BOUCHARD, C.
This action involves a dispute over whether a corporation created to effectuate a spin-off transaction is bound by provisions in a contract that the former parent corporation had entered into in connection with resolving a lawsuit with its stockholders.
In 2006, the media conglomerate News Corporation ("Old News Corp") entered into a Stipulation of Settlement (the "Settlement Agreement") to settle stockholder litigation filed in this Court 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 ("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 this action, 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 that contract, is nonetheless bound by that agreement as a transferee or assign of Old News Corp and, thus, that the 2014 extension of New News Corp's rights plan was impermissible under the Settlement Agreement.
In its complaint, plaintiff asserts four causes of action against New News Corp and its board of directors: declaratory judgment (Count I); breach of contract (Count II); breach of fiduciary duty (Count III); and reformation due to mutual mistake (Count IV). Defendants moved to dismiss the complaint in its entirety under Court of Chancery Rule 12(b)(6) for failure to state a claim and Count IV under Court of Chancery Rule 9(b) for failure to plead mistake with particularity.
In this opinion, I conclude that it is not reasonably conceivable that New News Corp is bound by the rights plan restrictions of the Settlement Agreement because, under the only reasonable interpretation of the Settlement Agreement and the Separation and Distribution Agreement, Old News Corp's rights and obligations under the Settlement Agreement were not transferred or assigned to, or otherwise assumed by, New News Corp. I thus dismiss Count I for failure to state a claim. Because Counts II-IV are each premised on New News Corp being bound by the Settlement Agreement, I also dismiss those claims on that basis.
Nothing in this decision relieves Old News Corp, now operating as Twenty-First Century Fox, Inc., from performing under the Settlement Agreement. It continues to be bound by those obligations, including the rights plan restrictions set forth therein.
Defendant News Corporation ("New News Corp" or the "Company"), a Delaware corporation based in New York, New York, is a publicly traded, newspaper and publishing company. The Company has two classes of common stock: Class A non-voting shares and Class B voting shares.
Defendants K. Rupert Murdoch, Peter L. Barnes, José María Aznar, Natalie Bancroft, Elaine L. Chao, John Elkann, Joel I. Klein, James R. Murdoch, Lachlan K. Murdoch, Ana Paula Pessoa, Masroor Siddiqui, and Robert J. Thompson have been the twelve members of New News Corp's board of directors (the "Board" or the "Individual Defendants") at all relevant times. Other than three overlapping directors—Defendants K. Rupert Murdoch, James R. Murdoch, and Lachlan K. Murdoch—the board of New News Corp has different members than the board of Old News Corp.
Rupert Murdoch is the Chairman of the Board and Chief Executive Officer of New News Corp.
Plaintiff Miramar Police Officers' Retirement Plan ("Plaintiff") has been a New News Corp stockholder at all relevant times.
On April 6, 2004, the predecessor of Old News Corp, an Australian corporation named The News Corporation Limited ("TNCL"), announced a reorganization plan to reincorporate in Delaware as Old News Corp. In the reorganization, holders of TNCL's Ordinary shares would receive a proportional amount of Old News Corp's Class A non-voting stock, and holders of TNCL's Preferred Limited Voting Ordinary shares would receive a proportional amount of Old News Corp's Class B voting stock. TNCL's Ordinary shares and Preferred Limited Voting Ordinary shares would vote separately on the reincorporation, which required approval by a 75% supermajority of all shares voting and 50% of all stockholders voting.
As TNCL would explain to its investors in a September 15, 2004, Information Memorandum, there are significant differences between Australian corporate law and Delaware corporate law relating to, among other things, the ability of the board of directors to adopt a stockholder rights plan or "poison pill." Under Australian law, a board may not adopt a rights plan without stockholder approval. By contrast, under Delaware law, a board may do so at any time without stockholder approval, subject to the directors' fiduciary duties, any limitations in the corporation's charter or bylaws, and any restrictions in a valid and enforceable agreement to which the corporation is a party.
