Saturday, September 23, 2023
I previously blogged about the shareholder derivative claims against Fox Corp, alleging that it violated its Caremark/Massey duties by defaming Dominion. And then I had a few follow ups on Caremark generally here and here.
This week, sorry, still more, because two additional shareholder plaintiffs filed complaints in Fox. One group is led by the New York City Employees’ Retirement System and includes the Oregon Public Employees Retirement Fund; the other is led by Tredje AP-Fonden. These complaints differ from the ones filed earlier in that the plaintiffs sought books and records under 220, and incorporated the results into their pleadings.
VC Laster has scheduled a hearing on November 9 to choose the leadership structure for the action – in other words, all the cases will be combined, some plaintiff(s) will be lead, and some counsel will be lead. If the parties don’t work that out amongst themselves (and they’ve had plenty of time so far), VC Laster will select one plaintiff/counsel group to control the action.
Under Delaware law, these decisions are made according to what are known as the Hirt factors, which evaluate which group can best represent the shareholders, based on size of stake, absence of conflict, competence of counsel, and quality and vigor of prosecution of the action. I have no opinion on which group is “better” for Hirt purposes and I have no idea what VC Laster is likely to do, but what does interest me is that the two most recently filed complaints are adopting different strategies to pleading the case against the Fox board. And it’s worth articulating what those are.
First, the two complaints offer different explanations for the fundamental failure of Fox’s systems to identify and prevent defamation.
The NYCRS complaint alleges that going back several years, Fox News has operated under a unique business model that advances political narratives regardless of the underlying facts. Comparisons are made to other news organizations, many of which make their editorial guidelines and standards public, while Fox does not. The Dominion defamation claim is treated as one set of allegations among many, including claims by Seth Rich’s family, Majed Khalil, Ray Epps, and Nina Jankowicz, to demonstrate an ongoing pattern by Fox.
The Tredje AP-Fonden complaint is a bit different. It mentions the Rich scandal, but the theory is actually that after Fox was accused of hacking cell phones in 2013, Fox entered into a settlement of a shareholder derivative action that instituted various controls. When Fox was then spun off in 2019 in connection with an asset sale to Disney, those controls were lifted – and that’s what precipitated the defamation of Dominion.
Second, the two complaints differ with respect to the Murdochs. As I said in my prior post on the earlier complaints, one of the interesting things about these lawsuits from a theoretical perspective is that they allege, pretty straightforwardly, that Fox defamed Dominion to avoid losing viewers. In other words, this was a business decision, to protect the company’s revenues and maximize wealth for shareholders. As I said in that post, normally, corporate boards are required to maximize shareholder profits – but there’s a hard limit of doing so by illegal means, which is what gives rise to the claims here. The prohibitions on breaking the law represent the outer limit of shareholder primacy, and therefore fit a bit uneasily within corporate law’s framework.
Well, the Tredje AP-Fonden plaintiffs apparently take that to heart, because their complaint, in addition to alleging that Fox’s board knowingly broke the law by allowing Dominion to be defamed and/or didn’t adopt proper systems to prevent it, also alleges that the Murdochs personally were trying to preserve their own status within the conservative movement, which they could not maintain if Fox lost viewers. In other words, they claim that the Murdochs operated in bad faith by putting their personal interests in maintaining clout ahead of shareholder interests. That possibility is mentioned a bit in the NYCRS complaint, but the Tredje AP-Fonden complaint leans into it much more. That’s interesting because a claim that the Murdochs were, essentially, conflicted, and attempting to preserve their own status, is much more of a traditional type of claim – rather than pursuing shareholder wealth, is the allegation, the Murdochs were pursuing their own interests. That theory doesn’t depart from shareholder primacy at all.
Also, Tredje AP-Fonden alleges that the Murdochs’ interests in maintaining political influence qualifies as a “personal benefit” justifying demand excusal, so I guess we may find out how far that concept stretches.
And the final thing that jumped out – and this actually is a similarity rather than a difference – is that both complaints mention that, after the Dominion lawsuit, an advocacy organization filed a petition to cause Fox to lose its broadcast license in Philadelphia. I am … skeptical … that Fox will lose its license, but the allegation that Fox put its broadcast licenses in jeopardy helps bolster one of the aspects of the case that previously stood out to me as a little novel, namely, that the “law” being broken was a common law tort. Allegations about violating the terms of regulatory benefits put the whole dispute much more firmly in traditional Caremark territory.