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E-MailMatt Salerno is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Salerno, Christopher Condlin, and Christina Prassas. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.
In Miramar Police Officers’ Retirement Plan v. Murdoch [1] the Delaware Court of Chancery dismissed plaintiff’s claims, refusing to hold that an “unambiguous” boilerplate successors and assigns clause operated to bind a spun-off company to the terms of a contract entered into by its former parent company. The contract at issue generally restricted the former parent company from adopting a poison pill with a term of longer than one year without obtaining shareholder approval. The decision will serve as a reminder to practitioners to carefully consider the impact that significant corporate transactions could have on their clients’ contractual rights and obligations.
Spin-off transactions have become more popular recently, as companies are increasingly looking to capitalize on stronger debt markets and the tax savings that can stem from a spin-off—sometimes in response to prompting by activist investors. One market observer reported that there were 60 spin-off transactions in 2014, marking a 62% increase from 2013, in which there were 37.
In 2006, Rupert Murdoch’s News Corporation (“Old News Corp”) entered into a settlement agreement in response to a shareholder derivative suit, in which Old News Corp agreed that unless certain limited exceptions were met, for a period of 20 years Old News Corp would not maintain any poison pill in effect for longer than one year without obtaining shareholder approval. In 2013, Old News Corp spun off its newspaper and publishing business as News Corp (“New News Corp”), with Old News Corp transitioning into a mostly media-related business operating as 21st Century Fox, Inc. In connection with the spin-off, New News Corp adopted a poison pill with a one-year term that would be triggered if a person or entity gained a 15-percent stake of either company. In 2014, following acquisition by a single investment management firm of a 14.3% “passive” stake in New News Corp, the board of New News Corp voted to extend the poison pill for a year, which the plaintiff alleged breached the settlement agreement.
The separation and distribution agreement between Old News Corp and New News Corp providing for the spin-off contained customary language that called for partial assignment to New News Corp of any “mixed contract” that “inures to the benefit or burden of” the business and operations of both Old News Corp and New News Corp. Plaintiffs argued that this language should be construed as requiring that Old News Corp remain bound by the settlement agreement and that the settlement agreement was “partially assigned” to New News Corp and that New News Corp should also be bound. The court, adopting New News Corp’s position, held that the settlement agreement was not assigned to New News Corp under the separation and distribution agreement and that the settlement agreement was wholly outside of the definition of “mixed contracts” as it “relates fundamentally to ‘a matter of internal affairs, regarding the relationship between Old News Corp, its directors, and its stockholders,’ not to the ‘business’ or ‘operations’ of either” Old News Corp or New News Corp.
Although Old News Corp was a party to the settlement agreement and New News Corp was not, the plaintiffs argued that boilerplate language in the settlement agreement providing that that agreement would be binding upon and inure to the benefit of the parties’ “transferees, successors and assigns” should be construed to render the settlement agreement binding upon New News Corp. In the court’s view, plaintiff’s reading of the contract would result in “absurd and unfounded” outcomes binding any bona fide third party transferee or assignee of any assets, rights or liability to a myriad of unrelated contracts entered into by the transferor of those assets, rights and liabilities. Instead, the court held that this “unambiguous” provision applies only to transferees or assignees of any rights or liabilities under the relevant contract and not to transferees or assignees of other assets or liabilities. Concluding otherwise would have imposed a substantial and unnecessary due diligence burden on acquirors of any business—requiring acquirors to perform due diligence not only on the business they were acquiring, but on all of the seller’s other businesses—just to ensure that the acquiror was not inadvertently binding itself to unrelated liabilities and obligations of the seller.
The dismissal of Miramar serves as a reminder to practitioners and their clients that if they expect a particular allocation of rights and obligations under a contract in the event of a significant corporate transaction such as a spin-off, they should expressly negotiate for and address that outcome in the contract and not merely rely on generic boilerplate language to accomplish their objective.
[1] Miramar Police Officers’ Retirement Plan v. Murdoch, C.A. No. 9860-CB (Del. Ch., Apr. 7, 2015).
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