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Corporate Spin-Off Transactions and Lawsuits Increase

August 2, 2016

Corporate spinoffs occur when a new independent company is created through the sale or distribution shares of an existing business, called the “parent company”. This may occur for several reasons, such as to help nurture new potentials from existing divisions of the parent company. Spinoffs can have various benefits for the parent company, the resulting independent company, and the general investment community as a whole. Some of the more successful business entities have had their beginnings as spinoff projects.

Corporate Spin Off Transaction Growth Trends

We are seeing an increased number of spinoffs in the past few years. This trend in growth can largely be attributed to the work of shareholder activism. That is, shareholder activists will often demand a spinoff from a company in which they have taken a position. Spinoff transactions may also be increasing because:

  • Spinoffs can sometimes return higher yields than other business activities (which is favorable given current low-yield environments)
  • Spinoffs may often unlock value from the spinoff business and reveal new potentials for existing projects
  • From the parent company’s perspective, the choice to create a spinoff can assist with larger strategic decisions, such as facilitating debt payoffs

Legal Issues Associated with Spinoffs

Even smaller spinoff projects can be massively complex, and may involve a number of legal issues and considerations. To give you a picture of how complex spinoffs can be, some common issues that need to be addressed in a spinoff may include:

  • Governance issues, such as board composition and diversity, especially with regards to board members with roles at the parent company
  • How legal representation and legal liability work out for the parent and spin-off entity
  • Whether the spinoff company will adopt similar governance measures and policies as the parent
  • Transparency and disclosure regarding information related to the spinoff decision
  • Actions by the parent and/or spinoff entity that can affect shareholders
  • Use of a spinoff as an attempt avoid investigations for merger/acquisitions violations

In particular, violations of state and federal conflict-of-interest laws can be a major concern in this area. For instance, regulations may vary regarding whether a person can serve on boards for both the parent and the spinoff. With the increase in spinoff transactions, we should also be seeing a corresponding increase in legal actions related to spinoffs.

Lawsuit Filed by Kessler Topaz in Connection with Kimberly-Clark's Spinoff of Halyard

An example of the legal complexities and conflicts that can arise in connection with spin-off transactions can be seen in a recent lawsuit filed in the health care industry.  The law firm of Kessler Topaz Meltzer & Check, LLP has recently announced the filing of a shareholder class action lawsuit against Halyard Health, Inc (“Halyard”) and Kimberly-Clark Corporation (“Kimberly Clark”). The suit is being filed on behalf of investors who purchased or otherwise acquired Kimberly-Clark or Halyard securities in connection with Kimberly-Clark’s spin-off of Halyard in October 2014.

The class action lawsuit alleges that the defendants made false and/or misleading statements regarding Halyard’s MICROCOOL surgical gowns. Specifically, the complaint alleges that Halyard failed to disclose issues regarding the gowns’ effectiveness and their failure to meet industry standards. The gowns were provided to U.S. workers during the Ebola crisis.

Also, according to the complaint, 60 Minutes reported that Kimberly-Clark and Halyard “aggressively” marketed MICROCOOL gowns to hospitals during the Ebola crisis, despite them being prone to leaks. After the release of the news, shares of Halyard’s stocks fell $1.21 per share (4.3%).

For more information regarding Class Period, legal options, lead plaintiff recommendations, and other important issues, investors who purchased or otherwise acquired Halyard securities during the Class Period are encouraged to contact Kessler Topaz (Darren J. Check, Esq., D. Seamus Kaskela, Esq. or Adrienne O. Bell, Esq.) at (888) 299-7706 or by email at info@ktmc.com.

As you can see, spin off transactions can create opportunities that are beneficial to the company as well as shareholders. However, extra care must be taken to ensure that legal issues such as disclosure, transparency, and sound business practices are properly addressed.

The best thing for companies to do is to have clearly delineated policies and plans for spinoff transactions, and to ensure that issues such as disclosure and compliance are directly built into such plans. If you have any questions, concerns, or legal issues regarding shareholder rights and spinoff transactions, don’t hesitate to contact us at Kessler TopazOur team of attorneys is dedicated to preventing fraud and protecting shareholder rights at all levels of corporate decision-making.