Column: Fox shareholders are circling Rupert Murdoch

By Alison Frankel

April 19 (Reuters) - (The opinions expressed here are those of the author, a columnist for Reuters.) When Fox Corp agreed on Tuesday to pay $787.5 million to settle defamation claims by Dominion Voting Systems Corp, it gave shareholder lawyers exactly what they needed to sue Rupert Murdoch and the rest of the Fox board.

The nine-figure settlement is tangible evidence of the consequences of Fox’s reporting on election fraud claims by supporters of former President Donald Trump in the aftermath of the 2020 election.

Last month, Delaware Superior Court Judge Eric Davis told the world that Fox aired dozens of false statements about Dominion. Tuesday's settlement resolves any remaining doubt that the network's decision to broadcast the false statements came at a high cost.

With that proof in hand, plaintiffs lawyers are now poised to bring lawsuits accusing Murdoch and other Fox board members of breaching their fiduciary oversight duties by failing to block the network’s flawed reporting, despite red-flag warnings.

One such shareholder complaint is already on file in Delaware Chancery Court. And based on my conversations on Tuesday night with four prominent shareholder lawyers, all of whom asked to remain anonymous as they solidify their legal strategies, additional lawsuits against Fox officers and directors are on the way.

At least two shareholder firms have already demanded to see Fox’s internal corporate records as they investigate the board's conduct. These books-and-records demands under Delaware’s corporate code are often a harbinger of litigation against board members, as my Reuters colleagues Jody Godoy and Helen Coster reported on Tuesday.

A Fox Corp spokesperson declined to comment on the prospective breach of duty litigation.

When shareholders accuse board members of botching their oversight duties, they typically bring their claims on behalf of the corporation itself, arguing that shareholders must step in to sue directors and officers because board members can’t be trusted to represent the company’s interests.

These cases, known as derivative suits, face a unique early obstacle: Shareholders have to convince the judge that it would have been pointless to ask board members to sue on behalf of the company. They typically argue that board members wouldn’t approve litigation that would expose themselves to liability, or that directors are so closely tied to a dominant shareholder – in this case, Rupert Murdoch and his family – that they can’t make independent decisions.

If shareholders can establish their right to sue on the company’s behalf, they must then show that Fox’s board members acted so egregiously that their actions can’t be attributed merely to an error in judgment.

The law in Delaware, where Fox is incorporated, gives corporate board members wide leeway under what’s known as the business judgment rule. As long as directors have acted with good faith and reasonable care, they generally can’t be held liable even when their actions turn out to have bad consequences for the company. Business judgment doctrine provides such powerful protection that for decades, shareholder claims against board members who allegedly breached their oversight duties were considered to be nearly impossible to win.

That’s recently changed, as shareholders have capitalized on Delaware precedent that precludes boards from endorsing illegal conduct under the guise of boosting shareholder value. Both Boeing Co and Blue Bell Creameries, for instance, paid millions to settle derivative suits in the wake of U.S. Justice Department investigations.

So a key question in any prospective case against Fox directors will be whether defamation is outside of the bounds of legality. Fox hasn’t been accused of a crime by state or federal prosecutors, after all. It hasn’t even, as a technical matter, been found liable for defamation, since it settled with Dominion before any judgment against the company. The settlement, moreover, allowed Fox to avoid a direct admission that its reporting was false.

Fox board members will probably argue that the network's election fraud coverage was justifiable, both journalistically and as a matter of business judgment.

Dominion, as you probably recall, uncovered copious evidence that Fox executives were worried about losing audience share to far-right competitors in the aftermath of the 2020 presidential election. Dominion contended that Fox leaders, including Murdoch, knew election fraud claims by Trump and his allies were baseless, yet continued to air their accusations for fear of driving away Fox viewers.

In a derivative suit, Fox board members may argue that the network's coverage decisions were simply good business. (One plaintiffs lawyer told me such an argument would be a stretch: “If the name of your company is Fox News," he said, "it’s not in your job description to proliferate lies.")

Directors might also contend that Fox made a defensible editorial decision to air election fraud assertions from Trump allies amid nationwide post-election turmoil. The company, after all, has argued throughout the Dominion litigation, as well as in a parallel billion-dollar defamation case brought by voting technology company Smartmatic USA Corp, that the allegations themselves were newsworthy enough to warrant coverage.

We'll see how that assertion plays with the Delaware judge, Vice Chancellor Travis Laster, who has been assigned to oversee the first Fox derivative suit and will almost certainly preside over additional lawsuits.

Laster has plenty of experience with this sort of derivative oversight suit. Last December, he tossed a derivative case accusing directors of pharmaceutical distributor AmerisourceBergen Corp of ignoring red-flag warnings that opioids were being fraudulently prescribed, even though the company has paid out billions of dollars in opioid-related litigation. But just a month later, Laster issued a groundbreaking decision that shareholders could proceed with claims against a former McDonald’s Corp executive accused of fostering a corporate culture in which sexual misconduct flourished.

Dominion’s closely-watched case against Fox has already offered a primer on defamation law in the U.S. Get ready for a similar education in Delaware shareholder derivative litigation.

Read more:

Fox resolves Dominion case, but $2.7 billion Smartmatic lawsuit looms

Exclusive-Fox investors seek records in possible step toward suing directors

In Dominion v. Fox, a disputed legal theory has sweeping implications (Reporting By Alison Frankel; editing by Leigh Jones)