Geeyoung Min is an Adjunct Assistant Professor at Columbia Law School and Young Ran (Christine) Kim is Associate Professor at the University of Utah College of Law. This post is based on their recent article, forthcoming in the UC Irvine Law Review. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here) and The Perils of Small-Minority Controllers (discussed on the Forum here) by Lucian Bebchuk and Kobi Kastiel.
A corporate spin-off creates a new spun-off public company (“SpinCo”) by distributing the new company’s stock to the shareholders of a parent company (“ParentCo”) in the form of dividends proportional to their stock ownership. In this process of dividing one company into two or more stand-alone companies, the corporate spin-off offers potentially unchecked discretion for managers over corporate governance. First, because the SpinCo stock is internally distributed to ParentCo’s shareholders, the SpinCo’s various features including governance arrangements are not subject to market-pricing checks as in an Initial Public Offering (“IPO”). Second, current corporate law consistently treats a spin-off as a way to distribute dividends falling within managers’ discretion. ParentCo’s managers can solely decide whether, when, and how to make dividends through the form of a spin-off without shareholder approval. An important assumption for the lack of shareholder approval in a spin-off is that there are no fundamental changes to shareholder rights before and after the spin-off. Furthermore, the same assumption of mere change in forms of ownership also functions as a basis for tax-free benefit for spin-offs.
