise" should be construed to encompass reverse  triangular mergers unpersuasive and its related construction of Section 5.08 to  be unreasonable.

Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , 62 A.3d 62, 88 (Del. Ch. 2013).  See I’ve Been Thinking About Conversion, But I Haven’t Decided To Convert .

Here in California, U.S. District Court Judge Samuel Conti recently addressed the issue even more recently as follows:

No California state court has resolved this matter, and the Court is not inclined to guess at possible conclusions.  The Court therefore begins from the presumption that a reverse triangular merger, which leaves intact the acquired corporation, does not effect a transfer of rights from the wholly owned subsidiary to its acquirer as a matter of law. What little applicable law there is could be analogized from California cases on stock sales, like Farmland Irrigation Co. v. Dopplmaier , 48 Cal. 2d 208, 223, 308 P.2d 732 (Cal. 1957), which suggested that if a plaintiff had sold all of his stock in a corporation, there could be no contention that the corporation's licenses would be extinguished as a matter of law, since the two contracting parties were still extant and in privity.

Florey Inst. of Neuroscience & Mental Health v. Kleiner Perkins Caufield & Byers, 2013 U.S. Dist. LEXIS 138904 (N.D. Cal. Sept. 26, 2013).

Both jurists confronted, and declined to follow, Judge Marilyn Hall Patel's earlier decision in SQL Solutions v. Oracle Corp. , 1991 U.S. Dist. LEXIS 21097 (N.D. Cal. Dec. 18, 1991) with Vice Chancellor Parsons saying: "I decline to adopt the approach outlined in SQL Solutions , however, because doing so would conflict with Delaware's jurisprudence surrounding stock acquisitions, among other things.  Under Delaware law, stock purchase transactions, by themselves, do not result in an assignment by operation of law."  Judge Conti said "Plaintiff relies solely on SQL Solutions to argue that assignment occurred as a matter of law when an acquired corporation became another corporation's wholly owned subsidiary.  That case did not analyze nonassignment clauses and also found that federal copyright law forbid transfer."

Hollywood, Somali Pirates and Homer

Over the weekend, I saw the recently released film,  Captain Phillips .  The movie tells the story of the takeover of the MV Maersk by Somali pirates.  When the Navy uses a Somali speaker to communicate with the pirates, one of the pirates asks "Who's this?".  The translator answers "nemo", the Latin word for "no one".  The interchange, of course, is an echo of the famous encounter of Odysseus and the Cyclops, Polyphemus in Homer's Odyssey :

Κύκλωψ, εἰρωτᾷς μ᾽ ὄνομα κλυτόν, αὐτὰρ ἐγώ τοι ἐξερέω: σὺ δέ μοι δὸς ξείνιον, ὥς περ ὑπέστης. Οὖτις ἐμοί γ᾽ ὄνομα: Οὖτιν δέ με κικλήσκουσι μήτηρ ἠδὲ πατὴρ ἠδ᾽ ἄλλοι πάντες ἑταῖροι. Cyclops, you are asking my renowned name, nevertheless I will declare: "Give to me the hospitality, you were promising.  My name is no one: no one is what my mother, father and all my comrades call me."

Homer,  Odyssey Book 9, lines 364 -367 (my translation). Matters went downhill from there for both Polyphemus and the pirates.

Keith Paul Bishop

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Spotting issues with assignment clauses in M&A Due Diligence

Written by: Kira Systems

January 19, 2016

6 minute read

Although not nearly as complex as change of control provisions , assignment provisions may still present a challenge in due diligence projects. We hope this blog post will help you navigate the ambiguities of assignment clauses with greater ease by explaining some of the common variations. (And, if you like it, please check out our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence. )

What is an Assignment Clause?

