-- 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 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
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:
(Reporting by Alison Frankel; Editing by Eddie Evans)