assignability of licenses in reverse triangular mergers ... · assignability of licenses in reverse...

Assignability of Licenses in Reverse Triangular Mergers: an Update

Craig Carpenter & Van Wiltz May 14, 2013

● Craig Carpenter, Transactional Intellectual Property

● Van Wiltz, Corporate & Securities

Introduction

● Overview ● Merger Structuring & Considerations

● Assignability in license agreements

● The Delaware Case: Meso Scale Diagnostics v. Roche Diagnostics GMBH ● Background

● Round 1: 2011 Motion to Dismiss Ruling

● Round 2: 2013 Motion for Summary Judgment Ruling

● Why is this important? ● The Current State of the Law ● Practice Pointers ● Q & A

Agenda

Merger Structuring

● Types:

● Forward Merger

● Forward Triangular Merger

● Reverse Triangular Merger

● Considerations:

● Liabilities

● Tax Issues

● Transferability − Intellectual Property

− Contracts

− Consents & Approvals

Forward Merger

BEFORE

Forward Merger

AFTER

Forward Triangular Merger

BEFORE

Forward Triangular Merger

AFTER

Reverse Triangular Merger

BEFORE

Reverse Triangular Merger

AFTER

● Generally, intellectual property licenses are personal to the Licensee (i.e. cannot be assigned).

● The license grants use rights, not ownership rights.

● Parties often clarify this point by including an anti-assignment clause.

● Basic Anti-assignment Clause:

● “The rights and licenses granted herein may not be assigned by the Licensee without the prior written consent of the Licensor, and any purported assignment not consented to by Licensor will be of no force and effect.”

Mergers & Transferability of IP Licenses

● Anti-assignment clause preventing a Change of Control: ● “For purposes of the preceding sentence, and without limiting its

generality, any merger, consolidation or reorganization involving Licensor (regardless of whether Licensor is a surviving or disappearing entity) will be deemed to be a transfer of rights, obligations or performance under this Agreement for which Licensee's prior written consent is required.”

● “Licensee may not assign or otherwise transfer this Agreement or its rights, interests or obligations under this Agreement, whether through a merger, Change of Control, asset sale, stock sale or otherwise, except with the prior written consent of Licensor.”

● “If Licensee undergoes a Change of Control, Licensor may terminate this Agreement upon thirty (30) days prior written notice to Licensee.”


● Merger Structure & Anti-assignment Provisions

● If a merger is structured as a FORWARD MERGER or a FORWARD TRIANGULAR MERGER, third party consents are required for those target company contracts which contain anti-assignment clauses.

● However, such consents are usually unnecessary in REVERSE TRIANGULAR MERGERS unless the target company contracts contain change of control clauses.

. . . Or so we thought . . .


● Court of Chancery of Delaware

● Vice Chancellor Donald Parsons

● Two relevant opinions:

● 2011 Motion to Dismiss: Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, C.A. No. 5589, 2011 WL 1348438 (Del. Ch. April 8, 2011).

● 2013 Motion for Summary Judgment: Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, C.A. No. 5589, 2013 WL 655021 (Del. Ch. Feb. 22, 2013).

Delaware Case: Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH

● Transaction at issue:

● In 2007 ROCHE (defendant) acquired BIOVERIS CORP., which was the patent holder and licensor of ECL technology, through a Reverse Triangular Merger. ROCHE intended to acquire the rights to use and exploit the ECL technology.

● Plaintiff, MSD was a prior licensee of ECL technology from a predecessor of BIOVERIS.

● In 2003, prior to the transaction at issue, MSD (and other ECL licensees) had signed an agreement with the BIOVERIS predecessor that contained an anti-assignment clause binding all parties.

Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH - Background

● On June 22, 2010, the plaintiffs (MSD) filed a complaint in Delaware Chancery Court alleging that the acquisition by Roche of BioVeris Corporation through a reverse triangular merger violated the anti-assignment clause found in the 2003 agreement between the plaintiffs and the predecessor entity to BioVeris.

Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH – Round 1

● The Court’s 2011 Motion to Dismiss Ruling

● Issue: Whether an RTM, where the surviving entity of the merger is the same entity that originally held the rights before the merger, can constitute an assignment by operation of law and therefore violate an anti-assignment provision?

● Holding: The court denied the defendants’ motion to dismiss, finding that a RTM may qualify as an assignment by operation of law breaching certain anti-assignment provisions.


● Reasoning:

● The Court stated that plaintiffs could plausibly argue 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.


● This ruling is noteworthy and problematic because:

● This decision questioned the widely held view that Reverse Triangular Mergers do not involve any assignment by the target and therefore never can trigger an anti-assignment clause that prohibits an assignment by operation of law.

● It is counterintuitive: the entity assigned a contract/license to itself?

● The Court’s decision implied that a reverse triangular merger alone will not constitute an assignment by operation of law. However, the Court showed a willingness to consider the Acquiring company’s post-acquisition dealings with the target company.

