Delaware Court Treats Grant Of A Security Interest As Triggering Contractual Payment-Assignment Rights

Key Takeaways

• The Delaware Court of Chancery held that a borrower's grant of a security interest in a license agreement constituted an "assignment" and "transfer" of payment rights, thereby triggering the counterparty's right of first negotiation and right of first refusal, even though this was a routine secured financing rather than an outright sale or transfer of the asset.
• The court treated the grant of a security interest as the relevant "transfer" event at the time of collateralization, not just upon default or enforcement, meaning borrowers can face contract-compliance obligations at closing even when they retain ownership rights and lenders have not exercised remedies.
• The decision demonstrates that the distinction between a security interest and an outright assignment does not always carry over in contract-interpretation disputes; where a contract defines triggering events broadly, a secured financing may be treated as a "transfer" for contractual purposes based on the specific language the parties used, regardless of market assumptions about how secured loans typically work.

Introduction

A recent Delaware Court of Chancery decision highlights how transfer and assignment provisions in commercial agreements can be implicated by routine loan transactions in ways that market participants may not expect. In Commave Therapeutics SA v. Zevra Therapeutics, Inc. (the "Opinion"), the court held that a borrower's grant of a security interest in a license agreement constituted an "assignment" and "transfer" of payment rights under that license agreement, thereby triggering the counterparty's right of first negotiation ("ROFN") and right of first refusal ("ROFR") with respect to a Payment Assignment (defined below). While the case arose in an intellectual property license context, the court's reasoning has potentially broader relevance for secured transactions, collateral packages and diligence, particularly where contracts include payment-transfer language or ROFR/ROFN procedures.

Below we discuss the following topics related to the Opinion from a secured financing perspective. First, we provide a brief overview of the Opinion. Second, we lay out key takeaways and implications from the Opinion. Finally, we provide practical tips and drafting guidelines to address the Opinion's ruling.

Overview of the Delaware Opinion

Commave (the licensee) and Zevra (the licensor) entered into a 2019 collaboration and license agreement. The agreement included (i) exclusivity covenants restricting Zevra from developing certain competing products and (ii) an assignment provision that gave Commave procedural rights if Zevra decided to transfer its rights to receive payments under the agreement (a "Payment Assignment"). In 2024, Zevra entered a credit facility and granted the lenders a first-priority security interest in substantially all of its assets, including "all license agreements" relating to intellectual property. Commave claimed that this collateral pledge triggered the Payment Assignment procedures, but Zevra did not provide the contractual notice or run the ROFN/ROFR process.

In its summary judgment, the court held (among other things) that Zevra's 2024 debt transaction triggered the Payment Assignment provisions. The court reasoned that granting a security interest in the license agreement necessarily involved transferring an interest in the "bundle of rights" under that agreement (including the payment rights that give the contract value). The court also relied on the parties' drafting choices, including the agreement's express carve-out for a prior collateral assignment to a specific lender, which the court viewed as strong evidence that the parties contemplated collateral assignments falling within the Payment Assignment construct (except as expressly excluded). The court rejected Zevra's arguments that: (i) a security interest is not an assignment or transfer in this bespoke contractual context, (ii) Delaware UCC § 9-406(d)(1) invalidated the ROFN/ROFR mechanics (the court viewed them as procedural rights that may "practically impair" but do not legally prohibit assignment), (iii) the credit agreement's "Excluded Property" concept removed the license agreement from collateral, and (iv) the agreement's "null and void" clause could be used as a shield against damages for failing to honor the antecedent ROFN/ROFR. The court granted partial summary judgment to Commave on liability for Zevra's breach (with damages to be determined later).

Key Takeaways and Implications from the Opinion

While the court's holding turns on the specific language of the license agreement at issue, its reasoning raises broader questions for secured financings that rely on pledges of contractual rights and payment streams as collateral. Set out below are key takeaways for lenders, sponsors and borrowers that emerge from the court's analysis and are likely to be relevant in future secured transactions (pending further clarification of the decision in any appeal or future decisions in other cases).