First, the basics:

Anti-assignment clauses are common because without them, generally, contracts are freely assignable. (The exceptions are (i) contracts that are subject to statutes or public policies prohibiting their assignment, such as intellectual property contracts, or (ii) contracts where an assignment without consent would cause material and adverse consequences to non-assigning counterparties, such as employment agreements and consulting agreements.) For all other contracts, parties may want an anti-assignment clause that allows them the opportunity to review and understand the impact of an assignment (or change of control) before deciding whether to continue or terminate the relationship.

In the mergers and acquisitions context, an assignment of a contract from a target company entity to the relevant acquirer entity is needed whenever a contract has to be placed in the name of an entity other than the existing target company entity after consummation of a transaction. This is why reviewing contracts for assignment clauses is so critical.

A simple anti-assignment provision provides that a party may not assign the agreement without the consent of the other party. Assignment provisions may also provide specific exclusions or inclusions to a counterparty’s right to consent to the assignment of a contract. Below are five common occurrences in which assignment provisions may provide exclusions or inclusions.

Common Exclusions and Inclusions

Exclusion for change of control transactions.

In negotiating an anti-assignment clause, a company would typically seek the exclusion of assignments undertaken in connection with change of control transactions, including mergers and sales of all or substantially all of the assets of the company. This allows a company to undertake a strategic transaction without worry. If an anti-assignment clause doesn’t exclude change of control transactions, a counterparty might materially affect a strategic transaction through delay and/or refusal of consent. Because there are many types of change of control transactions, there is no standard language for these. An example might be:

In the event of the sale or transfer by [Party B] of all or substantially all of its assets related to this Agreement to an Affiliate or to a third party, whether by sale, merger, or change of control, [Party B] would have the right to assign any or all rights and obligations contained herein and the Agreement to such Affiliate or third party without the consent of [Party A] and the Agreement shall be binding upon such acquirer and would remain in full force and effect, at least until the expiration of the then current Term.

Exclusion for Affiliate Transactions

A typical exclusion is one that allows a target company to assign a contract to an affiliate without needing the consent of the contract counterparty. This is much like an exclusion with respect to change of control, since in affiliate transfers or assignments, the ultimate actors and responsible parties under the contract remain essentially the same even though the nominal parties may change. For example:

Either party may assign its rights under this Agreement, including its right to receive payments hereunder, to a subsidiary, affiliate or any financial institution, but in such case the assigning party shall remain liable to the other party for the assigning party’s obligations hereunder. All or any portion of the rights and obligations of [Party A] under this Agreement may be transferred by [Party A] to any of its Affiliates without the consent of [Party B].

Assignment by Operation of Law

Assignments by operation of law typically occur in the context of transfers of rights and obligations in accordance with merger statutes and can be specifically included in or excluded from assignment provisions. An inclusion could be negotiated by the parties to broaden the anti-assignment clause and to ensure that an assignment occurring by operation of law requires counterparty approval:

[Party A] agrees that it will not assign, sublet or otherwise transfer its rights hereunder, either voluntarily or by operations of law, without the prior written consent of [Party B].

while an exclusion could be negotiated by a target company to make it clear that it has the right to assign the contract even though it might otherwise have that right as a matter of law:

This Guaranty shall be binding upon the successors and assigns of [Party A]; provided, that no transfer, assignment or delegation by [Party A], other than a transfer, assignment or delegation by operation of law, without the consent of [Party B], shall release [Party A] from its liabilities hereunder.

This helps settle any ambiguity regarding assignments and their effects under mergers statutes (particularly in forward triangular mergers and forward mergers since the target company ceases to exist upon consummation of the merger).

Direct or Indirect Assignment

More ambiguity can arise regarding which actions or transactions require a counterparty’s consent when assignment clauses prohibit both direct and indirect assignments without the consent of a counterparty. Transaction parties will typically choose to err on the side of over-inclusiveness in determining which contracts will require consent when dealing with material contracts. An example clause prohibiting direct or indirect assignment might be:

Except as provided hereunder or under the Merger Agreement, such Shareholder shall not, directly or indirectly, (i) transfer (which term shall include any sale, assignment, gift, pledge, hypothecation or other disposition), or consent to or permit any such transfer of, any or all of its Subject Shares, or any interest therein.

