Written By IBM, one of the world’s largest technology companies, is facing a lawsuit over allegations of improper profits from a spun-off business. The lawsuit, filed by hedge fund and IBM shareholder Third Point LLC, accuses the company of unfairly benefiting from the spin-off of its managed infrastructure services unit.
In October 2020, IBM announced the spin-off of its managed infrastructure services unit, which would become a new publicly traded company named Kyndryl. The move was intended to allow IBM to focus on its cloud computing and artificial intelligence businesses, while Kyndryl would handle infrastructure services for clients.
However, Third Point LLC alleges that IBM received an improper benefit from the spin-off. The hedge fund claims that IBM agreed to pay Kyndryl a dividend of $5 billion in cash and $1.8 billion in assumed debt as part of the separation agreement. Third Point LLC alleges that this dividend was above market value, and that it unfairly enriched IBM at the expense of its shareholders.
The lawsuit was filed in the Southern District of New York, and seeks to recover damages on behalf of IBM shareholders. In a statement, Third Point LLC accused IBM of “flagrant disregard for its fiduciary duties” and claimed that the company had “engaged in an egregious example of corporate waste”.
IBM has denied the allegations, and has vowed to defend itself against the lawsuit. In a statement, the company said that the dividend paid to Kyndryl was “appropriate and reasonable”, and that it had been approved by the company’s board of directors and independent financial advisors.
The lawsuit against IBM is just the latest in a series of legal challenges facing the company. In 2019, IBM agreed to pay $14.8 million to settle a case brought by the Securities and Exchange Commission, which alleged that the company had violated accounting rules in its treatment of certain transactions.
The lawsuit also raises questions about the practice of spinning off businesses, which has become increasingly popular in recent years. Proponents of spin-offs argue that they allow companies to focus on their core competencies and unlock value for shareholders, while opponents claim that they often result in the loss of key capabilities and resources.
As the lawsuit against IBM continues to play out, it remains to be seen what impact it will have on the company’s future. However, it serves as a reminder of the importance of corporate governance and the need for companies to act in the best interests of their shareholders.
