In re Fox Corporation Derivative Litigation
Not Available (2024)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Delaware law establishes that corporate fiduciaries breach their duty of loyalty by knowingly causing the corporation to violate the law, and a derivative suit against them can proceed without a pre-suit demand if a majority of the board is deemed "interested" due to substantial liability risk or "not independent" due to deep-seated familial, financial, or personal/business ties, including a "debt of gratitude."
Facts:
- On November 3, 2020, the Fox News Channel declared Joseph Biden the winner of Arizona's electoral votes during the presidential election.
- After then-President Donald Trump contested the call, Fox News called the election for Biden on November 7, 2020, leading to a significant drop in Fox News' daytime and primetime audiences, while rival networks supporting Trump's election-fraud theories saw their ratings increase.
- In response to this viewer backlash, Rupert Murdoch, Lachlan Murdoch, and Fox News CEO Suzanne Scott decided to indulge and amplify Trump's election-denial narrative, leading Fox News to air stories and host guests like Sidney Powell and Rudy Giuliani who promoted unfounded claims that Dominion Voting Systems and Smartmatic USA voting machines illegally switched votes.
- The Fox News "Brainroom" (fact-checking department) could find no evidence to support these accusations against Dominion or Smartmatic, and Rupert Murdoch privately expressed that the claims were "really crazy stuff. And damaging," and that he saw "no evidence" of election fraud.
- Dominion and Smartmatic sent multiple cease-and-desist letters to Fox Corporation between November 2020 and January 2021, detailing false claims and threatening litigation, but Fox did not respond or retract any assertions.
- Rupert Murdoch, as Executive Chair of Fox News, was deeply involved in the daily operations, monitored content, knew the stories were false, had the power to stop them, and consciously allowed them to air to placate conservative viewers and maintain ratings.
- Lachlan Murdoch, as an officer and director, also admitted concern about viewer backlash and weighed in on the "tone" and "negativity" of Fox's coverage of Trump's claims.
- Directors Chase Carey and Jacques Nasser had longstanding and deep personal and business relationships with Rupert Murdoch, including significant financial benefits and expressions of profound mutual respect, and shared governance in an elite networking group.
Procedural Posture:
- In February 2021, Smartmatic sued Fox for defamation in the Supreme Court of the State of New York.
- In March 2021, Dominion sued Fox News for defamation in Delaware Superior Court (trial court/court of first instance).
- On December 16, 2021, the Delaware Superior Court denied Fox News' motion to dismiss Dominion's complaint, ruling that Dominion adequately pled defamation, including actual malice.
- On March 31, 2023, the Delaware Superior Court granted summary judgment in Dominion's favor on the falsity and defamatory per se elements but found that genuine issues of material fact remained regarding whether Fox News acted with actual malice, thus requiring a jury trial.
- On April 18, 2023, before trial commenced, Fox settled with Dominion for $787.5 million.
- The New York court denied the defendants' motion to dismiss Smartmatic's complaint, holding it stated a claim for defamation, and discovery remains ongoing.
- On July 10, 2023, Ray Epps filed a defamation and false lights lawsuit against Fox News.
- On April 26, 2024, stockholder plaintiffs filed the operative consolidated derivative complaint in the Court of Chancery of the State of Delaware (trial court/court of first instance), asserting breach of fiduciary duty claims against Fox's officers and directors.
- Defendants (K. Rupert Murdoch, Lachlan K Murdoch, Suzanne Scott, Viet Dinh, Charles D. Carey, Paul D. Ryan, Jacques A. Nasser, Anne Dias, Roland A. Hernandez, and Nominal Defendant Fox Corporation) moved to dismiss the derivative complaint under Court of Chancery Rule 23.1, arguing the stockholders lacked standing to pursue the claims on behalf of the company.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the complaint allege particularized facts sufficient to establish a reasonable doubt that a majority of Fox Corporation's board of directors could make an independent and disinterested decision regarding whether to pursue claims that certain fiduciaries knowingly caused the company to broadcast defamatory content, thereby excusing the requirement for stockholders to make a pre-suit demand?
Opinions:
Majority - Laster, V.C.
Yes, the complaint alleges particularized facts sufficient to establish a reasonable doubt that a majority of the Fox Corporation board of directors could make an independent and disinterested decision, thereby excusing the pre-suit demand requirement. The court found that Rupert Murdoch faces a substantial likelihood of liability for breach of his duty of loyalty because he knowingly caused or willfully permitted Fox News to broadcast defamatory content. The detailed allegations, including Murdoch's deep involvement in daily operations, his awareness that the election-fraud claims were baseless (as evidenced by his private texts, other Murdoch media reports, and his own testimony), his power to stop the broadcasts, and his motive to maintain ratings, create a reasonable inference of bad faith. Lachlan K. Murdoch is also disqualified due to a substantial likelihood of liability for the same reasons as Rupert, having been actively involved in decisions to amplify the election-denial narrative in response to viewer backlash. Additionally, his close familial relationship with Rupert means he lacks independence. Chase Carey is disqualified due to his lack of independence from Rupert Murdoch, stemming from a close and longstanding business and personal relationship. Carey received over $230 million from Murdoch-affiliated companies over decades, and both men expressed profound mutual respect and friendship, suggesting a "debt of gratitude" that could undermine his impartiality. Jacques Nasser is likewise disqualified due to his lack of independence from Rupert Murdoch, based on a decades-long social, personal, and business relationship. This includes co-founding and continuously serving on the Advisory Council of the American Australian Association (an elite networking group founded by Murdoch's father), Murdoch helping resuscitate Nasser's career, and multiple public displays of close personal ties. With Rupert Murdoch, Lachlan Murdoch, Chase Carey, and Jacques Nasser all disqualified (4 out of 8 directors), a majority of the board cannot independently and disinterestedly consider the demand to sue. Since the claims in Count II arise from the same nucleus of operative facts as Count I, demand is also excused for Count II.
Analysis:
This decision significantly clarifies and reinforces the rigorous application of Delaware's demand futility test under Rule 23.1, particularly for Massey claims involving a conscious decision to violate the law. It demonstrates that the "law" for such claims can originate from common law torts like defamation, not just statutory violations. Critically, the case expands on the concept of director "independence," emphasizing that deep-seated personal, social, and long-term business affiliations, including a "debt of gratitude," can overcome the presumption of independence, even without direct financial dependence. This provides a robust framework for stockholders to challenge board actions where powerful, interconnected fiduciaries are involved.