“Transfer” of Agreement vs. “Assignment” of Agreement

In some instances, assignment provisions prohibit “transfers” of agreements in addition to, or instead of, explicitly prohibiting “assignments”. Often, the word “transfer” is not defined in the agreement, in which case the governing law of the contract will determine the meaning of the term and whether prohibition on transfers are meant to prohibit a broader or narrower range of transactions than prohibitions on assignments. Note that the current jurisprudence on the meaning of an assignment is broader and deeper than it is on the meaning of a transfer. In the rarer case where “transfer” is defined, it might look like this:

As used in this Agreement, the term “transfer” includes the Franchisee’s voluntary, involuntary, direct or indirect assignment, sale, gift or other disposition of any interest in…

The examples listed above are only of five common occurrences in which an assignment provision may provide exclusions or inclusions. As you continue with due diligence review, you may find that assignment provisions offer greater variety beyond the factors discussed in this blog post. However, you now have a basic understand of the possible variations of assignment clauses. For a more in-depth discussion of reviewing change of control and assignment provisions in due diligence, please download our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence.

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Delaware Clarifies Impact of Common Merger Structure on Contractual Anti-Assignment Clauses

In a long-awaited decision, the Delaware Court of Chancery recently held in Meso Scale Diagnostics v. Roche Diagnostics [1] that the acquisition of a company by reverse triangular merger does not result in an assignment (whether by operation of law or otherwise) of the target company’s agreements. Thus, the Court put to rest the uncertainty that it created two years ago in the same case.

Reverse Triangular Mergers

A reverse triangular merger is a common form of merger in which the acquirer creates a wholly-owned subsidiary that then merges into the acquisition target. As a result, the target entity remains intact, while the “merger subsidiary” ceases to exist. The net effect is the same as a stock sale of the target, but with the advantage that a merger does not require action by all target stockholders as in a stock sale – a majority vote is typically sufficient. The reverse triangular merger is often used because of its relative simplicity and its ability to allow acquiring companies to obtain control of the target’s non-assignable contracts… or so everyone thought until April 2011.

Transaction Background… and Uncertainty

In 2007, Roche Diagnostics GmbH acquired BioVeris Corp. through a reverse triangular merger. BioVeris had previously licensed certain intellectual property from Meso Scale under an agreement that contained the following anti-assignment language:

“Neither this Agreement nor any of the rights, interests or obligations under [it] shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties . . .”

In 2010, Meso Scale filed a complaint against Roche alleging that Roche’s acquisition of BioVeris caused a de facto assignment of BioVeris’ intellectual property rights, and that, as a result of the above prohibition on assignment, a breach of contract occurred when BioVeris merged into the Roche merger subsidiary. Roche moved to dismiss the complaint.

In a surprise April 2011 ruling, the Delaware Court of Chancery denied Roche’s motion to dismiss. The Court’s opinion injected uncertainty into the realm of Delaware corporate law by indicating that, for purposes of interpreting an anti-assignment clause, there may be circumstances in which a reverse triangular merger should be considered an assignment “by operation of law.” [2]

Order is Restored

In its motion for summary judgment, Roche analogized reverse triangular mergers to transactions in which all target company shares are acquired. In both transactions, Roche argued, the target company remains intact and continues to own its assets. Accordingly, BioVeris did not assign any of its assets at the time of the merger. As Roche made clear, Delaware courts have long held that the stock sale of a company does not violate anti-assignment provisions that do not expressly prohibit a change of control.