1. A lien or grant of security interest can be treated as a "transfer" even before default: The court treated the grant of a security interest as the relevant "transfer" event and not something that matters only later if there is an event of default and lenders exercise remedies. This is meaningful because many parties (and many deal teams) think about liens as dormant unless and until enforcement becomes a real possibility. Here, the court effectively treated the collateralization step itself as sufficient to trigger the contract's transfer and monetization procedures. For borrowers, this means granting a security interest can create contract compliance obligations at or before the closing of a financing, even though the borrower did not give up its ownership rights in the collateral and the lenders have not exercised any remedies. For lenders and sponsors, this means a lien package can create execution risk tied to third-party contracts that may never show up if diligence is scoped only to traditional "anti-assignment" language.
2. Calling it a "security interest" does not necessarily avoid assignment or transfer language: In the lending market, parties typically draw a clear line between an outright sale or assignment of an asset and the grant of a security interest in that asset. The court's decision shows that this distinction does not always carry over in a contract interpretation dispute. Instead, the analysis turns on the specific language the parties used in the underlying agreement, not on market assumptions about how secured loans usually work. Where a contract defines a triggering event broadly (for example, a decision to "sell, assign, convey, grant or otherwise transfer" payment rights) the mere fact that a transaction is structured as a secured financing may not take it outside that definition. If the court views the creation of a lien as the transfer of the borrower's interest in the underlying payment rights, a secured financing can be treated as a "transfer" for contractual purposes, even though no asset has been sold and no enforcement has occurred.
3. ROFR/ROFN provisions can theoretically give third parties a right to be the lender: The structure of ROFN/ROFR rights tied to payment rights can have a surprising effect in a secured loan context. If the counterparty has a right to negotiate first and then match third-party terms for a transaction involving payment rights, that can look (at least conceptually) like giving the counterparty a chance to step into a lender-like economic position, or at least to influence the borrower's ability to close a financing by exercising leverage created by the process. This is potentially uncomfortable in several situations. For example, in many credit agreements, "disqualified institution" concepts and DQ lists are used precisely to avoid competitors becoming lenders. Payment-right ROFR/ROFN mechanisms are not always drafted with that reality in mind. Even if the counterparty would never actually become the lender, the mere possibility (and the need to analyze the path) can create friction and delay. Finally, many parties negotiate payment-transfer restrictions solely to restrict monetization transactions (e.g., factoring or sales of receivables), not to restrict customary all-assets secured financings. As noted below, a practical drafting point coming out of this decision is that parties may want to be explicit about whether customary bank financings are carved out, and whether competitors and/or disqualified persons are excluded from being eligible counterparties for a ROFR/ROFN on payment rights.
4. UCC Article 9 override is not a free pass when the relevant clause is procedural rather than a hard prohibition: A common instinct in secured transactions is to look to UCC Article 9's override provisions (including concepts reflected in UCC § 9-406 and § 9-408) when faced with assignment restrictions. But the court drew a practical line between (a) provisions that prohibit assignment or require consent (the classic "anti-assignment" clause), and (b) provisions that do not legally bar assignment but impose procedural steps that may slow or complicate a transaction (such as notice, negotiation periods or the opportunity to match terms). The court treated the ROFN/ROFR as enforceable procedural rights, meaning that while the lender's lien itself may remain valid, the borrower can still be in breach of the underlying contract if it fails to follow the agreed notice and negotiation process. For financing parties, this distinction is critical. Even where a security interest is not void or unenforceable, the borrower may still face damages exposure and may trigger knock-on issues under other agreements, including representations, covenants or default provisions tied to compliance with material contracts.
5. "Excluded Property" definitions may not protect you if written too narrowly: Many credit agreements exclude certain assets from collateral if granting a lien is prohibited by the underlying contract or would result in termination or similar adverse consequences. The court rejected the argument that the "Excluded Property" concept saved Zevra, because (in the court's view) the license agreement did not prohibit the lien, it just imposed procedures that Zevra should have followed. The practical problem is that many valuable contracts do not say "no liens." Instead, they contain provisions that: (a) trigger ROFR/ROFN rights, (b) require notice and waiting periods, (c) allow termination or pricing resets under certain transfer or encumbrance circumstances or (d) create "step-in" or other counterparty protections. If Excluded Property definitions are drafted to capture only contracts that flatly prohibit liens, then a borrower can end up in a situation where (i) the contract is still in the collateral package (so it matters to the lender), but (ii) granting the lien without adhering to the contract's process creates liability and execution headaches.
6. Diligence must go beyond "does it have an anti-assignment clause?": This decision is a diligence reminder that the relevant question is not whether you can assign the contract, but rather if the contract gives the counterparty rights or remedies if the contract (or any material right under the contract (including payment and royalty streams)) is pledged, encumbered, assigned or otherwise transferred. As a reminder, the Opinion framed the operative provision as a "Payment Assignment" (i.e., a transfer of rights to receive payment and related royalty reports), and the court held that pledging the license agreement as collateral transferred an interest in those payment rights. However, the court's reasoning in the Opinion — in which they treated the pledge of the agreement itself as transferring an interest in the "bundle of rights" and emphasized the "commercial reality" of what gives the contract value — may mean the Opinion is broader than the transfer of only payment rights in contracts. For lenders, sponsors and borrowers, that means diligence should include a focused review for: (a) payment assignment/monetization provisions; (b) ROFR/ROFN notice and timing mechanics; (c) termination and acceleration rights tied to transfers or encumbrances (including provisions that do not prohibit a lien, but impose contractual consequences if a lien or transfer occurs, which may remain enforceable notwithstanding UCC override concepts discussed in item 4 above); (d) step-in rights, pricing resets or change-of-control consequences; and (e) "null and void" language (or other remedial language) tied to assignment and transfer provisions. This is particularly important for IP licenses and royalty arrangements where the "value" of the contract is the payment stream itself — the sort of context where a court may be more willing to view a lien as implicating the payment rights that give the contract value.

