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Court of Chancery Holds Spinoff Corporation Not Bound By Agreement of Former Parent Corporation

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In Corporate Litigation | On April 8, 2015

In Miramar Police Officers’ Retirement Plan v. K. Rupert Murdoch, et al, C.A. No. 9860-CB (Del. Ch. April 7, 2015), the Delaware Court of Chancery held that a corporation created to effectuate a spin-off transaction was not bound by provisions in a contract that the former parent corporation had entered resolving a lawsuit with its stockholders.

In 2006, News Corporation entered into a Settlement Agreement to settle stockholder litigation filed in the Delaware Court of Chancery in 2005. The Settlement Agreement prevents News Corporation from maintaining a stockholder rights plan for longer than one year without obtaining stockholder approval.

In June, 2013, News Corporation (referred to by the Court as “Old News Corp”) spun-off its newspaper and publishing business into a wholly-owned subsidiary (referred to as “New News Corp”) and then spun off New News Corp to its stockholders pursuant to a Separation and Distribution Agreement. The New News Corp board immediately adopted a one-year stockholder rights plan. One year later, the board extended the existing plan without obtaining stockholder approval.

Plaintiff filed this action in July 2014, alleging that New News Corp was bound by the Settlement Agreement as a transferee of News Corporation, and as a result, the extension of the stockholder rights plan by the New News Corp board was a breach of the Settlement Agreement. In September, 2014, Defendants moved to dismiss the Complaint in its entirety under Court of Chancery Rule 12(b)(6).

In granting Defendants’ motion, the Court concluded:

It is not reasonably conceivable that New News Corp is bound by the rights plan restrictions in the Settlement Agreement because, under the only reasonable interpretation of the Settlement Agreement and the Separation and Distribution Agreement, Old News Corp’s rights and obligations under the Settlement Agreement were not transferred or assigned to, or otherwise assumed by, New News Corp.

In its decision, the Court cited Section 36 of the Settlement Agreement, which expressly provides that the Settlement Agreement is binding on any entity into which Old News Corp merges or with which it consolidates, as “demonstrating that the parties knew how to specifically address the effect that certain significant transactions would have on Old News Corp’s obligations under the Settlement Agreement.” The Court noted that by contrast, Paragraph 36 did not specifically reference asset transfers or spin-offs. The Court then applied the interpretive principal that “the expression of one thing is the exclusion of another,” and concluded “the plain terms of Paragraph 36 thus suggests that the parties to the Settlement Agreement, which was negotiated by sophisticated counsel experienced in corporation transactions, did not intend for the contract to be binding on the recipients of assets in an asset transfer and spin-off transaction.”

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