On September 16, 2020, the Superior Court of Delaware issued an order with potential implications for companies contemplating acquisitions of businesses or assets. In MTA Can. Royalty Corp. v. Compania Minera Pangea, S.A. De C.V., No. N19C-11-228 AML CCLD, 2020 Del. Super. LEXIS 2780 (Sept. 16, 2020), Judge Abigail M. LeGrow held that, following a merger,[1] the surviving company lacked standing to enforce a contract entered into by its predecessor (the non-surviving company in the merger) because the contract’s anti-assignment clause prohibited assignment “by operation of law”.
Companies considering acquisitions should carefully review their target’s contracts for anti-assignment clauses that prohibit assignment “by operation of law”, which Delaware courts interpret to include certain mergers. In addition, where a target’s key contracts contain anti-assignment clauses with such language, companies should carefully consider the preferred transaction structure. In a reverse triangular merger, the acquirer’s newly formed subsidiary is merged into the target, with the result being that the target survives and becomes the acquirer’s subsidiary. By contrast, in a forward triangular merger, the target does not “survive” and its rights are transferred to the existing subsidiary, which may implicate anti-assignment clauses. Reverse triangular mergers do not face the same issue because the target continues its corporate existence as a subsidiary of the acquirer.
Background of the contract and subsequent merger
In 2016, Compania Minera Pangea, S.A. de C.V. (“CMP”) purchased mineral rights in the El Gallo Mine from 1570926 Alberta Ltd. (“Alberta”). In exchange, CMP paid Alberta $5.25m in cash at closing and agreed to pay Alberta an additional $1m in 2018 subject to certain conditions. Of note, the agreement contained the following anti-assignment clause (the “Anti-Assignment Clause”):
Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise, by [Alberta] without the prior written consent of each other party, and any such assignment without such prior written consent shall be null and void. . . . [T]his Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns.
In July 2017, Alberta merged with Global Royalty Corp. (“Global”), a subsidiary of Metalla Royalty & Streaming Ltd., and Global was the surviving entity. Following that transaction, Global changed its name to MTA Canada Royalty Corp. (“MTA”). In November 2019, MTA brought a breach of contract claim against CMP based on CMP’s alleged failure to pay the $1m in consideration due in 2018.
Superior Court holds that anti-assignment clause extends to certain mergers
CMP argued that MTA lacked standing to enforce Alberta’s contract with CMP because, per the Anti-Assignment Clause, Alberta was required to obtain CMP’s written consent before assigning its rights to MTA. MTA argued that the Anti-Assignment Clause was meant to prevent third-party assignments, not “successor assignments” like Alberta’s merger. Id. at *11-12. To make this argument, it relied on a 1993 Chancery decision, in which then-Vice Chancellor Jacobs had held that, subject to certain conditions, anti-assignment clauses do not apply to mergers unless mergers are explicitly prohibited. Star Cellular Tel. Co. v. Baton Rouge CGSA., 1993 Del. Ch. LEXIS 158, at *25 (July 30, 1993). According to MTA, because the last sentence of the Anti-Assignment Clause referred to “successors”, it was clearly not intended to extend to mergers.
The Superior Court disagreed. It explained that, as a result of the merger, Alberta had ceased to exist, so MTA could only enforce the contract if it showed that the Anti-Assignment Clause did not apply. MTA, at *6. It then held that the Anti-Assignment Clause clearly barred Alberta’s transfer of rights through a merger because the clause prevented assignment “by operation of law”, which Delaware case law had interpreted as referring to forward triangular mergers. Id. at *7-14. In light of what it regarded as a straightforward application of the Anti-Assignment Clause, the Superior Court did not engage in the Star Cellular analysis. The Superior Court found that the reference to “successors” in the Anti-Assignment Clause meant only that “valid successors” had the right to enforce the contract. Id. at *13.
Potentially at odds with Chancery precedent?
Of special relevance is the Superior Court’s treatment of existing Delaware case law on anti-assignment clauses and forward triangular mergers. Existing precedent from the Court of Chancery held that anti-assignment clauses containing both a prohibition on assignment “by operation of law” and a reference to “successors” were ambiguous. Under the Star Cellular test, this ambiguity was construed against the application of the anti-assignment clause.
Specifically, MTA appears at odds with the Chancery ruling in Tenneco Auto. Inc. v. El Paso Corp., which also involved the impact of an anti-assignment clause following a forward triangular merger. C.A. No. 18810-NC, 2002 Del. Ch. LEXIS 26 (Mar. 20, 2002). The language of the anti-assignment clause in Tenneco was similar to that in MTA: both clauses prohibited assignment “by operation of law” while also referencing “successors”. In Tenneco, Vice Chancellor Noble found that those conflicting references made the anti-assignment clause ambiguous, meaning that, under the Star Cellular test, the successor company could enforce the contract. Id. at *7-10. The MTA Court did not explain why it reached the opposite result.
Similarly, in ClubCorp, Inc. v. Pinehurst, LLC, Vice Chancellor Parsons held that, following a forward triangular merger, an anti-assignment clause with language like that in Tenneco was ambiguous because the agreement both referenced “successors” and prohibited assignment “by operation of law”. No. 5120-VCP, 2011 Del. Ch. LEXIS 176, at *26-29 (Nov. 15, 2011). Again, the ambiguity militated in favor of finding that the anti-assignment clauses did not apply to the merger. MTA did not address Pinehurst.
Insights from MTA
MTA has several significant implications for practitioners. The first is a reminder to carefully review a target’s contracts for anti-assignment clauses. Such clauses in important contracts should be flagged and thoughtfully evaluated.
In addition, practitioners should remain aware that Delaware courts interpret the phrase “by operation of law” in assignment clauses to refer to mergers in which the target company does not survive. The presence of this language in anti-assignment clauses in a target’s important contracts (if those contracts are governed by Delaware law) should prompt a discussion about the appropriate transaction structure. For example, in MTA, the Court suggested that MTA would have had standing to enforce the contract with CMP if it had been merged through a reverse triangular merger rather than a forward triangular merger. The Superior Court cited a 2013 Chancery decision, Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, in which Vice Chancellor Parsons found that “a reverse triangular merger does not constitute an assignment by operation of law”. 62 A.3d 62, 83 (Del. Ch. 2013).
If dealing with similar language in anti-assignment clauses in important agreements, practitioners should consider alternative transaction structures that would allow the target to retain its corporate existence. According to MTA, such alternatives should allow successor companies to enforce agreements without running afoul of anti-assignment clauses prohibiting “assignment by operation of law”.[2]
[1] The transaction was an amalgamation under Canadian law, which the parties and the Court agreed was the equivalent of a merger under Delaware law. The transaction structure was equivalent to a forward triangular merger.
[2] This may not be true in other jurisdictions. For example, under California law, a reverse triangular merger has been found to be a transfer of rights by operation of law. See SQL Sols. v. Oracle Corp., 1991 U.S. Dist. LEXIS 21097, at *8-12 (N.D. Cal. Dec. 18, 1991).
