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From Securities Regulation Daily, April 7, 2015

Settlement agreement did not bind News Corp. spin-off

By John M. Jascob, J.D.

A corporation created to spin-off News Corporation’s publishing business was not bound by the terms of an agreement to settle stockholder litigation against its former parent, the Delaware Chancery Court has held. The Chancery Court ruled that it was not reasonably conceivable that the agreement’s restrictions on News Corporation maintaining a stockholder rights plan as a poison pill would also be transferred to the spin-off eight years later. Accordingly, the court denied the plaintiff’s request for a declaratory judgment and dismissed the claims against the spin-off for breach of contract, breach of fiduciary duty, and reformation due to mutual mistake (Miramar Police Officers’ Retirement Plan v. Murdoch, April 7, 2015, Bouchard, A.).

Background. A media conglomerate controlled by Rupert Murdoch, News Corporation (Old News Corp) entered into an agreement in 2006 to settle stockholder litigation filed in the Chancery Court during the prior year. The suit concerned the board’s extension, without a shareholder vote, of a shareholder rights plan that had been previously adopted as a poison pill. The agreement prevented Old News Corp for 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 (New News Corp) and then spun off New News Corp to its stockholders pursuant to a separation and distribution agreement.

In June 2013, the board of New News Corp adopted a one-year rights plan, which the board then extended for an additional year in June 2014 without obtaining stockholder approval. A stockholder then filed suit, alleging that the 2014 extension of New News Corp’s rights plan was impermissible because New News Corp was a transferee of Old News Corp and thus bound by the restrictions in the 2006 settlement agreement.

Rights plan restrictions did not transfer. The Chancery Court noted, however, that the pertinent provision in the settlement agreement provided that the agreement was to be binding on any entity into which Old News Corp merged or with which it consolidated. By contrast, the provision did not specifically reference other obvious forms of significant corporate transactions, such as asset transfers or spin-offs. Applying the interpretive principle that “the expression of one thing is the exclusion of another,” the court found that the language suggested 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 recipient of assets in an asset transfer and spin-off transaction.

The Chancery Court rejected the plaintiff’s contention that New News Corp was bound by the restrictions as both a “transferee” and an “assign” of Old News Corp because it had received the newspaper assets from Old News Corp.  Under this logic, the court observed, the rights plan restrictions in the settlement agreement would then apply to any entities to which Old News Corp transfers or assigns any asset or liability it ever possessed. This interpretation would paralyze Old News Corp from engaging in even the most modest form of asset transfers due to the risk that counterparties would unwittingly find themselves bound to the rights plan restrictions as a “transferee” or “assign.” In the court’s view, no reasonable person would have accepted such an “absurd result” when signing a settlement agreement in order to resolve a relatively narrow breach of contract lawsuit.

The Chancery Court also rejected the plaintiff’s argument that the rights plan restrictions were transferred to New News Corp under the separation and distribution agreement. The plaintiff argued that the rights plan obligations were transferred or assigned to New News Corp as a "mixed contract," which was defined under the separation agreement as a contract that inured to the benefit or burden of the “business and operations” of both New News Corp and Old News Corp. The court concluded, however, that the only reasonable way to conceive of Old News Corp’s obligations under the settlement agreement were as internal governance obligations and not as obligations that inured to the burden of New News Corp’s newspaper and publishing “business and operations” or Old News Corp’s broadcast and media “business and operations.” As a result, the settlement agreement did not constitute a “mixed contract,” but instead constituted a liability retained by Old News Corp. As a matter of law, therefore, the plaintiff failed to state a claim that New News Corp was bound by the 2006 settlement agreement.

The case is No. 9860-CB.

Attorneys: Stuart M. Grant (Grant & Eisenhofer P.A.) and Robert D. Klausner (Klausner, Kaufman, Jensen & Levinson) for Miramar Police Officers’ Retirement Plan. Gregory V. Varallo (Richards, Layton & Finger, P.A.) for K. Rupert Murdoch.

Companies: Miramar Police Officers’ Retirement Plan

MainStory: TopStory MergersAcquisitions CorporateGovernance DelawareNews

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