● This created much uncertainty and concern for M&A Attorneys


● Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, C.A. No. 5589, 2013 WL 655021 (Del. Ch. Feb. 22, 2013)

● The Court’s 2013 Motion for Summary Judgment:

● Where we are today

● The Court revisits the key issue in the motion to dismiss ruling

Round 2 – Court Revisits the 2011 Ruling

● Issue: Whether an RTM, where the surviving entity of the merger is the same entity that originally held the rights before the merger, can constitute an assignment by operation of law and therefore violate an anti-assignment provision?

● Holding: Largely reversing its previous opinion, the court granted the defendants’ motion for summary judgment, finding 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.”


● Reasoning: In particular, the Court found the defendants’ interpretation of the disputed agreement reasonable on two grounds: ● Application of Section 259 of the Delaware General Corporation

Law.

− “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.”

● Consistency with the reasonable expectations of the parties.

− Relying on a substantial amount of legal scholarship and commentary in support of the proposition that reverse triangular mergers do not constitute an assignment by operation of law as it relates to the surviving corporation.


● Forward Mergers Distinguished

● The Court distinguished a handful of Delaware cases that plaintiffs claimed supported their position.

● The Delaware cases cited by plaintiffs involved forward mergers and in those situations, unlike in the case of a reverse merger, the party to the contract in question disappears (merged out of existence).

● California Law Distinguished

● The Court also rejected plaintiffs’ invitation to follow a California case that held that a reverse triangular merger effected an assignment by operation of law.

− SQL Solutions, Inc. v. Oracle Corp., 1991 WL 626458 (N.D. Cal. Dec. 18, 1991)

● Vice Chancellor Parsons concluded that this line of cases conflicted with Delaware’s jurisprudence surrounding stock acquisitions.


● Takeaways:

● Removes the uncertainty created by Vice Chancellor Parsons in his 2011 Opinion.

● A judicial confirmation of the principle that a reverse triangular merger does not result in the assignment (by operation of law or otherwise) of the surviving corporation’s contracts.

● Reinforces the general consensus regarding reverse triangular mergers and their utility.


● Delaware Law

● First Delaware Court to address this issue

● Reinforces the general consensus regarding reverse triangular mergers

● More certainty in drafting licensing agreements

● More certainty in deal structuring

Why are these Opinions Important?

● Delaware:

● Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, C.A. No. 5589, 2013 WL 655021 (Del. Ch. Feb. 22, 2013)

● California:

● SQL Solutions, Inc. v. Oracle Corp., 1991 WL 626458 (N.D. Cal. Dec. 18, 1991)

● Texas:

● Tex. Bus. Org. Code § 10.008(a)(2)

● TXO Production Co. v. M.D. Mark, Inc., 999 S.W.2d 137, 143 (Tex. App.—Houston [14th Dist.] 1999, pet. Denied)

Current State of the Law

● Client is Licensor:

● Draft purposefully and unambiguously: use anti-assignment and change of control provisions to keep control in the Licensor’s hands.

● Parties intending that a merger be treated as an assignment in violation of an anti-assignment provision should address that issue head on in their agreement by:

− Specifying as a matter of contract that a reverse merger is an “assignment,” or

− Including an express change of control provision that triggers a consent requirement or the forfeiture of certain rights.

Practice Pointers – Intellectual Property

● Client is an Acquiring company: ● Due Diligence

− During the due diligence process of a merger or acquisition parties must make a full inventory of all contracts and licenses, review the terms to ascertain transfer and use restrictions, and determine if an anti-assignment clause has the potential to be violated by the prospective transaction.

● Valuation − Scrutinize contractual relationships of the target company and attain

approval of any third parties with respect to an change of control restriction in order to preserve the value of any licensing agreement or contract.

● Transaction Structuring ● Post-acquisition behavior

Practice Pointers – M&A

● Freely Assignable. ● Licensee shall not assign or otherwise transfer any of

its rights, or delegate or otherwise transfer any of its obligations or performance under this Agreement without Licensor's prior written consent, which consent Licensor shall not unreasonably withhold or delay.

● Licensee shall not assign or otherwise transfer any of its rights, or delegate or otherwise transfer any of its obligations or performance under this Agreement without Licensor's prior written consent, which consent Licensor shall not unreasonably withhold or delay may give or withhold in its sole discretion.

Practice Pointers – Anti-Assignment Clauses

Pro-licensor

Pro-licensee

Practice Pointers – Anti-Assignment Clauses

Pro-licensor

Pro-licensee

● This Agreement is personal to Licensee. Licensee shall not assign or otherwise transfer any of its rights, or delegate or otherwise transfer any of its obligations or performance, under this Agreement, in each case whether voluntarily, involuntarily, by operation of law or otherwise, without Licensor's prior written consent, which consent Licensor may give or withhold in its sole discretion, and any purported assignment not consented to by Licensor will be of no force and effect. For purposes of the preceding sentence, and without limiting its generality, any merger, consolidation, reorganization or change of control involving Licensee (regardless of whether Licensee is a surviving or disappearing entity) will be deemed to be a transfer of rights, obligations or performance under this Agreement for which Licensor's prior written consent is required.

● If Licensee undergoes a Change of Control, Licensor may terminate this Agreement upon thirty (30) days prior written notice to Licensee.

● Questions?

Question & Answer

assignability of licenses in reverse triangular mergers ... · assignability of licenses in reverse...

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