COLUMN-News Corp scandal hits Delaware courts-Frankel
-- Alison Frankel writes the On the Case blog for Thomson Reuters News & Insight (newsandinsight.com). The views expressed are her own. --
By Alison Frankel
NEW YORK, July 11 (Reuters) - Talk about lucky timing.
Back in May, Grant & Eisenhofer and Bernstein Litowitz Berger & Grossmann filed a consolidated Delaware Chancery Court complaint against the officers and directors of Rupert Murdoch's News Corp (NWSA.O), claiming that the News Corp board fell down on the job when it approved the $615 million acquisition of a film and television production company wholly owned by Murdoch's daughter Elisabeth. "Enough is enough," said the 51-page complaint.
Turns out enough wasn't quite enough after all. Late Friday, facing a deadline to respond to News Corp's motion to dismiss the case, the plaintiffs firms amended their complaint to add allegations based on last week's revelations in the News of the World phone hacking scandal. Weighing in at 94 pages, the newly-amended complaint accuses the News Corp board of ignoring the tabloid's "unlawful and reprehensible activity" even as the evidence of the scandal built.
"The board's refusal to inquire into whether Murdoch loyalists had implicated News Corp [in phone hacking and bribe paying] further confirms its complete inability and unwillingness to cross him, much less to make the hard but necessary decisions independent of Murdoch's personal demands and desires," the complaint says. "These acts have caused the Company to be required to effectively abandon one of its premier properties, face reputational harm, and even risk the loss of the opportunity to acquire BSkyB."
According to Westlaw, the Delaware derivative suit is the only state or federal shareholder claim News Corp faces right now, although scandals like the News of the World mess tend to breed lawsuits. Bernstein Litowitz and Grant & Eisenhofer had a head start because they'd already included some information about phone hacking at News of the World in their May complaint -- as evidence that it would have been futile for shareholders to demand that the board take action to block the acquisition of Elisabeth Murdoch's production company. As the News of the World scandal intensified last week, the firms rushed to supplement their previous complaint to add the latest developments, including details on James Murdoch's involvement and the board's allegedly too-little-too-late appointment of Joel Klein and Viet Dihn -- News Corp board members with U.S. Justice Department experience -- to investigate the scandal.
On Monday, plaintiffs lawyers Jay Eisenhofer of Grant & Eisenhofer and Mark Lebovitch of Bernstein Litowitz told OTC that the phone hacking scandal is yet another example -- along with the acquisition of Elisabeth Murdoch's company -- of the News Corp board's heedless obeisance to Murdoch's wishes. "The board's inaction in response to the phone hacking is part and parcel of a long line of actions and inactions that serve Rupert's interests at the expense of the company and the shareholders," said Lebovitch. Added Eisenhofer: "This is more of the same. Protecting James Murdoch, protecting Rebekah Brooks -- that's what Murdoch wants, that's what the board does."
The Delaware Chancery Court standard for successful derivative suits such as the News Corp action is very tough to meet. Shareholders have to show that the board could not act independently because board members were conflicted. The News Corp complaint points out that six of the 16 members of the board are either Murdoch relations or employees who report directly to Rupert Murdoch. Other longtime directors are old Murdoch friends or political cronies, some of whom allegedly rely on the lavish compensation they receive for their board service. Plaintiffs lawyers claim the News Corp board simply doesn't function the way Delaware boards are supposed to. "The board has allowed Murdoch to operate News Corp as his own private fiefdom with little or no oversight to protect the company and its shareholders," the complaint says.
News Corp is represented in the derivative suit by Skadden, Arps, Slate, Meagher & Flom. (Skadden partner Edward Welch didn't return OTC's call for comment.) In its motion to dismiss -- which was filed before the hacking claims were added -- the company asserts that independent directors evaluated and approved the Elisabeth Murdoch deal. "It is well-settled that decisions made by disinterested and independent directors are protected by the business judgment rule," the response says. "Plaintiffs allege nothing to suggest that this well-settled principle should not apply here. These allegations are nothing more than a transparent attempt to create provocative, media-worthy sound bites."
Hmm. Sounds like a story Rupert Murdoch would love.
This blog post first appeared here: link.reuters.com/cac62s
(Reporting by Alison Frankel; Editing by Eddie Evans)
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