M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Tuesday, July 12, 2011

More troubles for Murdoch

The ongoing collapse of the Murdoch enterprise is almost as fascinating to watch as that unforced error going on in DC right now.  It's also found its way into an ongoing challenge to News Corp's acquisition of Shine from earlier in the Spring.  Plaintiffs have now amended their complaint (here) ( News Corp-Shine-Amended Complaint - helpfully red-lined for your reading pleasure) to include additional claims against the board for violations of fiduciary duty related to its running of News Corp while closing its eyes to what appears to have been a pattern of law breaking in its news gathering operations.  From the amended complaint:

The most recently revealed manifestation of the Board’s utter capitulation to the control and domination of Murdoch is their complete failure to oversee the news gathering practices carried out under the watch of Murdoch’s close friends, confidantes, and staunch supporters, Rebekah Brooks and Andy Coulson, both of whom served as the chief editors of News Of The World, News Corp’s premier UK newspaper. ... The Board failed in its duty to investigate this egregious conduct in the face of red flags, for to do so would have required Defendants to be objective, critical, and non-biased, which they are incapable of being, given Murdoch’s control over all of the Board’s affairs.

Recent revelations have demonstrated that, over the past decade, both junior and very senior employees at the British tabloid the  News of the World and its sister newspaper the Sun were engaged in a massive scheme to intercept voicemail and other forms of electronic communication in order to obtain stories for the papers.

News Corp’s Board should have learned that reporters from News of the World were using illegal means to gather news during Brooks’ tenure as chief editor of News of the World from 2000 to 2003.  Given Murdoch’s close personal and professional relationship with Brooks, described more fully below, and the fact that Brooks herself was fully aware of and even involved in this conduct, it is inconceivable that he and his fellow Board members would not have been aware of the manner in which Brooks ran News of the World and, later, the Sun.

News Corp’s Board received (or should have received) its next red flag when, in 2005, Prince William’s staff notified authorities that William’s phone had been hacked.  The Prince’s aides noticed that voicemails to which they had never listened were showing up as “saved” messages in William’s inbox.  At the same time,  News of the World was running a series of articles that reported startlingly intimate details of the Prince’s life.  Indeed, one News of the World article quoted verbatim a hacked voicemail in which William imitated Prince Harry’s girlfriend. ...

The magnitude of the problem must have been apparent to the Board as far back as 2009.  The Guardian reported on July 8, 2009 that “27 different journalists from the News of the World and four from the Sun” made more than 1,000 requests to private investigators to secure wiretaps, phone records, or otherwise illegally obtain personal and confidential information.  According to The Guardian, “These purchases were not secret within the  News of the World  office:  they were openly paid for by the accounts department with invoices that itemised [sic] illegal acts” (emphasis added).  Moreover, evidence seized in connection with the 2006 Goodman investigation reveals that “several thousand public figures” were targets of News International’s illegal newsgathering practices, including, during a single month in 2006: then-deputy prime minister John Prescott; Tessa Jowell, a government official then responsible for regulating the media; Gwyneth Paltrow; George Michael; and Jade Goody.

Goodness.  And it goes on ...

Of course, the chancery court has made it clear on numerous occassions that boards may not sanction violations of the law and still comport with their duty of loyalty to the corporation.  If it's true that the board knew - or closed its eyes to the fact that - there was wide-spread illegal activity going on at News Corp's operations - or that indeed illegal activity was at the center of News Corp's ability to get scoops and therefore make profits, then this case has just taken a turn for the very worse for News Corp's directors.  

I guess, the directors could go for broke and make an argument hinted at in Massey:  "You shareholders knew just as much as we did that we were breaking the law and you invested anyway - so you get nothing!"  Remember in that case, Vice Chancellor Strine was not all that sympathetic to arguments that shareholders were victims of a board that sanctioned egregious violations of the law.  Here, I suppose the shareholders will argue that the pattern of law breaking is as much a shock to them as it was to everyone else.

In any event, this case has just moved from being an interesting entire fairness claim destined to end up on the heap to a fascinating soap opera where plaintiffs have a shot.



Update:  Hey, when it rains, it pours...  It turns out that US-based News Corp doesn't even have to pay taxes! A negative effective tax rate.  Excellent.  From Reuters:

Over the past four years Murdoch's U.S.-based News Corp. has made money on income taxes. Having earned $10.4 billion in profits, News Corp. would have been expected to pay $3.6 billion at the 35 percent corporate tax rate. Instead, it actually collected $4.8 billion in income tax refunds, all or nearly all from the U.S. government.

he relevant figure is the cash paid tax rate. This is the net amount of corporate income taxes actually paid after refunds. For those four years, it was minus 46 percent, disclosure statements show.

Even on an accounting basis, which measures taxes incurred but often not actually paid for years, News Corp. had a tax rate of under 20 percent, little more than half the 35 percent statutory rate, company disclosures examined by Reuters show. News Corp. had no comment.

 Oh yeah, and now News Corp's proposed acquisition of BSkyB is teetering on the edge.



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