From a real estate practitioner’s perspective, perhaps the most important issue that arises in connection with a corporate transaction (whether structured as an asset sale, merger or stock sale) is the question of whether consent to the transaction is required under the leases of the target entity.1 While M&A lawyers have long relied on the reverse triangular merger (RTM) structure—where a subsidiary of the acquirer merges into the target, whose identity remains unchanged despite a change in its ownership—to avoid violating prohibitions on assignment contained in the target’s agreements, case law has not always been clear on whether such mergers constitute transfers of the target’s contracts “by operation of law.”2 A recent case from the Delaware Court of Chancery, however, suggests that RTMs may not violate prohibitions on lease assignments—even prohibitions that specifically restrict assignments by operation of law—that do not include express restrictions on changes of control.3
Non-Assignment Clauses
Most leases prohibit absolute assignments without landlord consent. Mergers pose an interpretive problem because, although the lessee’s interest after the merger transaction is owned by an entity that is different from the original tenant (in the case of a forward merger) or by the same entity but with different equity ownership (in the case of a reverse merger), there is no actual assignment of the lessee’s interest. Rather, the lessee’s interest “vests” in the surviving entity by operation of the merger statute.4 However, many courts have found that the effect of a merger is to cause an assignment of the target’s leases and other contracts. This view is particularly common where the lease explicitly restricts assignments by operation of law (in this case, the operation of the merger statute) and where—as is the case in a forward merger—the identity of the tenant, not merely its ownership, changes.5
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