In July 2004, at the behest of certain TNCL stockholders, the Australian Council of Super Investors, Inc. ("ACSI"), a non-profit organization providing corporate governance services to its Australian pension fund members, and Corporate Governance International ("CGI"), an Australian proxy advisory firm, drafted a "Governance Article" to be included in Old News Corp's charter. The Governance Article was intended to incorporate aspects of Australian corporate law to govern certain matters involving Old News Corp's internal affairs. In particular, the proposed Governance Article provided that "the Board shall not have the power to, and shall not, create or implement any device, matter or thing the purpose, nature or effect of which is commonly described as a `poison pill.'"
On August 20, 2004, ACSI and CGI sent the Governance Article to TNCL and requested that it be included in Old News Corp's charter. On September 26, 2004, after some back and forth, TNCL informed ACSI that "it would not adopt the Governance Article, and would not negotiate any further."
Soon thereafter, TNCL resumed negotiations with ACSI over the proposed Governance Article. During those negotiations, TNCL proposed that the board of Old News Corp adopt a policy that, immediately following the reincorporation, "no [rights plan] instituted by the [b]oard could remain in effect longer than one year unless approved by stockholders, nor could a [rights plan] be `rolled over' for successive terms without stockholder approval."
On October 6, 2004, TNCL issued a press release announcing the new policy:
On October 7, 2004, TNCL reiterated the general contours of this policy in an email to ACSI and in letters to its stockholders. TNCL also submitted this policy to the Federal Court of Australia "in connection with proceedings seeking the court's approval of the reorganization," which was required under Australian law.
On October 26, 2004, TNCL's stockholders approved the reorganization. Approximately one week later, the Federal Court of Australia also approved it.
On November 3, 2004, TNCL shares stopped trading on the Australian Stock Exchange, and Old News Corp shares began trading on a when-issued basis on the New York Stock Exchange.
On November 3, 2004, Liberty Media Corporation ("Liberty"), which owned approximately 9.1% of TNCL/Old News Corp's Class B voting stock at the time, disclosed that it had partnered with a third party to acquire an additional 8% of the company's voting stock, increasing its ownership to approximately 17.1%.
On November 8, 2004, in response to Liberty's disclosure, the TNCL/Old News Corp board announced that it had adopted a rights plan with a 15% threshold. The plan provided that Liberty's disclosure did not trigger the issuance of rights under the plan, but any additional acquisition by Liberty of 1% or more of the company's stock would do so.
In the press release announcing its decision to adopt the rights plan, the TNCL/Old News Corp board disclosed that the plan would expire in one year unless ratified by stockholders. The board specifically referenced that the terms of this rights plan were consistent with the policy it had announced in October 2004.
On November 12, 2004, the reincorporation was completed, and the former directors of TNCL all continued as directors of Old News Corp.
On August 10, 2005, in a Form 8-K Current Report announcing Old News Corp's financial results for the second quarter of 2005, the board of Old News Corp disclosed that it had unilaterally decided to extend its then-existing rights plan for an additional two years. According to Plaintiff, the Form 8-K "made no reference to the [b]oard's unanimously adopted policy" requiring stockholder approval of a rights plan lasting longer than one year.
On October 7, 2005, Old News Corp stockholders sued the company and its directors in this Court. The plaintiffs alleged five causes of action: (i) breach of contract; (ii) promissory estoppel; (iii) fraud; (iv) negligent misrepresentation and equitable fraud; and (v) breach of fiduciary duty. On October 22, 2005, the defendants in that lawsuit moved to dismiss for failure to state a claim.
On December 20, 2005, Chancellor Chandler dismissed the fraud, negligent misrepresentation and equitable fraud, and fiduciary duty claims, but denied the defendants' motion to dismiss the breach of contract and promissory estoppel claims. Chancellor Chandler concluded, in relevant part, that the complaint alleged facts "barely sufficient to state a claim that defendants made an oral contract with the shareholders[,]. . . [and] the key term of the alleged oral contract was that shareholders would get to vote on any extension of a poison pill."
On March 17, 2006, with a trial scheduled to begin on April 24, 2006, the parties began settlement negotiations. The focus of those negotiations was an agreement "that would give the [b]oard the ability to adopt a pill of only limited duration, and that anything longer (through adoption of another pill or extension of an existing pill) would require an affirmative vote of the stockholders."
On April 12, 2006, the parties entered into the Settlement Agreement
Paragraph 21(f)(i), which is relevant to Plaintiff's breach of contract claim asserted in Count II, imposes certain limitations governing Old News Corp's adoption or extension of a rights plan. It states as follows:
I refer at times to the sentence beginning "Notwithstanding the foregoing" in Paragraph 21(f)(i) as the "Vote Exception."
