Last week, the Delaware Court of Chancery upheld the terms of an agreement requiring The Chemours Company to arbitrate a challenge to its spin-off from DuPont. In doing so, Vice Chancellor Glasscock rejected Chemours’ claims that the process DuPont followed in structuring and executing the spin-off rendered the terms of the spin-off unconscionable and thus Chemours’ consent to arbitration ineffective. The Chemours decision is important as it recognizes that parent companies rely on the parent-subsidiary relationship in structuring spin-offs and in doing so need not follow an arm’s length process with its subsidiary as would apply to a transaction with an unrelated third party.
Chemours was formed as a wholly-owned subsidiary of DuPont in 2015 to hold its performance chemicals business, and was spun off to DuPont’s stockholders later that year. As is typical in spin-offs, the Separation Agreement assigned certain assets and liabilities to Chemours. The Separation Agreement also provided that Chemours would generally indemnify DuPont for the liabilities it assumed, which is also customary in spin-offs. In connection with the spin-off, Chemours also paid DuPont a $3.9 billion leveraged dividend.
Conventional wisdom in spin-offs has been that, in practice, the parent company has considerable latitude in shaping the structure and terms of the spin-off, without regard as to whether they are fair to the subsidiary being spun off (“Spinco”). This discretion is subject to the guardrails of fraudulent conveyance law and Internal Revenue Code rules (the latter of which must be met for the transaction to be “tax-free”). Within these limits, the parent generally (i) determines the scope of the business Spinco will conduct, (ii) allocates assets and liabilities between itself and Spinco, (iii) determines the initial capital structure of Spinco (including the nature and quantum of debt of Spinco) and (iv) establishes Spinco’s initial governance structure and board composition.
Historically, the few challenges to spin-offs have come in the form of fraudulent conveyance claims brought by a bankruptcy trustee against the former parent as part of the bankruptcy proceedings of the former Spinco. Parent companies typically defend against such claims by showing that the Spinco was solvent at the time of the spin-off (often relying on a solvency opinion issued by a financial advisor in connection with the spin-off) and received reasonably equivalent value in the transaction.
Occasionally, Spincos or bankruptcy trustees have also sought to impose spin-off liability on the parent company directors, as well as the pre-spin Spinco directors, on the theory that they owed fiduciary duties to Spinco and its post-spin stockholders, and breached those duties in connection with the spin-off. Courts have held consistently that a corporate parent owes no fiduciary duties to a subsidiary (other than a duty not to take actions that cause the subsidiary to be unable to meet its legal obligations) and directors of the wholly-owned subsidiary owe the subsidiary only the duty to manage in the best interest of the parent (so long as the subsidiary is able to meet its obligations).
However, Chemours’ claims were of a different nature and sought to change the parent-subsidiary relationship in a manner that would likely render many spin-offs impractical.
The Delaware Court of Chancery Decision
Chemours Consented to the Arbitration Provisions of the Separation Agreement
Chemours claimed that it was not bound by the arbitration provisions of the Separation Agreement because it did not validly consent to those provisions (or the rest of the Separation Agreement). There was no dispute that the terms of the spin-off were dictated by DuPont and that the post-spin Chemours management team, who were DuPont employees prior to the spin-off, had little to no opportunity to negotiate them. Vice Chancellor Glasscock found that the approval of the spin-off and the Separation Agreement by a duly appointed board of directors, and the execution of the Separation Agreement by a duly appointed executive, sufficed to evidence Chemours’ consent. The Court also rejected Chemours’ argument that it did not consent in a “real-world” sense because pre-spin Chemours had no will of its own and was controlled by its parent company, noting that Chemours was unable to show that it did not consent in a contractual sense, and that “[s]imply because the parent dictates terms to its wholly-owned subsidiary is not a grounds under Delaware law to infer lack of consent such that the contract would not be enforceable.”
The Contract to Arbitrate is not Unconscionable
Chemours also argued that the terms of the Separation Agreement were unconscionable (both procedurally and substantively) and thus should not be enforced.
The claims of unconscionability were largely complaints with the parent-subsidiary relationship, and lack of what Chemours viewed as arm’s length bargaining. In support of its argument, Chemours pointed to purported limitations on the remedies available to the arbitrator and the one-sided cost-allocation mechanism for challenges to environmental liabilities. Chemours also complained that, among other things, it was not allowed to engage independent counsel, DuPont and its counsel prepared all of the spin-off documentation without any input from Chemours (as well as clarification by such counsel that it represented DuPont, not Chemours), DuPont employees executed the spin-off agreements on behalf of Chemours, and the Chemours board approving the transaction was composed entirely of DuPont employees which took notice that DuPont (as sole stockholder) had determined that the spin-off and the Separation Agreement were in the best interests of DuPont. Moreover, shortly after approving the spin-off and executing the spin-off agreements on behalf of Chemours, each of the DuPont employees resigned from their roles as Chemours directors and executive officers. Although Chemours took issue with this process, each of these features is not unusual in the context of spin-offs or in more quotidian transactions between parent corporations and their subsidiaries.
