Presenting a live 90-minute webinar with interactive Q&A Reverse and Forward Triangular Mergers Alternative Approaches to Structure M&A Transactions, Implications for Anti-Assignment Clauses WEDNES DAY, FEBRUARY 15, 2012 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Thomas D. Washburne, Jr., Part ner, Venable , Washingt on, D.C. Norman Lencz, Part ner, Venable , Balt imore Brian J. O'Connor, Part ner, Venable , Balt imore The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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REVERSE AND FORWARD TRIANGULAR MERGERS AFTER MESO SCALE DIAGNOSTICS, LLC V. ROCHE DIAGNOSTIC GMBH Stafford Webinar Thomas D. Washburne Norman Lencz Brian J. O’Connor February 15, 2012 5
FORWARD TRIANGULAR MERGER (“FTM”) TARGET PARENT SHAREHOLDERS TARGET MERGER SUB STATUTORY MERGER 6
FTM - STEPS • Typically, Parent sets up new Merger Sub for purposes of the transaction, but use of “old and cold” Merger Sub is also possible. • Target merges into Merger Sub pursuant to state law. • All assets and liabilities of Target are transferred to Merger Sub by operation of law. • Target stock cancelled by operation of law. 7
REVERSE TRIANGULAR MERGER (“RTM”) TARGET PARENT SHAREHOLDERS TARGET MERGER SUB STATUTORY MERGER 8
RTM - STEPS • Typically, Parent sets up new Merger Sub for purposes of the transaction, but use of “old and cold” Merger Sub is also possible. • Merger Sub merges into Target pursuant to state law. • Parent’s Merger Sub stock is converted into Target stock by operation of law. • Target stock cancelled by operation of law. 9
MESO BACKGROUND Players • Roche Holding Ltd (“Roche”) • BioVeris Corporation (“BioVeris”) • IGEN International (“IGEN”) • Meso Scale Diagnostics (“MSD”) • Meso Scale Technologies (“MST”) 10
1992 IGEN grants Roche a limited license to ECL Technology. 1995 • IGEN and MST form JV called MSD. • IGEN licenses remaining ECL Technology to MSD. MSD has right to any technology previously granted to 3 rd parties (i.e. Roche) that terminate. 1997 IGEN sues Roche for breach of license. 11
Two weeks after losing its 4 th Circuit Appeal 2003 Roche reaches agreement to purchase IGEN and reacquire access to the ECL Technology for $1.25 billion through complex corporate restructuring. 2003 Corporate restructuring – Prior to sale to Roche - IGEN, MSD and MST form BioVeris to hold ECL Technology; BioVeris grants Roche a new limited license. 12
2003 • Restructuring includes a Consent from MSD and MST to Roche’s acquisition of IGEN with a prohibition of assignment by “operation of law or otherwise” of the rights, interests and obligations under the Consent. • The “interests” include the BioVeris license to Roche. 13
Late 2006 BioVeris makes a claim against Roche for infringement of the BioVeris license of ECL Technology; demands an independent accounting and royalties. Early 2007 • Roche acquires BioVeris in a Reverse Triangular Merger and gains access to the BioVeris rights to all ECL Technology. • Following the acquisition Roche closes the BioVeris facilities and lays off all employees and discontinues its product lines. 14
2010 • MSD & MST sue Roche invoking the non- assignment clause in the Consent and allege Roche’s acquisition of the BioVeris license to ECL Technology is invalid. • Roche contends that its acquisition of BioVeris through an Reverse Triangular Merger does not constitute an assignment of the Consent “by operation of law”. 15
KEY OPINION POINTS Delaware law contract • Motion to Dismiss • Limited case law • Stock Purchase cases are distinguished • “Operation of law” language versus “change of control” clause • Use of FTM case principles – Tenneco and Star Cellular • Relevance of post-merger conduct • Subsequent case – Clubcorp does not resolve questions • 16
PRACTICE IMPLICATIONS Review all material contracts for • “operation of law” anti-assignment clauses Determine post-merger plans for target • Consider whether to seek consents • Restructure transaction as a stock • purchase BUT tax implications Contract drafting – Be explicit. • 17
FTM – TAX TREATMENT • FTM treated for tax purposes as a sale by Target of its assets, followed by a liquidation of Target. • FTM can be structured to be either taxable or tax-free. • To be tax-free, FTM must be structured to qualify as a tax-free reorg pursuant to Section 368 (a)(2)(D). 18
TAX-FREE FTM In addition to satisfying the requirements necessary for all tax- free reorgs (continuity of interest, continuity of business enterprise, business purpose, etc.), FTM must also meet the following requirements: 1. Parent must “control” Merger Sub (i.e., 80% of voting stock and 80% of total number of other shares). 2. Merger Sub must acquire “substantially all” of Target’s historic assets (per IRS, 90% of FMV of net assets and 70% of FMV of gross assets). 3. Had Target merged into Parent, would have qualified under Section 368(a)(1)(A). 4. No Merger Sub stock consideration permissible. 19
FAILED TAX-FREE FTM • If FTM fails to satisfy the requirements for tax-free treatment under Section 368(a)(2)(D), it may nevertheless qualify under a different reorg provision. • If FTM fails to qualify as tax-free under any reorg provision, the transaction will generally be taxable at both the corporate and shareholder levels. 20
RTM – TAX TREATMENT • RTM treated for tax purposes as a sale by Target shareholders of their Target stock. • RTM can be structured to be either taxable or tax-free. • To be tax-free, RTM must be structured to qualify as a tax-free reorg pursuant to Section 368 (a)(2)(E). 21
TAX-FREE RTM In addition to satisfying the requirements necessary for all tax-free reorgs (continuity of business enterprise, business purpose, etc.), RTM must also meet the following requirements: 1. At least 80% of the consideration received by the Target shareholders must be Parent voting stock. 2. After the transaction, Target must hold “substantially all” of its assets and Merger Sub’s assets. 22
FAILED TAX-FREE RTM • If RTM fails to satisfy the requirements for tax-free treatment under Section 368(a)(2)(E), it may nevertheless qualify under a different reorg provision. • If RTM fails to qualify as tax-free under any reorg provision, the transaction will generally be taxable at the shareholder level only. 23
USE OF STOCK PURCHASE- TAX IMPLICATIONS If a stock purchase is used to avoid Meso issues • associated with an RTM, the transaction may qualify for tax-free treatment as a “B” reorg under Section 368(a)(1)(B). To qualify as “B” reorg, however, 100% of the • consideration paid to Target shareholders must be acquiror stock. (“No boot in a B”). No “substantially all” requirement, so Target can • divest itself of unwanted assets before the transaction. 24
FOR FURTHER INFORMATION Thomas D. Washburne Norman Lencz Venable LLP Venable LLP Washington, DC Baltimore, MD 202-344-4068 410-244-7842 twashburne@venable.com nlencz@venable.com Brian J. O’Connor Venable LLP Baltimore, MD 410-244-7863 bjoconnor@venable.com 25
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