Practical Guidelines for Future Financings

The Commave v. Zevra ruling alerted market participants that granting a lien on a contract can trigger hidden transfer restrictions. If the reasoning gains traction, below are practical tips and drafting guidelines to address the Opinion's ruling:

1. Diligence and Contract Review: Lenders should thoroughly diligence a borrower's key contracts (licenses, JV agreements, franchise agreements, etc.), not only for classic any anti-assignment clauses and consent requirements, but also for procedural requirements and other counterparty rights (such as notice obligations, ROFR/ROFN provisions and waiting periods) that can be activated by granting a lien or otherwise encumbering the contract. As the Delaware court observed, provisions triggering rights on "any transfer" are found in many commercial agreements. If a significant revenue-generating contract contains a first-refusal right or a no-encumbrance clause, the lender and borrower must recognize that pledging that contract without addressing the clause could lead to a default or the counterparty exercising purchase rights. To assist with keeping track of these issues, create a diligence checklist that flags contracts with broad language that may result in a pledge or collateral assignment constituting a transfer or that impose notice, negotiation, matching rights, termination/acceleration, step-in rights, pricing resets or similar consequences in connection with any transfer or encumbrance.
2. Drafting to Clarify Treatment of Security Interests: Parties can proactively draft around the issue. When negotiating new contracts that contain transfer restrictions, explicitly state whether the grant or perfection of a security interest counts as a "transfer" under that agreement. For example, the contract could stipulate that a collateral assignment to a lender in the ordinary course of business does not, by itself, constitute a transfer or trigger any ROFR/ROFN or similar procedural rights. Parties may also wish to address separately how any ROFR/ROFN would apply, if at all, to a post-default enforcement scenario, since long notice or negotiation periods can be difficult to manage in a workout scenario. These sorts of carveouts would protect the borrower's financing flexibility and avoid inadvertently triggering ROFRs or defaults for routine secured loans. Moreover, if the intent is to include pledges, the contract should say so unambiguously. Clarity on this point will prevent later litigation over the contract's intent.
3. Structuring Credit Agreements (Excluded Property): From the lender's side, credit agreements should be carefully structured to avoid pledging assets that could cause a problem. Most loan agreements have an "Excluded Property" definition exempting contracts from the collateral pool that prohibit assignment. In light of Commave, lenders may expand this to also exclude contracts that, while not outright prohibiting assignment, "give rise to rights in favor of a third party in the event of an assignment or transfer." For instance, if a license would trigger a partner's ROFR upon any transfer, the lender might exclude that license (or at least exclude the payment rights under it) from the collateral, unless the partner consents or waives the ROFR. Adjusting the excluded collateral definition to account for ROFR/ROFN-bearing contracts can prevent unintentional breaches. Of course, whether a lender agrees to exclude a lucrative contract may depend on negotiating leverage and the importance of that asset to the deal. In some cases, lenders might require the borrower to obtain a waiver or consent from the contract counterparty as a condition precedent to pledging the asset. Borrowers, for their part, should be prepared to either secure those consents or carve out the assets to avoid jeopardizing the contract.