Paragraph 36 provides that the Settlement Agreement is binding upon the parties and, among others, their "transferees, successors and assigns."
On June 1, 2006, Chancellor Chandler approved the Settlement Agreement and retained jurisdiction for purposes of enforcing it. Under Paragraph 20 of the Settlement Agreement, the lawsuit would be dismissed with prejudice if, at the company's October 2006 annual meeting, Old News Corp's stockholders voted in favor of extending the then-existing stockholder rights plan for two years.
In 2013, the board of Old News Corp decided to split Old News Corp into two publicly traded companies. The primary agreement governing the transaction was the Separation and Distribution Agreement,
Under the Separation and Distribution Agreement, Old News Corp transferred its newspaper and publishing business to New News Corp, a wholly owned subsidiary, on June 28, 2013. That same day, Old News Corp distributed all of its New News Corp stock to its stockholders. After the separation, the Individual Defendants comprised the Board of the newly-independent New News Corp, and Chairman Rupert Murdoch beneficially owned 39.4% of the Company. As noted above, none of the twelve members of the Board of New News Corp serves on the board of Old News Corp except for the three Murdoch directors.
On June 28, 2013, in conjunction with the corporate separation, the Board of New News Corp adopted the stockholder rights plan (the "Rights Plan") that is the subject of this litigation.
On September 10, 2013, Southeastern Asset Management, Inc. ("Southeastern"), an investment management firm, filed a "passive investor" Schedule 13G with the Securities and Exchange Commission disclosing that it had acquired approximately 11.9% of the Company's voting stock. By March 30, 2014, Southeastern had acquired an additional 2.4% of the Company's voting stock, increasing its ownership to approximately 14.3%.
On June 18, 2014, ten days before the Rights Plan was to expire, the Board approved a one-year extension of the Rights Plan without obtaining stockholder approval. Plaintiff alleges that, at that time, "[n]o circumstance, as set forth in the Settlement Agreement . . ., exist[ed] that would [have] allow[ed] [New] News Corp to extend the [Rights Plan] without stockholder approval."
On July 7, 2014, Plaintiff initiated this action. On August 25, 2014, Plaintiff filed the operative Complaint, which asserts four causes of action: declaratory judgment that New News Corp is bound by the Settlement Agreement (Count I); breach of contract on the ground that the Board's extension of the Rights Plan was a breach of the Settlement Agreement (Count II); breach of fiduciary duty on the ground that the Board acted in bad faith by causing New News Corp to breach the Settlement Agreement (Count III); and, in the alternative, reformation of the Vote Exception in the Settlement Agreement on the ground of mutual mistake (Count IV).
On September 9, 2014, Defendants moved to dismiss the Complaint in its entirety under Court of Chancery Rule 12(b)(6) for failure to state a claim. They also moved to dismiss Count IV under Court of Chancery Rule 9(b) for failure to allege mistake with particularity. On February 10, 2015, I heard oral argument on Defendants' motion.
Defendants' motion to dismiss under Court of Chancery Rule 12(b)(6) must be denied unless, accepting as true all well-pled allegations of the Complaint and drawing all reasonable inferences from those allegations in Plaintiff's favor, there is no "reasonably conceivable set of circumstances susceptible of proof" in which Plaintiff could recover.
The meaning of the Settlement Agreement underlies all of Plaintiff's claims. Delaware law "adheres to the objective theory of contract interpretation,"
Because contract interpretation is a question of law, "a motion to dismiss is a proper framework for determining the meaning of contract language."
"Dismissal, pursuant to Rule 12(b)(6), is proper only if the defendants' interpretation is the only reasonable construction as a matter of law."
In Count I, Plaintiff seeks a declaratory judgment that "[New] News Corp is bound by the terms of the Settlement Agreement."
Plaintiff acknowledges that the spin-off of Old News Corp's newspaper and publishing business was done for legitimate business reasons
I now address Plaintiffs' two arguments for why New News Corp is bound by the Settlement Agreement.
