Private Equity

Few things are more fundamental to M&A due diligence than determining whether any of the material contracts to which the target is a party require a counterparty’s consent as a condition to the proposed acquisition. And that determination is significantly influenced by the specific language set forth in the contract’s anti-assignment/change of control provision, as well as the form the proposed acquisition takes—i.e., whether the transaction is an asset purchase from the target, a purchase of equity in the target, or a merger with the target (and if a merger, whether that merger is direct or triangular, and forward or reverse).^[1] A recent Delaware Superior Court decision, MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V., 2020 WL 5554161 (Del. Super. Sept. 16, 2020), is a stark reminder of the importance of carefully analyzing change of control/anti-assignment provisions and taking advantage of all available structuring alternatives to avoid untoward results that can occur from completing an acquisition deemed to require a counterparty’s consent.

MTA Canada Royalty involved a claim by a successor to a selling party under an acquisition agreement for payment by the buyer of a Conditional Payment owing to the selling party if the mining property sold pursuant to that agreement remained in operation after a date certain. It appears that the requirements for triggering the obligation to make the Conditional Payment were satisfied, but because of some transactions undertaken by the selling party, and the impact of an anti-assignment clause in the acquisition agreement, the buyer claimed that the person actually asserting entitlement to that Conditional Payment was not so entitled (indeed, no one was because the selling party had ceased to exist).

Following the acquisition of the mining property by the buyer, the stockholders of the selling party sold all of their shares in the selling party to a third party, but purported to carve out the Conditional Payment Obligation owing to the selling party from the sale of stock of the selling entity. So, when the Conditional Payment came due, the selling party’s former stockholders, rather than the selling party, sued to collect the Conditional Payment when it was not forthcoming from the buyer. In an earlier decision, Coeur Mining, Inc. v. Compania Minera Pangea, S.A. de C.V., 2019 WL 3976078 (Del. Super. Aug. 22, 2019), the court held that the selling party’s former stockholders had no standing to claim the Conditional Payment because the only person entitled to that Conditional Payment was the selling party itself, and there really is no such thing as carving out assets of an entity in favor the entity’s stockholders selling the stock of that entity, without the entity itself assigning (by way of a dividend) those assets to its stockholders. And, of course, if an assignment had occurred it was prohibited by the anti-assignment provision in the agreement creating the Conditional Payment Obligation. Thus, the court dismissed the former stockholders’ claim outright.

MTA Canada Royalty was the second bite at the apple. If the selling entity’s former stockholders, who purported to retain the right to the Conditional Payment, had no standing to pursue collection of the Conditional Payment themselves, then presumably the selling party still could (and one would assume the selling party would then have an obligation to turn over the Conditional Payment to the former stockholders when collected).^[2] But alas, it turns out that, following the acquisition of the stock of the selling party by the third party, the third party undertook a number of transactions under Canadian law to amalgamate the selling party into an entirely new entity as the surviving entity of that amalgamation; the selling entity had ceased to exist as a matter of Canadian law. Thus, the plaintiff in this second bite lawsuit to collect what was presumably otherwise owed was not the selling party to the original acquisition agreement, but a successor to that selling party.

While the amalgamation was a creature of Canadian law, the original acquisition agreement containing the anti-assignment clause was governed by Delaware law. The parties apparently conceded that the amalgamation was the equivalent of a merger under Delaware law. The buyer argued that the anti-assignment clause in the original acquisition agreement was violated when the amalgamation occurred without the buyer’s consent; and that the successor had no standing to claim the Conditional Payment. However, under Delaware law, a general prohibition on a party transferring or assigning an agreement does not automatically prohibit a merger involving a contracting party, even one in which the contracting party is not the survivor of such merger. As noted by the Delaware Court of Chancery in Star Cellular Telephone Co., Inc. v. Baton Rouge CGSA, Inc., 1993 WL 294847, at *8 (Del. Ch. Aug. 2, 1993):

[W]here an antitransfer clause in a contract does not explicitly prohibit a transfer of property rights to a new entity by a merger, and where performance by the original contracting party is not a material condition and the transfer itself creates no unreasonable risks for the other contracting parties, the court should not presume that the parties intended to prohibit the merger.

Nonetheless, “[w]hen an anti-assignment clause includes language referencing an assignment ‘by operation of law,’ Delaware courts generally agree that the clause applies to mergers in which the contracting company is not the surviving entity.”^[3] Here the anti-assignment clause in the original acquisition agreement did purport to include a prohibition on assignments “by operation of law.”^[4] And, although Delaware has recognized that a merger in which the contracting party is the survivor (a reverse triangular merger) is not an assignment by operation of law “because the contract rights remain with the contracting party and do not pass to another entity,” the amalgamation here resulted in a new entity acquiring the contract rights of the original selling party and the original selling party ceasing to exist. Thus, the effect of the anti-assignment clause and its applicability to the amalgamation resulted in the buyer having no obligation for the payment of the Conditional Payment to anyone.

Although the court appears to acknowledge the seeming “unfairness of allowing [the buyer] to avoid making a payment it allegedly owes[,]” the court nonetheless concludes that “it is not this Court’s function to save sophisticated contracting parties from an unfair or unanticipated result of their own corporate transactions.” After all, “[t]he parties could have avoided this result through careful drafting during contract negotiations or by utilizing a different corporate structure when [the selling party and the surviving new entity] combined.”^[5]