Drawing upon Delaware case law regarding forward triangular mergers, Meso Scale countered that the BioVeris reverse triangular merger constituted an assignment “by operation of law,” urging the Court to embrace an unreported 1991 decision by the U.S. District Court for the Northern District of California, SQL Solutions v. Oracle Corp. [3] SQL Solutions also involved a reverse triangular merger and anti-assignment language in the target company’s inbound license agreement. The SQL Solutions court found, in that case, that the third-party licensor would have been “adversely impacted” because the acquiring company was one of the licensor’s direct competitors. The court suggested that third-party consents should be obtained even in the reverse triangular merger context, especially when the intellectual property licensed to the target company is an essential part of its business.

The Delaware Court of Chancery granted Roche’s motion for summary judgment, concluding that Section 259 of the Delaware General Corporation Law supported Roche’s position that a reverse triangular merger does not result in an assignment by operation of law or otherwise. [4] Specifically, the Court held that “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.”

In response to Meso Scale’s argument that the merger constituted a de facto assignment, the Court held that, under Delaware’s doctrine of “legal significance,” the fact that a forward triangular merger would have triggered the plaintiff’s consent rights did not have any bearing on the reverse triangular merger at issue.

The Court also found that the parties did not intend for the negotiated language to require third-party consent upon a change of control, since “the vast majority of commentary discussing reverse triangular mergers indicates that a reverse triangular merger does not constitute an assignment by operation of law as to the surviving entity.”

Finally, the Court rejected the approach suggested by SQL Solutions , stating simply that such an approach conflicted with Delaware’s jurisprudence regarding stock acquisitions, as well as Section 259.

Implications

The Court’s ruling confirms that, under Delaware law, reverse triangular mergers do not result in the assignment, by operation of law or otherwise, of agreements held by a target company. The decision offers comfort to practitioners and would-be acquirers that regularly engage in M&A transactions governed by Delaware law that they can structure deals in a manner that ensures that consents will not be required with respect to target company agreements that do not contain language expressly prohibiting a change of control.

The decision also highlights the fact that it is limited to transactions and agreements governed by Delaware law. There is still uncertainty as to the risks associated with contractual anti-assignment clauses in certain jurisdictions. As a result, it would be prudent in situations where Delaware is not the governing law (and there is ambiguity in the applicable jurisdiction) to obtain all third-party consents to the assignment of material agreements.

Finally, the decision also serves as a reminder to practitioners to include clear consent and assignment language when drafting licenses and other agreements to avoid a court having to infer the intent of the parties after the fact. The Meso Scale court specifically noted that the plaintiffs “could have negotiated for a change of control provision” but failed to do so.

[1] Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , No. 5589-VCP (Del. Ch. Feb. 22, 2013).

[2] Reading the factual allegations in Meso Scale’s favor (as all courts must at the motion to dismiss stage), the Court found that Meso Scale had alleged sufficient facts to withstand Roche’s motion to dismiss. Meso Scale alleged that, within months of the merger, all of BioVeris’ employees were laid off, its Maryland facility was shut down and it was slated to cease all production. The Court found that these circumstances created a plausible argument “that ‘by operation of law’ was intended to cover mergers that effectively operated like an assignment, even if it might not apply to mergers merely involving changes of control.”

[3] SQL Solutions v. Oracle Corp. , 1991 WL 626458 (N.D. Cal. Dec. 18, 1991).

[4] Section 259 provides that: “When any merger or consolidation shall have become effective under this chapter, for all purposes of the laws of this State the separate existence of all the constituent corporations, or of all such constituent corporations except the one into which the other or others of such constituent corporations have been merged, as the case may be, shall cease and the constituent corporations shall become a new corporation, or be merged into 1 of such corporations . . . the rights, privileges, powers and franchises of each of said corporations, and all property, real, personal and mixed, and all debts due to any of said constituent corporations on whatever account . . . shall be vested in the corporation surviving or resulting from such merger or consolidation; and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation as they were of the several and respective constituent corporations.”