The Court of Chancery rejected Chemours’ position, noting that “[e]ven if the Delegation Clause was the product of procedural unfairness, it cannot be procedurally unconscionable because such a finding cannot be squared with settled Delaware law that ‘[w]holly-owned subsidiary corporations are expected to operate for the benefit of their parent corporations, that is why they are created.’” Vice Chancellor Glasscock observed that the “spirit of procedural unconscionability” is “wholly inconsistent with the routine enforcement of parent-subsidiary contracts,” and remarked that parent-subsidiary contracts “are routinely enforced not because they reflect arms’-length bargaining between a parent and its subsidiary – which of course they do not – but because the parent determines they are desirable for the parent, and subsidiary fiduciaries ‘are obligated only to manage the affairs of the subsidiaries in the best interests of the parent and its shareholders.’” Vice Chancellor Glasscock also noted that Delaware enforces “admittedly non-consensual contracts”  between parents and subsidiaries “because they allow the corporate machinery to run smoothly – to find such a contract unenforceable based on procedural unconscionability would be nonsensical, because their presumptive validity acknowledges that they are not the product of fair bargaining.”
Importantly, the Court of Chancery reaffirmed the long-standing principle that a wholly owned subsidiary exists to benefit its parent. This principle has been the backbone not just of spin-offs, but of the intercompany transactions that occur almost every day at almost every corporation. Practitioners can breathe a sigh of relief that this principle still stands.
We expect parent companies and practitioners will continue to be diligent in determining the optimal level of assets, liabilities and leverage for Spinco. Our experience has been that in pursuing spin-offs well-advised parent companies are motivated to create a Spinco that will not only survive on its own, but will also be appropriately valued by the capital markets and poised to deliver long-term value to its stakeholders. After all, at least at the time Spinco’s shares are initially distributed, Spinco’s stockholders will be the parent stockholders, to whom the parent’s directors owe fiduciary duties.
Parent companies should also remain vigilant in crafting the SEC disclosure documents for the spin-off and other public communications made in connection with the spin-off and ensure they adequately disclose the material liabilities of Spinco at the time of the spin-off, together with appropriate risk factors and forward-looking statement disclaimers.
With the growing influence of the stakeholder theory of the corporation, there may be an increase in claims like the ones asserted by Chemours, as Spincos seek to position themselves as stakeholders owed duties by parent companies. For now at least, the Delaware judiciary seems disinclined to embrace this view.
Not surprisingly, Chemours reportedly intends to appeal the Court of Chancery’s decision to the Delaware Supreme Court. Stay tuned.
 The Chemours Company v. DowDupont Inc., Corteva, Inc. and E.I. Du Pont de Nemours and Company, C.A. No. 2019-0351, (Del. Ch. March 30, 2020).
 See, e.g., In re Tronox Inc., 503 B.R. 239 (Bankr. S.D.N.Y. 2013) and U.S. Bank Nat. Ass’n v. Verizon Commc’ns, Inc., 761 F.3d 409 (5th Cir. 2014), as revised (Sept. 2, 2014). The plaintiffs in these fraudulent conveyance cases have claimed the spin-off was an actual fraudulent transfer (which requires a showing that the transfer was made “with actual intent to hinder, delay or defraud” a creditor) and/or constructive fraudulent transfer (which generally requires a showing that the transferor received less than reasonably equivalent value in the exchange, and was insolvent, rendered insolvent, or had unreasonably small capital at the time of the transfer).
 Idearc, at 436-437, citing Trenwick Am. Litig. Tr. v. Ernst & Young, L.L.P., 906 A.2d 168, 173 (Del. Ch. 2006), aff’d sub nom. Trenwick Am. Litig. Tr. v. Billett, 931 A.2d 438 (Del. 2007) and Anadarko Petroleum Corp. v. Panhandle E. Corp., 545 A.2d 1171, 1174 (Del. 1988).
 Chemours, slip op. at 27.
 Amended complaint at 13-18, The Chemours Company v. DowDupont Inc., Corteva, Inc. and E.I. Du Pont de Nemours and Company, C.A. No. 2019-0351, (Del. Ch. March 30, 2020).
 Id., at 17-18.
 Chemours, slip op. at 37, quoting Trenwick.
 Chemours, slip op. at 37.
 Chemours, slip op. at 37, quoting Anadarko.
 Chemours, slip on. at 37.
 Id., at 37-38.