The Volokh Conspiracy
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Shareholder Derivative Lawsuit Against Fox Officers and Directors Over Fox $787M Libel Settlement Can Go Forward
"[T]he complaint alleges facts sufficient to raise a reasonable doubt that at least three other directors lack independence from Murdoch."
From In re Fox Corp. Derivative Litigation, handed down yesterday by Vice Chancellor Travis Laster of the Delaware Court of Chancery:
This pleading-stage decision addresses whether the stockholder plaintiffs have standing to pursue a derivative action. When making that determination, the court must accept the complaint's well-pled allegations as true and grant the plaintiffs the benefit of all reasonable inferences. The complaint casts the defendants in a poor light, but at this stage of the case, the court cannot assess the truth of the allegations. The question instead is whether, taking those allegations as true, the plaintiffs have standing to assert their claims.
The plaintiffs have sued over events surrounding the 2020 presidential election. Late on November 3, 2020, the Fox News Channel declared Joseph Biden the winner of Arizona's electoral votes. Then-President Donald Trump contested the call based on allegations about election fraud. Hours later, Trump declared himself the winner. Despite Trump's claim, Fox News called the election for Biden on November 7. The daytime and primetime audiences for Fox News plummeted by over one-third.
Starting the next day, Fox News began airing stories sympathetic to Trump's election-fraud claims. Fox News also hosted guests who championed those claims. Trump advisors Sidney Powell and Rudy Giuliani appeared repeatedly on Fox News and asserted that Dominion Voting Systems and Smartmatic USA provided voting machines and voting software that illegally switched votes from Trump to Biden.
Dominion and Smartmatic sent cease-and-desist letters to Fox News' parent corporation, Fox Corporation ("Fox" or the "Company"). In the "Brainroom"—the Fox News fact-checking department—no one could find evidence to support the accusations against Dominion or Smartmatic. Yet Fox News continued to air the election-fraud narrative and host guests who advanced it.
In February 2021, Smartmatic sued Fox for defamation. Dominion sued Fox in March. The Dominion trial moved forward more quickly. On the first day of the trial, Fox settled with Dominion for $787.5 million. The Smartmatic litigation remains pending.
Corporations don't have minds or bodies. They only act when humans cause them to act. But like humans, corporations can act in ways that harm themselves. Delaware law gives its corporations expansive freedom to pursue any lawful business in pursuit of profit. But Delaware law does not permit a corporation to operate unlawfully. Not only that, but corporate fiduciaries breach their duty of loyalty when they decide to violate the law. Thus, when humans cause a corporation to violate the law in a way that harms the corporation, the corporation can recover from the humans who knowingly caused the corporation to violate the law and suffer harm.
In this lawsuit, Fox stockholders seek to shift the Company's losses onto the individuals who they say caused the Company to violate the law and suffer harm. The plaintiffs contend that Fox's senior officers—including Rupert and Lachlan Murdoch—and its board of directors (the "Board") decided to violate the law by having Fox News defame Dominion and Smartmatic. The plaintiffs allege that the defendants knew that Fox News was breaking the law by defaming Dominion and Smartmatic but consciously prioritized profits over legal compliance.
The defendants have moved to dismiss the complaint under Court of Chancery Rule 23.1. In substance, the motion asserts that even if the plaintiffs have identified valid corporate claims, they do not have standing to bring them. A corporate claim is a corporate asset, and under Delaware law, the board of directors has authority over how to manage the company. That includes making decisions about whether to assert corporate claims. But there is an exception to that rule. A stockholder plaintiff can pursue litigation on the corporation's behalf when its board of directors is so conflicted that the board cannot make an independent and disinterested decision about whether to sue. When a stockholder plaintiff seeks to invoke this exception, Rule 23.1 requires that the complaint plead facts sufficient to support it.
To analyze a Rule 23.1 motion, the court examines the board of directors in office when the suit was filed. Considering each director in turn, the court asks whether the complaint contains particularized allegations sufficient to raise a reasonable doubt about whether that director could make a disinterested and independent decision about whether to assert the claim. If that director-by-director analysis results in the board lacking a majority of independent and disinterested directors who could decide whether to sue, then the plaintiff has standing.
Here, the Board has eight members. For the Board to be able to exercise disinterested and independent judgment about whether to assert a claim, there must be at least five directors who qualify as disinterested and independent. Stated conversely, the plaintiff must raise a reasonable doubt about the disinterestedness or independence of at least four directors.
The complaint alleges particularized facts sufficient to support a reasonable inference that Murdoch faces a substantial risk of liability for breaching his duty of loyalty by deciding in bad faith to have the Company violate the law. When a director faces a substantial risk of liability on a claim, that director has an interest in the corporation not asserting that claim. Murdoch is therefore disqualified for purposes of Rule 23.1.
The court need not analyze whether other members of the Board face a substantial risk of liability, because the complaint alleges facts sufficient to raise a reasonable doubt that at least three other directors lack independence from Murdoch. A reasonable doubt exists about whether Lachlan could make an independent decision about whether to sue his father. A reasonable doubt also exists about two other directors—Chase Carey and Jacques Nasser. The complaint alleges particularized facts about close and longstanding business and personal ties between them and Murdoch that are sufficient to disqualify them.
That is the introduction; the whole opinion is over 12,000 words long, and is available here.