• Advisory Deleware Clarifies Impact of Common Merger Structure.pdf

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Delaware Court holds anti-assignment clause prevents enforcement of contract after merger

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On September 16, 2020, the Superior Court of Delaware issued an order with potential implications for companies contemplating acquisitions of businesses or assets.  In MTA Can. Royalty Corp. v. Compania Minera Pangea , S.A. De C.V. , No. N19C-11-228 AML CCLD, 2020 Del. Super. LEXIS 2780 (Sept. 16, 2020), Judge Abigail M. LeGrow held that, following a merger,[1] the surviving company lacked standing to enforce a contract entered into by its predecessor (the non-surviving company in the merger) because the contract’s anti-assignment clause prohibited assignment “by operation of law”. 

Companies considering acquisitions should carefully review their target’s contracts for anti-assignment clauses that prohibit assignment “by operation of law”, which Delaware courts interpret to include certain mergers.  In addition, where a target’s key contracts contain anti-assignment clauses with such language, companies should carefully consider the preferred transaction structure.  In a reverse triangular merger, the acquirer’s newly formed subsidiary is merged into the target, with the result being that the target survives and becomes the acquirer’s subsidiary.  By contrast, in a forward triangular merger, the target does not “survive” and its rights are transferred to the existing subsidiary, which may implicate anti-assignment clauses.  Reverse triangular mergers do not face the same issue because the target continues its corporate existence as a subsidiary of the acquirer.

Background of the contract and subsequent merger

In 2016, Compania Minera Pangea, S.A. de C.V. (“CMP”) purchased mineral rights in the El Gallo Mine from 1570926 Alberta Ltd. (“Alberta”).  In exchange, CMP paid Alberta $5.25m in cash at closing and agreed to pay Alberta an additional $1m in 2018 subject to certain conditions.  Of note, the agreement contained the following anti-assignment clause (the “Anti-Assignment Clause”):

Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise, by [Alberta] without the prior written consent of each other party, and any such assignment without such prior written consent shall be null and void. . . . [T]his Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns.

In July 2017, Alberta merged with Global Royalty Corp. (“Global”), a subsidiary of Metalla Royalty & Streaming Ltd., and Global was the surviving entity.  Following that transaction, Global changed its name to MTA Canada Royalty Corp. (“MTA”).  In November 2019, MTA brought a breach of contract claim against CMP based on CMP’s alleged failure to pay the $1m in consideration due in 2018.

Superior Court holds that anti-assignment clause extends to certain mergers

CMP argued that MTA lacked standing to enforce Alberta’s contract with CMP because, per the Anti-Assignment Clause, Alberta was required to obtain CMP’s written consent before assigning its rights to MTA.  MTA argued that the Anti-Assignment Clause was meant to prevent third-party assignments, not “successor assignments” like Alberta’s merger.   Id. at *11-12.  To make this argument, it relied on a 1993 Chancery decision, in which then-Vice Chancellor Jacobs had held that, subject to certain conditions, anti-assignment clauses do not apply to mergers unless mergers are explicitly prohibited.   Star Cellular Tel. Co. v. Baton Rouge CGSA ., 1993 Del. Ch. LEXIS 158, at *25 (July 30, 1993).  According to MTA, because the last sentence of the Anti-Assignment Clause referred to “successors”, it was clearly not intended to extend to mergers.

The Superior Court disagreed.  It explained that, as a result of the merger, Alberta had ceased to exist, so MTA could only enforce the contract if it showed that the Anti-Assignment Clause did not apply.   MTA , at *6.  It then held that the Anti-Assignment Clause clearly barred Alberta’s transfer of rights through a merger because the clause prevented assignment “by operation of law”, which Delaware case law had interpreted as referring to forward triangular mergers.   Id.  at *7-14.  In light of what it regarded as a straightforward application of the Anti-Assignment Clause, the Superior Court did not engage in the  Star Cellular analysis.  The Superior Court found that the reference to “successors” in the Anti-Assignment Clause meant only that “valid successors” had the right to enforce the contract.   Id. at *13.

Potentially at odds with Chancery precedent?