Paragraph 36 of the Settlement Agreement, which is governed by Delaware law,
Significantly, 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. By contrast, Paragraph 36 does 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,"
Unable to point to specific language in Paragraph 36 addressing asset transfers or spin-offs, Plaintiff premises its argument on ostensibly generic language in Paragraph 36 concerning "transferees" and "assigns." Citing definitions of these terms in Black's Law Dictionary,
Under the logic of Plaintiff's broad interpretation of the terms "transferees" and "assigns" in Paragraph 36, the rights plan restrictions in the Settlement Agreement would apply to any entities to which Old News Corp transfers or assigns any asset or liability it ever possessed. By extension, the rights plan restrictions would then apply to any entities to which the transferees and assigns of Old News Corp thereafter transfer or assign any of their own assets or liabilities, ad infinitum. Parties to contracts governed by Delaware law "are free to make bad bargains,"
Examples readily come to mind demonstrating the absurdity of Plaintiff's argument. Plaintiff's interpretation would mean that were Old News Corp to sell some of its film equipment to, say, CBS Corporation, CBS would be a "transferee" of Old News Corp's assets within the meaning of the Settlement Agreement such that CBS would thereafter be bound by the rights plan restrictions of the Settlement Agreement. Similarly, under Plaintiffs' interpretation, if Old News Corp were to sell five television trucks to five different public entities, each of those entities would become subject to the rights plan restrictions of the Settlement Agreement. As these examples illustrate, Plaintiff's interpretation 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 due to the risk that counterparties would unwittingly find themselves bound to the rights plan restrictions in the Settlement Agreement as a "transferee" or "assign" of Old News Corp. That is an absurd result, in my view, that no reasonable person would have accepted when signing the Settlement Agreement in order to resolve a relatively narrow breach of contract lawsuit.
In my opinion, when viewed in the context of the entire contract,
Hypothetically, the parties could have structured a contractual bargain in the manner suggested by Plaintiff,
Thus, in my view, the rights plan restrictions of the Settlement Agreement did not automatically transfer to New News Corp under Paragraph 36 simply because Old News Corp transferred and/or assigned some of its assets and liabilities to New News Corp. Instead, the operative question is whether Old News Corp agreed to transfer or assign any of its rights or obligations under the Settlement Agreement to New News Corp when it spun-off its newspaper and publishing business. To answer that question, one must look at the contractual provisions governing that transaction.
The Separation and Distribution Agreement, which is also governed by Delaware law,
The "Separated Liabilities" assumed by New News Corp were specifically enumerated in a six-part definition, while the "Remainco Liabilities" retained by Old News Corp were defined as "the Liabilities of Remainco, other than the Separated Liabilities."
The Settlement Agreement is not expressly listed as a Separated Liability and, accordingly, Plaintiff does not contend that Old News Corp's rights or obligations under the Settlement Agreement were expressly transferred or assigned to New News Corp. Rather, Plaintiff argues that the obligations under the Settlement Agreement were transferred and/or assigned to New News Corp as a "Mixed Contract."
The Separation and Distribution Agreement defines a "Mixed Contract" as "any agreement to which . . . [Old News Corp] or [New News Corp] is a party prior to the Distribution that inures to the benefit or burden of both of the Remainco Business and the Separated Business."
Under Section 2.02(g)(i) of the Separation and Distribution Agreement, a Mixed Contract that cannot be partially assigned is to be divided such that the liabilities associated with the Separated Business would be borne by New News Corp and the liabilities associated with the Remainco Business would be borne by Old News Corp. In each case, Old News Corp had the sole discretion, to be exercised in good faith, to determine how to apportion the liabilities associated with each Mixed Contract:
According to Plaintiff, the Settlement Agreement constitutes a Mixed Contract that "covers, and inures to, both the newspaper [assets] [(i.e., the Separated Business)] and the media assets [(i.e., the Remainco Business)], because all those assets were owned by [Old] News Corp when the Settlement was made effective through the Settlement Agreement."
In opposition, New News Corp contends that the Settlement Agreement is not a Mixed Contract because it did not inure to the "benefit" or "burden" of the Separated Business of New News Corp or the Remainco Business of Old News Corp. In particular, New News Corp submits that the Settlement Agreement exists outside the universe of "Mixed Contract" agreements because 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 the Separated Business or the Remainco Business.
