July 28, 2011
As discussed earlier this week, News Corp. is facing some legal trouble in the U.S. over its phone hacking scandal, which is primarily unfolding overseas in Britain.
As briefly touched on in that post, News Corp. is also confronting a civil suit brought by a shareholder of News Corp.
Technically, since this is a shareholder derivative suit, News Corp. itself isn’t being sued, but rather the suit’s target is the board of directors on behalf of the corporation.
The shareholder, Gregory Shields, is claiming the phone hacking scandal has hurt the corporation, naming all 16 board members, including Rupert Murdoch, as defendants.
The complaint provides the facts surrounding the scandal in great detail, and more relevantly, describes how and why the defendant board members are responsible.
Specifically, the complaint claims that they defendants “made false and/or misleading statements and/or failed to disclose that the company lacked adequate internal controls.”
Of course, the complaint goes further than that.
It also claims that the defendant board members schemed to cover up the phone hacking scandal for years, were responsible for the practices through their gross mismanagement, and were also directly responsible for approving settlements from lawsuits that arose from the phone hacking practice at News Corp.
Hot Doc: Shields v. Murdoch
Additionally, the complaint alleges that the board members further schemed to cover up the scandal by working to have the court records of these lawsuits sealed.
The complaint alleges that all of this, including the scandal and the cover-up by the defendant board members, has injured News Corp. (as if it weren’t obvious).
The complaint does go on, thankfully, to detail just how the scandal has injured the corporation – such as killing News Corp.’s takeover bid for BSkyB (a major U.K. broadcasting company), the closure of 168-year-old newspaper News of the World, and the resignation of several high ranking News Corp. employees.
All of these factors, in addition to the public backlash, have contributed to the corporation’s injury, which the complaint seeks to remedy not only financially, but also with the invalidation of the elections that appointed the defendants to the board in the first place.
How can a court do this?
If the court determines, as the complaint alleges, that the defendants violated section 14(a) of the Securities Exchange Act – meaning the defendants intentionally withheld information about the scandal in their definitive proxy statements, the court can void the elections.
The court would also need to find that the information would have been material to News Corp.’s shareholders in determining whether to elect the defendants to manage the company (and it wouldn’t take much effort to reach that conclusion).
So boiled down into plain English, what does this mean?
If the court determines that the defendants knew about the scandal and didn’t disclose it, they could not only lose their positions on the board of directors, but may also be liable for the financial injury to News Corp. caused by the scandal.
Don’t feel too bad for them, though, since they all almost certainly carry directors and officers liability insurance, which should mostly shield them from the financial impact.
The true fallout from the scandal will be primarily absorbed by News Corp. itself.
Even if the entire board of directors is replaced, the damage done may be beyond repair in the near future.
Thus, even if this shareholder derivative suit is completely successful, it will still be the shareholders who pay the price for the scandal.