Of special relevance is the Superior Court’s treatment of existing Delaware case law on anti-assignment clauses and forward triangular mergers.  Existing precedent from the Court of Chancery held that anti-assignment clauses containing both a prohibition on assignment “by operation of law” and a reference to “successors” were ambiguous.  Under the Star Cellular test, this ambiguity was construed against the application of the anti-assignment clause. 

Specifically, MTA  appears at odds with the Chancery ruling in Tenneco Auto. Inc. v. El Paso Corp. , which also involved the impact of an anti-assignment clause following a forward triangular merger.  C.A. No. 18810-NC, 2002 Del. Ch. LEXIS 26 (Mar. 20, 2002).  The language of the anti-assignment clause in Tenneco  was similar to that in MTA :  both clauses prohibited assignment “by operation of law” while also referencing “successors”.  In Tenneco , Vice Chancellor Noble found that those conflicting references made the anti-assignment clause ambiguous, meaning that, under the Star Cellular test, the successor company could enforce the contract.   Id. at *7-10.  The MTA Court did not explain why it reached the opposite result.

Similarly, in ClubCorp, Inc. v. Pinehurst, LLC , Vice Chancellor Parsons held that, following a forward triangular merger, an anti-assignment clause with language like that in Tenneco was ambiguous because the agreement both referenced “successors” and prohibited assignment “by operation of law”.  No. 5120-VCP, 2011 Del. Ch. LEXIS 176, at *26-29 (Nov. 15, 2011).  Again, the ambiguity militated in favor of finding that the anti-assignment clauses did not apply to the merger.   MTA did not address Pinehurst.

Insights from MTA

MTA has several significant implications for practitioners.  The first is a reminder to carefully review a target’s contracts for anti-assignment clauses.  Such clauses in important contracts should be flagged and thoughtfully evaluated. 

In addition, practitioners should remain aware that Delaware courts interpret the phrase “by operation of law” in assignment clauses to refer to mergers in which the target company does not survive.  The presence of this language in anti-assignment clauses in a target’s important contracts (if those contracts are governed by Delaware law) should prompt a discussion about the appropriate transaction structure.  For example, in MTA , the Court suggested that MTA would have had standing to enforce the contract with CMP if it had been merged through a reverse triangular merger rather than a forward triangular merger.  The Superior Court cited a 2013 Chancery decision, Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , in which Vice Chancellor Parsons found that “a reverse triangular merger does not constitute an assignment by operation of law”.  62 A.3d 62, 83 (Del. Ch. 2013). 

If dealing with similar language in anti-assignment clauses in important agreements, practitioners should consider alternative transaction structures that would allow the target to retain its corporate existence.  According to MTA , such alternatives should allow successor companies to enforce agreements without running afoul of anti-assignment clauses prohibiting “assignment by operation of law”.[2]

[1] The transaction was an amalgamation under Canadian law, which the parties and the Court agreed was the equivalent of a merger under Delaware law.  The transaction structure was equivalent to a forward triangular merger. 

[2] This may not be true in other jurisdictions.  For example, under California law, a reverse triangular merger has been found to be a transfer of rights by operation of law .  See SQL Sols. v. Oracle Corp. , 1991 U.S. Dist. LEXIS 21097, at *8-12 (N.D. Cal. Dec. 18, 1991). 

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NY Courts Have Jurisdiction Over Out-of-State, Non-Merged Firms

By Beth Wang

New York courts can exercise jurisdiction over non-state-based companies that acquire the liabilities and assets of another entity that has done business there, even if they never merge, the state’s top court ruled Thursday.

The unanimous opinion from the New York Court of Appeals opens the door for the US Court of Appeals for the Second Circuit to exercise personal jurisdiction over Lebanese bank Société Générale de Banque au Liban SAL, the successor of Lebanese Canadian Bank, in a lawsuit alleging the bank financially supported terrorist group Hezbollah in the period leading up to its 2006 attack against Israel.

Allowing ...

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