On April 7, 2015, Chancellor Bouchard issued an opinion holding that a subsidiary corporation is not bound by a settlement agreement entered into by the parent corporation before the subsidiary was spun off. In 2006, News Corporation (“Old News Corp”), the parent corporation, entered into a settlement agreement with its shareholders requiring it to obtain shareholder approval to maintain a stockholder rights’ plan (the “Rights Plan” or the “Plan”) for more than one year. In 2013, Old News Corp spun off its newspaper and publishing businesses subsidiary (“New News Corp”). The New News Corp board adopted a one-year shareholder rights’ plan, but ten days before the Plan was set to expire, the board of New News Corp elected to extend it for another year without shareholder approval. In the complaint, the plaintiff claimed that the extension without shareholder approval violated the Old News Corp Settlement Agreement, to which New News Corp is bound, because Paragraph 36 of the Settlement Agreement bound any transferees of assets and liabilities and because Section 2.02 of the Separation Agreement between New News Corp and Old News Corp made the Settlement Agreement binding on New News Corp.
Paragraph 36 of the Settlement Agreement binds any “transferees” or “entity into which or with which any party or person may merge or consolidate.” However, the agreement is silent when it comes to other corporate transactions—namely, asset transfers and spin-offs. The term “transferees” of assets failed to carry the day for the plaintiff because it is not dispositive of whether the assets and liabilities were transferred under the spin-off agreement, but it is dispositive whether those assets and liabilities are transferred under the Settlement Agreement. A contrary reading of the term transferee would bind third parties to the settlement agreement for innocuous purchases and “would paralyze Old News Corp (and any public company with which it has done or wishes to do business) from engaging in even the most modest form of asset transfers.”
Similarly, the Court ruled that Section 2.02 of the Separation Agreement between New News Corp and Old News Corp does not bind New News Corp to the Settlement Agreement. The plaintiff argued that the Separation Agreement was a mixed contract that transferred the Settlement Agreement’s obligation to New News Corp. A mixed contract is defined in the Separation Agreement as anything “that inures to the benefit or burden” of the business operations of Old News Corp and the remaining business of Old News Corp. Chancellor Bouchard reasoned that the Separation Agreement could not be a mixed contract because the Plan dealt with the internal affairs of Old News Corp and its shareholders, not business or operations of Old News Corp. Simply stated, the Settlement Agreement deals with Old New Corp’s corporate governance, not New News Corp’s publishing and newspaper business and operations. As a matter of law, the Settlement Agreement cannot bind New News Corp and the claim for declaratory judgment had to be dismissed.
The Court of Chancery’s holding reflects the most principled outcome for this case. As Chancellor Bouchard showed, the interpretation of the Settlement Agreement’s Paragraph 36 would lead Old News Corp into a situation where it could not conduct even the most minor business transaction without a possible fundamental change to the corporate governance of the party with whom it intends to conduct business. And the Settlement Agreement dealt with Old News Corp’s internal operations and corporate governance and cannot be a mixed contract under the Separation Agreement’s definitions.
Justin Forcier is the Volume 40 Manuscript Editor for the Delaware Journal of Corporate Law. He is also the 2014-2015 President of Widener School of Law Delaware’s Transactional Law Honor Society. During his third year of law school, Justin interned for The Honorable Thomas L. Ambro on the United States Court of Appeals for the Third Circuit. Upon graduation, Justin plans to sit for the Delaware Bar Exam and clerk for The Honorable Richard R. Cooch on the Superior Court of Delaware.
Suggested Citation: Justin Forcier, Miramar Police Officers’ Retirement Plan v. Murdoch: Not Bound By The Past, Del. J. Corp. L (May 2, 2015), www.djcl.org/blog.