Spin-Offs and Successorship Clauses
In 2006, the media conglomerate News Corporation, referred to as Old News Corp, entered into a Settlement Agreement to settle stockholder litigation filed in Delaware in 2005. Subject to certain exceptions, the Settlement Agreement prevents Old News Corp during a period of twenty years from maintaining a stockholder rights plan for longer than one year without obtaining stockholder approval.
In 2013, Old News Corp transferred 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 the terms of a Separation and Distribution Agreement. After the spin-off, Old News Corp was renamed Twenty-First Century Fox, Inc., which is now a broadcast and media company.
In June 2013, the board of New News Corp adopted a one-year rights plan. In June 2014, the board extended that plan for an additional year without obtaining stockholder approval. In an action commenced in Delaware, a stockholder of New News Corp alleges that New News Corp, which was formed years after the Settlement Agreement was signed and is not a party to the Settlement Agreement, is nonetheless bound by that agreement as a transferee or assignee of Old News Corp and, thus, that the 2014 extension of New News Corp’s rights plan was not permissible under the Settlement Agreement.
The court found paragraph 36 of the Settlement Agreement, which is governed by Delaware law, defines the universe of persons to be bound by the terms of the Settlement Agreement:
This Settlement shall be binding upon and shall inure to the benefit of the parties (and, in the case of the benefits, all Released Persons) and the respective legal representatives, heirs, executors, administrators, transferees, successors and assigns of all of such foregoing persons and upon any corporation, partnership, or other entity into or with which any party or person may merge or consolidate.
The court noted paragraph 36 expressly provides that the Settlement Agreement is to be binding on any entity into which Old News Corp merges or with which it consolidates, demonstrating that the parties knew how to specifically address the effect that certain significant corporate transactions would have on Old News Corp’s obligations under the Settlement Agreement. Paragraph 36 did not specifically reference other obvious forms of significant corporate transactions that may involve Old News Corp, namely asset transfers or spin-offs. Applying the interpretive principle that “the expression of one thing is the exclusion of another,” the court found the plain terms of Paragraph 36 suggest that the parties to the Settlement Agreement, which was negotiated by sophisticated counsel experienced in corporation transactions, did not intend for that contract to be binding on the recipient of assets in an asset transfer and spin-off transaction.
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