The Reverse Triangular Merger Loophole and Enforcing Anti

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creased due diligence in obtaining the necessary third-party consents in a
reverse triangular merger transaction will result in increased transaction
costs for each party. Despite these increased costs, erring on the conservative
side by requiring consent from all third parties reduces potential litigation
and helps parties understand the viability of the proposed reverse
triangular merger. Oftentimes, a proposed merger or acquisition “gets
canned or valued down” following conflicts over intellectual property
rights, personnel contracts, or contract incompatibilities in integrating the
two companies. 178 Because of the benefits 179 of reverse triangular mergers,
there is a tendency to underestimate the complexity of integrating two systems
or changing over to a new system entirely. Requiring third-party consent
in reverse triangular mergers is critical to curbing “potential risks and
red flags.” 180 In an economy where the average life cycle of a product is
only eighteen months from launch to death, arguing about a nonmerging
party’s contractual anti-assignment clause rights in court for five years is
not productive. 181
Additionally, after the due diligence schedule is given to the acquiring
entity and target company, it is ultimately the decision of management to
determine which third-party consents they want to pursue. For example, a
contractual right that is traditionally characterized as personal (i.e., patent
rights) cannot be assigned with the nontransferring party’s consent. However,
consent from a nonmerging third party who contracts to provide the
target company with printer paper might be considered “insubstantial” and
disregarded by company management. Due diligence is critical to the success
of any reverse triangular merger. It must go beyond high-level overviews
by effectively investigating any contract that might make or break
transition efforts. Thus, upon the occurrence of a reverse triangular merger,
entities do not need to obtain consent unless the contract in question involves
the transfer of an intellectual property license or unless the contract
prohibits assignment by reverse triangular merger or change of control.
178
Lee Copeland, Due Diligence, COMPUTERWORLD, Mar. 6, 2000, http://www.computerworld.
com/news/2000/story/0,11280,42836,00.html. “Due diligence is going in and digging a hole in the
ground and seeing if there’s oil, instead of taking someone’s word on it.” Id. Due diligence entails taking
all the “reasonable steps” to ensure that both buyer and seller get what they expect “and not a lot of
other things that you did not count on or expect.” Id. The process involves everything from reading the
fine print in corporate legal and financial documents such as equity vesting plans and patents to interviewing
corporate officers. Id.
179
See supra note 16 and accompanying text.
180
See Copeland, supra note 178.
181
Id. “It’s the kiss of death to make an improper acquisition . . . not only are you buying a dog,
but the dog can kill your company.” Id.