Anti-Assignment Provisions and Their Effect on Transaction Structures
If you look at the last page or so of most commercial contracts, buried among the boilerplate clauses one will often find a provision that looks something like this:
"Neither this Agreement nor any of the rights, interests or obligations under the Agreement shall be assigned, in whole or in part, by operation of law or otherwise by either party without the prior written consent of the other party."
Lawyers refer to this as an "anti-assignment" provision, and its goal is to ensure that the two contracting parties will not be able to transfer their obligations under the agreement to someone else without first getting permission from the other party. For example, if you have contracted with an organization because of its reputation and expertise in a given area, you may not want that organization to be able to outsource that responsibility to another party.
Contract assignment issues can play a significant role in mergers and acquisitions, as buyers will want to be sure they acquire all of the seller’s key customer and vendor contracts. If these contracts require consent from the counterparties, it can add significant cost and time to a transaction. The default position under most contracts is that the contracts are assignable unless the parties have expressed an intent to the contrary. As such, anti-assignment provisions are added to contracts for just that purpose.
In one of the most common transaction structures, an asset sale, contracts have to be assigned to the acquiring party, so if contracts have anti-assignment provisions, the buyer will need to obtain the consent of the contracting parties before the contract can be transferred. If many consents are required, or if the counterparties use the opportunity to try to break contracts or otherwise extract concessions, it can add delay and uncertainty to a transaction.
To avoid this issue, acquisitions are sometimes structured as "reverse triangular mergers" where the buyer forms a subsidiary (typically called a "merger sub") which merges with and into the target company. The merger sub becomes a part of the target company, and the target company becomes a subsidiary of the buyer. In this structure, the party to the contract never changes; it is just the owners of that party that have changed. As such, transaction attorneys have long held the belief that reverse merger transactions should not be considered assignments. A recent Delaware Chancery Court case, Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, has affirmed this position under Delaware law, which provides even further certainty on this issue.
On the flip side, when drafting contracts, if parties do want to prevent the counterparty from being able to transfer the contact in a merger, or other change of control transaction, they will need to state this very explicitly in their contracts. Anti-assignment provisions need to explicitly address merger situations and state whether the parties intend consent to be required.
It is also worth noting that the Meso Scale decision is applicable for Delaware law, and although Delaware courts are persuasive in many other states, other courts could come to a different conclusion. For example, a U.S. District Court for the Northern District of California, in SQL Solutions v. Oracle, held that a reverse triangular merger did result in an assignment by operation of law of a license agreement of the target company.
In either case, this illustrates the importance of clear drafting in contracts, and the need for experienced transaction counsel to be involved early in the deal structuring process so that issues like anti-assignment provisions can be identified early and appropriately addressed, if needed. Please call us if you have any questions or would like to discuss further.
by Bart D. Dillashaw