Protecting Yourself Against Changes in Contractual Counterparties
For many businesses, a contract is made with a particular counterparty because of the character, specialized abilities or other personal attributes of the owner(s) of the other contracting party. This is particularly true in the case of small to medium-sized closely-held businesses. If the original counterparty to your contract assigns or delegates its obligations to a third party, the reason for selecting that original counterparty is frustrated. Imagine the unintended consequences if an original counterparty assigns its performance obligations to your competitor or other undesired business associate.
Typically, protection against these types of assignments is achieved by the "anti-assignment" provisions contained within the contract (i.e. neither party may assign or delegate its rights or obligations without the prior written consent of the other party). However, what happens if the counterparty’s ownership changes (rather than the counterparty simply assigning the contract)? A contract with a counterparty under new (and undesired) ownership is equally challenging as if the contract were simply assigned.
In order to protect against this problem, it is always advisable to couple a "change of control" clause with an anti-assignment clause. A change of control clause, in general, allows for your termination of the contract (or other remedy) if a meaningful ownership change in your counterparty occurs without your consent.
A recent Delaware case, Meso Scale v. Roche1, highlights the risk of failing to include a change of control clause within a contract.
Meso Scale and BioVeris Corporation were parties to a series of contracts providing for the license by Meso Scale of certain patents owned by BioVeris. One of these contracts was a license which prohibited assignment "by operation of law or otherwise" without Meso Scale's prior written consent. Importantly, the license did not require Meso Scale's consent for changes of ownership in BioVeris. In 2007, Roche Holding acquired BioVeris through a reverse triangular merger without first seeking consent from Meso Scale. [In a reverse triangular merger, a wholly owned subsidiary of an acquirer merges with and into an acquisition target, resulting in the survival of the target company as a wholly owned subsidiary of the acquirer. The net result is very similar to the acquisition of all of the stock of the target company.] As a result, Meso Scale was party to a license with a Roche-owned entity.
Apparently, Meso Scale did not want to license the patents from Roche. Because of the absence of a change of control provision in the license, Meso Scale was relegated to bringing a claim for breach of contract, alleging that the reverse triangular merger constituted an assignment by operation of law, and therefore required Meso Scale’s consent. Roche moved for summary judgment. The Delaware Court of Chancery ruled that the acquisition of a company through a reverse triangular merger does not result in an assignment by operation of law or otherwise. Therefore, Meso Scale was out of luck and was left with a Roche-controlled entity as its counterparty to the patent license.
This decision serves as a reminder that, if you want protection against contracting with a "stranger," and if negotiations and leverage permit, an anti-assignment provision coupled with a change of control provision should be included in your contracts. The court in the Meso Scale case specifically noted that Meso Scale "could have negotiated for a change of control provision" and failed to do so. You may also want to detail the consequences of a prohibited change of control or assignment when appropriate. Thus, for example, if you want to prevent being forced to honor a contract after the ownership of the original (acceptable) counterparty changes, the contract should include specific language permitting the non-changed party to terminate the contract following a change of control.
1 Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, No. 5589 VCP (Del. Ch. Feb. 22, 2013).