Can a business be liable for tortious interference with contract when it acquires another business and then
terminates a contract to which the acquired business is a party?

At least in the case of an acquisition structured as a reverse triangular merger, the answer under California
law is "yes", according to the California appellate court in Asahi Kasei Pharma Corporation v. Actelion Ltd.[1].

In Asahi, a California corporation ("Target") had entered into a development and license agreement (the
"License Agreement") with a Japanese entity ("Patent Holder") to obtain U.S. and European regulatory
approvals for Patent Holder's drug ("Drug"), and to develop andmarket the Drug in those territories.

Another company ("Purchaser") marketed another drug which competed with the Drug. Purchaser had earlier
considered acquiring Target, but had not proceeded with an acquisition transaction. However, Target's new
License Agreement with Patent Holder caught the attention of Purchaser, and Purchaser began to explore a
possible acquisition of Target.

During the due diligence process, Purchaser made the determination that if an acquisition was effected, it
would not go ahead with the License Agreement for the Drug, as that might result in pricing pressure for its
competitive drug.

Purchaser and Target signed a definitive agreement providing for the pending acquisition. The proposed
transaction was structured as a reverse triangular merger--whereby Purchaser formed a new wholly-owned
subsidiary, which would be merged into Target (with Target's thereafter becoming a wholly-owned subsidiary
of Purchaser).

Between the signing of the merger agreement and the closing of the merger, Patent Holder on a number of
occasions sought assurance from the merger parties that the Drug would continue to be marketed under the
License Agreement following the consummation of the merger. Although Purchaser had already made a
decision not to so continue, Purchaser had Target respond that there had been "no decision" made with
respect to the fate of the Drug; in another communication, a key executive of Purchaser stated that there
was an intention to proceed under the License Agreement.

Thereafter, the merger closed, and Patent Holder was notified of Purchaser's intention to discontinue
development. Patent Holder notified Target that Target was in breach of the License Agreement because
Target had failed to confirm prior to the change in control that Purchaser would not interfere in Target's
obligations under the License Agreement. In subsequent termination discussions, Purchaser claimed its
decision to discontinue was due to safety issues, and threatened to report these safety issues to regulatory
authorities (despite the fact that a subsequent required clinical report to the FDA stated there were no safety

Patent Holder then terminated the License Agreement, and sued Purchaser and its executives for tortious
interference with contract. At trial, and after various post-trial motions, Patent Holder was awarded a judgment
in excess of $400,000,000, including over $30,000,000 of punitive damages.These damages were in addition
to other damages recovered by Patent Holder from Target in a separate arbitration for breach of contract.

One of the issues on appeal was whether the defendants could be liable for tortious interference with the
License Agreement. A party is always free to breach a contract to which it is a party; in that event, the party
may be liable in damages to the other party in contract, but not in tort. Punitive damages are only recoverable
for tort claims.

Purchaser argued that to have potential liability, the interfering party must be a "stranger" to the contract; that
it was not a stranger after having acquired Target; and that its advising its subsidiary to breach the contract was
subject to a privilege.

The court disagreed, and held that a parent corporation and its executives could be liable for tortious interference
with contract where they interfered with the contract of its subsidiary. While the defendants did have a qualified
privilege which they could assert as an affirmative defense, such privilege did not apply if the defendants used
improper means to interfere, which meant intentional misrepresentation, concealment or extortion. Here, the
improper means were found to be present.

Asahi is the typical "bad facts make bad law" type of case. Acquirers of businesses need to avoid the fact pattern
in Asahi to avoid potential tort liability for terminating contracts as part of a business acquisition.

While in some cases there may be good reasons for structuring a transaction as a reverse triangular merger, in
this case structuring the acquisition as a reverse triangular merger made all of the difference in the outcome.
Had Purchaser structured the acquisition as an asset sale, it would have been assigned Target's rights under
the License Agreement, and as a contracting party could not have been liable for tortious interference with the

[1] 222 Cal. App. 4th 945 (2013).