Provisions restricting assignment can be tricky

It can be tough to get a firm grip on a contract's assignment provision.

This truth was brought home again by a decision last week from the Delaware Court of Chancery, the highest court in *the* state known to set the standards in corporate law.

The case is Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, and DLA Piper's Trent Dykes has posted to the Venture Alley blog about it.

The assignment clause at center stage in the case reads in pertinent part 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 . . . . Any purported assignment without such consent shall be void."

Sounds tight, no? You might expect that if the licensee sold its company to another party - and wanted to be paid in the transaction for the value of the license - the consent of the licensor would be required?

But contract law is not always intuitive and the structures of a transaction and the words written in contracts can make critical differences.

Trent links to a detailed summary of the case by his partner, John Reed, in which we find this helpful upshot:

"[T]he Court granted summary judgment that a reverse triangular merger was not an assignment by operation of law or otherwise, meaning that the acquisition of the company holding a license to valuable technology did not require the consent of the entity that granted the license."

I went to the underlying case asking myself the question, "so just what kind of assignments would require consent, under the assignment clause in the case?"

Bill of saleLet's take as a given that a purported sale, transfer or assignment of just the license itself - not as part of a merger or sale of a company - would trigger the consent requirement of the contractual assignment clause above. Let's also grant that a sale of the licensee's business, structured as an asset sale where the buyer was purchasing all or substantially all of the assets of the licensee, would trigger the consent requirement. Those kinds of transactions involve straight out assignments.

More interesting, and more problematic, is what kinds of structures are implicated when the concept of "assignment" is broadened to include the additional concept of an assignment "by operation of law." The Meso case is telling us that a reverse triangular merger is *not* an "assignment by operation of law."

Vice Chancellor Parson's opinion in the Meso case does get into a discussion of how to giving meaning to that phrase, "by operation of law." Generally speaking, an assignment "by operation of law" can be found or inferred when the party under the contractual restriction on assignment is not the surviving entity in a merger. The court stated that certain cases cited by the effective licensor "are distinguishable because they involved forward triangular mergers where the target company was not the surviving entity, whereas in this case [the effective licensee] was the surviving entity in a reverse triangular merger."

In short, the entire question of whether or not consent was required under the assignment provision may well have turned on the choice, in an M&A context, on what entity would be legally deemed to be the survivor.

Photo: Josh Bancroft/ Flickr.

blog comments powered by Disqus