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Delaware Chancery Court Rules that a Reverse Triangular Merger May Constitute an Assignment by Operation of Law

May 24, 2011

Thaddeus J. Malik, Jill R. Sheiman & Eric M. Jones

Reverse triangular mergers are a popular deal structure used to acquire all of the outstanding equity interests of a target company. In a reverse triangular merger, the acquiror forms a subsidiary which is merged with and into the target company with the target company surviving the merger, and the target stockholders receive cash, acquiror stock, or a combination of cash and stock. The end result is the same as a pure stock purchase, but reverse triangular mergers offer the advantage of requiring only the approval of a majority in interest of stockholders (unless a higher percentage is required by the target companys governing documents), subject to statutory appraisal and dissenters rights, instead of the approval of all stockholders (or at least a sufficient amount of shares to qualify for a follow-on short-form merger).

Deal attorneys have long believed that a reverse triangular merger, like a stock purchase, does not involve an assignment of the target companys assets and, therefore, does not trigger anti-assignment provisions in the target companys contracts that restrict an assignment by operation of law. However, in a case of first impression, the Delaware Court of Chancery (the Court) in Meso Scale Diagnostics LLC v. Roche Diagnostics GMBH concluded that there was ambiguity regarding whether such a provision should apply in the context of a reverse triangular merger and denied defendants motion to dismiss, thus calling into question this long-held belief.

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