4. Consents and Waivers: If a critical contract has an anti-assignment or ROFR provision, consider approaching the counterparty in advance for a limited consent or waiver in the context of the financing. For example, the counterparty might agree not to treat the grant of a security interest as a triggering transfer, or not to exercise any ROFR triggered by the financing, provided the lender agrees to certain conditions. Any such agreement should be documented (such as via a tri-party consent or waiver). While this adds upfront complexity, it can save all parties from dispute later. If the counterparty refuses, the borrower and lender then know to treat that asset with caution (perhaps excluding it as noted in item 3 above).
5. Beware of "Disguised" Transfers: Market participants should also be mindful that courts will look at substance over form. A sham arrangement intended to circumvent a ROFR (e.g., labeling a sale as a "loan" with an immediate default to transfer ownership) will likely be seen through by courts. An illustrative New York case (Shao v. Li, 2013) involved an LLC membership interest subject to a ROFR. One member made a "collateral assignment" of the interest to a third party, and the court examined whether this was a good-faith loan or a de facto sale designed to evade the ROFR. The lesson is that structuring a transfer as a pledge will not fool a court if the economic reality is an outright transfer. Thus, honesty in structuring is the best policy. If a deal requires transferring an asset, address the ROFR head-on rather than attempting to circumvent it.
6. License Agreements and Other Contracts: Parties who regularly enter agreements with transfer restrictions (such as IP licenses, distribution agreements, etc.) should reassess those provisions in light of Commave. A licensor (like Zevra) may want more flexibility to pledge its rights. Such a licensor might now negotiate for a clause that permits "collateral assignments to lenders or financing sources" without triggering the partner's ROFR. On the other hand, a licensee or partner (like Commave) that includes a ROFR to protect its position will want to ensure the contract clearly defines what triggers that ROFR. If the intent is to include any monetization of the rights (including a financing), the contract should say so. If not, the contract should state clearly that the ROFR is not intended to apply to liens and collateral assignments, rather than relying on general "transfer" language that a court may later interpret to include security interests, as occurred in the Opinion. Being precise will help avoid any unintended "surprises" in court.

Conclusion

The Commave v. Zevra decision underscores that transfer and monetization provisions in commercial agreements can have consequences well beyond the transactional contexts in which they were originally negotiated. Even where a financing is structured as a customary secured loan, broadly drafted assignment or payment-transfer language may be interpreted to treat the grant of a security interest as a triggering event, potentially activating ROFR/ROFN procedures, notice obligations or other counterparty rights at closing. As a result, parties can no longer assume that collateral pledges are legally or commercially inert unless and until an event of default occurs. Instead, careful attention must be paid to the interaction between financing documents and the underlying contracts that comprise a borrower's most valuable assets.

For secured lenders, sponsors and borrowers, the practical takeaway is the need for earlier and more expansive diligence, coupled with clear drafting and structuring decisions to address these risks head-on. That may include revisiting how transfer restrictions are framed in commercial agreements, reassessing whether standard "Excluded Property" definitions adequately capture contracts that impose procedural or economic consequences upon encumbrance, and proactively seeking consents or waivers where necessary. While the Opinion is grounded in the specific contractual language at issue and was issued by the Delaware Court of Chancery, its reasoning may be influential beyond Delaware. The Opinion highlights issues that are likely to recur in future secured transactions (particularly those involving IP-heavy or contract-driven businesses) making it an important reference point for financing parties navigating similar issues going forward.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.