Reprinted with permission from the July 14, 2011 edition of the NEW YORK LAW JOURNAL © 2011 ALM Media Properties, LLC.

In 1991, the federal district court for the Northern District of California ruled in SQL Solutions Inc. v. Oracle Corp. that the acquisition of a company pursuant to a reverse triangular merger (RTM) constituted a breach of a non-assignable agreement under which the company licensed certain software. No subsequent reported cases reached a similar conclusion in the context of an RTM (in which the target company survives the merger as the buyer’s subsidiary), leading many M&A and IP practitioners to view SQL Solutions as an outlier. However, the Delaware Chancery Court’s recent denial of a motion to dismiss in Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH2 casts new doubt on whether M&A lawyers can rely on an RTM acquisition structure to avoid violating prohibitions on assignment contained in the target company’s contracts.

Mergers and Assignments

In general, a buyer can acquire a target company in one of three ways: asset purchase, stock purchase or merger. Asset acquisitions by definition constitute an assignment of the target company’s contracts to the buyer. Stock acquisitions do not violate anti-assignment provisions because the target company remains the same legal entity — and a party to the non-assignable agreement — before and after the sale...