In Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH (go here for a PDF copy), the Delaware Court of Chancery held that it’s not clear whether for purposes of a no-assignment provision a reverse triangular merger constitutes an assignment “by operation of law.” (A reverse triangular merger is when Sub merges into Target.)
I’m not going to go into any detail regarding the case, as that information is readily available elsewhere. (Plucking a couple of examples at random, go here for Milbank’s analysis and go here for Shearman & Sterling’s analysis.)
Instead, let’s consider the phrase by operation of law. Here’s what Tina Stark’s book Negotiating and Drafting Contract Boilerplate
Transfers by operation of law are generally considered involuntary transfers. They include court-ordered property transfers, bankruptcy-related transfers, and transfers to or from an executor or an administrator. Whether mergers and consolidations are transfers by operation of law is an open question. The cases reach inconsistent results.
That suggests that if you use the phrase by operation of law, you run the risk of getting into a fight over exactly what it means. And the Meso Scale Diagnostics case provides a great example of exactly that.
So what should you do instead? Koncision’s confidentiality-agreement template uses a bare-bones no-assignment provision that doesn’t get into by-operation-of-law territory, so here’s a more detailed version that I’ve just come up with:
Without the prior written consent of the other party, neither party may voluntarily or by court order (1) assign any of its rights under this agreement, whether by contract or by merger (whether that party is the surviving or disappearing entity), consolidation, dissolution, or otherwise, or (2) delegate any of its obligations under this agreement or its performance in satisfaction of any conditions to any obligations of the other party under this agreement. Any assignment or delegation in breach of this section X will be void.
Some observations:
- I’m aware it doesn’t read very easily.
- If you provide for the possibility of consent, it would be safest to assume that consent can’t be unreasonably withheld. If you have a problem with that, omit any mention of consent.
- I think it’s helpful to distinguish the issue of volition (voluntary or or by court order) from the mechanism of assignment (by contract or something else).
- I suggest that “by court order” is what’s left if you eliminate mergers, consolidations, and dissolution from by operation of law.
- The reference to “the surviving or disappearing entity” covers both direct mergers, triangular mergers, and reverse triangular mergers.
- Don’t simply prohibit assigning the entire contract—a court might construe that as prohibiting just delegation of duties.
- The reference to “performance in satisfaction of any conditions” acknowledges that if you promise to pay me $50 if I mow your lawn, I might want to delegate the task of mowing your lawn to someone else. If I do so, I’m not delegating an obligation, I’m delegating performance aimed at satisfying a condition. I got this idea from Negotiating and Drafting Contract Boilerplate, but I’ve chosen to articulate it differently.
- Saying that any assignment or delegation in breach will be void might be enough by itself. But including a prohibition too would provide a remedy if the other party nevertheless tries to assign or delegate, thereby causing you to incur legal fees.
- Saying that a court-ordered assignment will be void won’t work if the law overrides any restriction on assignment. See this August 2006 post on AdamsDrafting on how that plays out in bankruptcy.
- If you’re worried about a change of control, you might want to handle that by means of an event-of-default provision rather than a no-assignment provision: it’s a bit of a stretch to consider a change in Acme’s ownership as constituting assignment by Acme of its rights under a contract.
But once you have your broad no-assignment wording, you have to determine whether for a given transaction you need the full monty, something less, nothing at all, or a provision authorizing assignment. I won’t get into that here.
I welcome comments. In addition to more general issues, would this language work in civil-law jurisdictions and other common-law jurisdictions? In that regard, I have in front of me Mark Anderson’s A-Z Guide to Boilerplate and Commercial Clauses
, written for an English readership; I hope Mark forgives me for not considering just yet how my proposed language squares with the recommendations contained in his chapter on “assignment and novation.” Incidentally, Mark recently posted this item on IP Draughts about the importance of addressing assignment in IP contracts.
Ken, thanks for the mention of the book. Language involving “by operation of law”, seems a bit specialist for a confidentiality agreement. As to what it means, I think it is a sweep-up that may cover oddities, eg:
– contracts with an individual that may continue when he dies, eg copyright licence agreements?
– contracts that become contracts with a new entity by virtue of a law.
In the latter category, I can cite my former client Royal Free Hospital School of Medicine, which was dissolved and whose assets transferred to University College London under the University College London Act 1996 (see section 5 which deals with automatic transfer of property without any assignment). See http://www.legislation.gov.uk/ukla/1996/3/contents/enacted
To tee up a potential Plan B, counsel for a non-assigning party might ask for a termination right — if the other party engages in a merger that the non-assigning party doesn’t like, and the merger would not be considered an “assignment” under applicable law, then the non-assigning party can terminate the agreement.[1] [2]
[1] Of course, the consequences of termination would have to be thought through and suitably addressed.
[2] I’ve never been 100% comfortable with the concept of terminating the Agreement. My late partner and mentor Tom Arnold was of the school of thought that contracts per se are historical facts and can never be terminated – only specific rights and duties can be terminated.
Ken:
I have some nitpicks.
The Texas statute on the effect of a merger (section 10.008 at http://www.statutes.legis.state.tx.us/Docs/BO/pdf/BO.10.pdf) specifically says that a merger vests rights in property in the successor organization without any assignment or transfer having occurred. Someone who knows this law better than me might be able to comment on whether that would include, for example, a lease to either real property or capital equipment. If you nonetheless want to prohibit the lease vesting int he successor, i think your language will have to use a word other than “assign.”
Along the same lines, the statute makes the successor entity be the primary obligor without calling it a delegation, so the non-delegation language might not be effective. The statute does allow a contract to specify additional obligors.
The two points above are important mainly because Texas law allows a merger to have multiple surviving or new entities result from the merger. So, your valuable lease might end up being held by a much less creditworthy entity. I don’t have a solution for this problem that would be generally applicable. I think instead, the drafter will have to look towards protections elsewhere, like warranties that the lessee would breach by becoming less creditworthy or a termination right that kicks in on any organic event.
You might want to change “court order” to “government action” to handle situations where regulatory bodies take control of a company (e.g. banks, insurers) and also have statutory, quasi-judicial power to transfer obligations to successors.
Finally, your construction of “neither party may” seems to run afoul of the guidance in MSCD 2.150. But the meaning of “may” in the construction remains consistent with MCSD and the alternative construction — each party shall not — is a clunky here, so I see why you chose the alternative.
Chris
Chris: Hmm. Regarding your first two points, I’ll have to put on my thinking cap. I might take a while to respond.
Yes, I will change “court order” to something that refers to “Government Body” or some such. I did something similar for purposes of Koncision’s confidentiality-agreement template.
I periodically fall foul of my own guidelines, and I’m delighted when people point that out. But regarding “neither party may,” have a look at MSCD 2.152.
Ken
“By operation of law” could also cover death, if one of the parties is an individual. I doubt it would be any more effective than trying to prohibit assignment by court order. There are, of course, ways of addressing the effect of death directly, if it’s a real issue.
One senior lawyer advised me a one-sided transfer of shares from A to B under “operation of law” without any transfer deed or court order. He explained the following:
1. A breached the shareholders agreement. The agreement said that in case any shareholder breaches, his shares will be bought by other shareholders.
2. Since the agreement was breached, hence the shares were transferred to other shareholders under “operation of law”.
3. Since it came under operation of law, hence the transfer of shares became “transmission of shares” which needs no court order or transfer deed.
I was shocked to listen this approach. Can you comment.
so does permanent disability fall under operation of the law and therefore Transmission applies?
Your page is very useful for us mortals to understand some technical language. I am grateful indeed.