11:56am PT by Eriq Gardner
Rupert Murdoch Beats Lawsuit Over News Corp. Shareholder Rights
Rupert Murdoch has solidified his control over News Corp. after a Delaware Court of Chancery judge on Tuesday rejected a lawsuit dealing with stockholder rights in the wake of the 2013 News Corp. split.
The genesis of the dispute dates to 2004 when News Corp. announced plans to reorganize itself from an Australian company to one based in Delaware. At the time, some Australian stockholders aimed to incorporate aspects of Australian corporate law into the governance of Murdoch's company. In particular, groups representing Australian pension funds wished to prevent News Corp. from adopting an American-style "poison pill," sometimes used by a corporation's board of directors to prevent a hostile takeover.
After some negotiations, News Corp. appeared to come to an agreement that there would be no stockholder rights plan instituted by the board lasting longer than one year unless approved by shareholders. But then, John Malone's Liberty Media upped its stake in News Corp. from 9.1 percent to 17.1 percent, and in response, News Corp. announced a rights plan with a 15 percent threshold. In 2005, News Corp. announced that it was extending this rights plan for two additional years.
Stockholders sued the company, and on a motion to dismiss, a judge allowed a claim that the company had breached an oral contract to survive. On the precipices of trial, the parties worked out a settlement agreement that limited News Corp.'s ability to maintain a rights plan for longer than one year without first obtaining stockholder approval.
Flash forward to 2013, when News Corp split its publishing assets (Dow Jones, Wall Street Journal, HarperCollins) from its broadcast and media assets. The latter has now been renamed 21st Century Fox. Murdoch continues to be the chairman of each.
In conjunction with the split, the board of the "New News Corp." adopted a stockholder rights plan — one with a 15 percent threshold — for a year. Then, ten days before expiration, the company's board approved an extension for an additional year without stockholder approval.
Last August, the Miramar Police Officers' Retirement Plan — a News Corp. stockholder — filed a lawsuit against Murdoch and other company officers seeking a declaratory judgment that the company was bound by the old settlement agreement and had breached contract and fiduciary duties.
In looking at the dispute, Delaware Chancellor Andre Bouchard looks at a settlement agreement that imagined a scenario where News Corp. might merge with another company, but had only vague language regarding asset transfers and spin-offs. The judge simply can't imagine that the settlement was meant to cover the "absurd and unfounded results" of imposing the shareholder rights agreement on asset transfers. He gives the examples of News Corp. selling film equipment to CBS, saying plaintiffs interpretation would mean that "CBS would thereafter be bound by the rights plan restrictions of the Settlement Agreement" and that it would "paralyze" News Corp and any public company from doing business together.
The judge also looks at the agreement governing the separation of New News Corp. from Old News Corp. The deal largely put most liabilities on the shoulders of 21st Century Fox. The judge rejects plaintiff's interpretation that the shareholder rights obligation under the settlement agreement was transferred to New News Corp. as a "mixed contract."
"I conclude as a matter of law that the Settlement Agreement did not prevent Old News Corp from spinning off some of its assets to a new public corporation free from the rights plan restrictions in the Settlement Agreement and that it permissibly did so under the terms of the Separation and Distribution Agreement," writes Chancellor Bouchard.
As a result, Murdoch beats the lawsuit and News Corp.'s board can pretty much come up with any stockholder rights plan — including poison pills — it wishes. The same can't be said for 21st Century Fox, which from the looks of today's decision, still counts the old settlement agreement as a liability.