As explained above, to have qualified as a Mixed Contract, the Settlement Agreement must have inured to the benefit or burden of the "business and operations" of the Separated Business of New News Corp and the Remainco Business of Old News Corp. According to commonly used dictionaries,
The key terms of the Settlement Agreement reflect this reality. The consideration exchanged in that contract was the release of certain claims by Old News Corp's stockholders for a promise by Old News Corp that it would not maintain a rights plan for longer than one year, subject to certain exceptions, without stockholder approval. That consideration had nothing to do with the commercial enterprise or commercial activities of Old News Corp in 2006, nor did it have anything to do with the commercial enterprise or commercial activities of the Separated Business or the Remainco Business in 2013. The Settlement Agreement instead limited the situations in which the Old News Corp board could unilaterally adopt or extend a rights plan and granted to Old News Corp stockholders the right to vote on board action in other situations. As such, the Settlement Agreement involved "matters that pertain to the relationships among or between the corporation and its officers, directors, and shareholders" and thereby implicated Old News Corp's internal affairs and corporate governance.
In sum, the only reasonable way to conceive of Old News Corp's obligations under the Settlement Agreement concerning rights plans are as internal governance obligations and not as obligations that inure to the burden of New News Corp's newspaper/publishing "business and operations" or Old News Corp's broadcast/media "business and operations." For this reason, the Settlement Agreement does not constitute a Mixed Contract as defined in the Separation and Distribution Agreement. Instead, it constitutes a Remainco Liability that Old News Corp retained pursuant to the Separation and Distribution Agreement. Thus, as a matter of law, Plaintiff has failed to state a claim that New News Corp is bound by the Settlement Agreement.
Finally, even if Plaintiff were correct that the Settlement Agreement constitutes a Mixed Contract within the meaning of the Separation and Distribution Agreement, it is still not reasonably conceivable that New News Corp is subject to the rights plan restrictions of the Settlement Agreement. Section 2.02(g)(i) of the Separation and Distribution Agreement expressly provides Remainco (i.e., Old News Corp) with the sole discretion, to be exercised in good faith, to determine which portion of a Mixed Contract should be borne by New News Corp and which portion should be borne by Old News Corp. Plaintiff has not alleged that, in violation of Section 2.02(g)(i), Old News Corp failed to exercise good faith in determining not to transfer any of the rights or obligations of the Settlement Agreement to New News Corp.
For the reasons explained above, I conclude as a matter of law that the Settlement Agreement did not prevent Old News Corp from spinning off some of its assets to a new public corporation free from the rights plan restrictions in the Settlement Agreement and that it permissibly did so under the terms of the Separation and Distribution Agreement. Accordingly, Count I, which seeks a declaratory judgment that New News Corp is bound by the terms of the Settlement Agreement, is dismissed for failure to state a claim for relief.
In Count II, Plaintiff alleges that New News Corp "breach[ed] the Settlement Agreement by extending the [Rights Plan] during a nine-month Interim Period, without stockholder approval, and without any circumstance existing that, under the terms of the Settlement Agreement, would allow adoption or extension of a [Rights Plan] without stockholder approval during an Interim Period."
In Count III, Plaintiff alleges that the Individual Defendants acted in bad faith when they "deprive[d] the stockholders of their right to vote on [Rights Plan] provisions under the Settlement Agreement."
The factual predicate for Count III is that New News Corp is bound by the Settlement Agreement, which Plaintiff has failed to establish. Plaintiff does not advance any breach of fiduciary duty theory independent from the purported breach of the Settlement Agreement. For instance, Plaintiff does not allege that, when the Individual Defendants extended the Rights Plan in 2014, they breached their fiduciary duties by acting unreasonably,
Count IV of the Complaint seeks to have the Court reform the Settlement Agreement because the parties to that contract
Put another way, Plaintiff alleges that the parties to the Settlement Agreement "never intended the exception to be triggered where a stockholder filing on a Schedule 13G and expressly disavowing any intent to affect management of [New] News Corp established a position in [New] News Corp stock more than 6 months prior to the expiration of the [Rights Plan]."
As the factual predicate of its reformation claim, Plaintiff must first establish that New News Corp is bound by the Settlement Agreement.
For the foregoing reasons, Defendants' motion to dismiss is GRANTED.
