“By Operation of Law” (Including Draft No-Assignment Language)

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:

  1. I’m aware it doesn’t read very easily.
  2. 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.
  3. 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).
  4. I suggest that “by court order” is what’s left if you eliminate mergers, consolidations, and dissolution from by operation of law.
  5. The reference to “the surviving or disappearing entity” covers both direct mergers, triangular mergers, and reverse triangular mergers.
  6. Don’t simply prohibit assigning the entire contract—a court might construe that as prohibiting just delegation of duties.
  7. 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.
  8. 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.
  9. 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.
  10. 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.

 

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.