Could News Corp board face Caremark liability? – ProfessorBainbridge.com
You’ll recall from our earlier coverage that News Corp reincorporated in Delaware a few years ago, so any corporate law claims arising out of the scandal will be subject to Delaware law.
It was reported back in 2011 that shareholders had already filed derivative suits claiming that News Corps’ board had breached fiduciary duties to shareholders by failing to prevent the phone hacking scandal:
News Corp shareholders have alleged that company directors were aware of the extent of the phone hacking in Britain, which resulted in last month’s closing of the 168-year-old News of the World newspaper, or turned a blind eye to it.
They say Murdoch’s alleged control over the board in part may explain the directors’ inattention or reticence to act.
According to the complaints, the scandal has cost News Corp, forcing it to abandon its bid to take full control of pay-TV company British Sky Broadcasting Plc (BSY.L), and opening it up to investigations including an FBI probe.
So far, at least three lawsuits have been filed in Manhattan federal court and one in Delaware Chancery Court.
Various commentators opined at the time that the lawsuits were a longshot. Which is probably right, but let’s revisit the question in light of what we know now.
Since the Caremark decision the board of directors of a Delaware corporation has had a duty to ensure that appropriate “information and reporting systems” are in place to provide the board and top management with “timely and accurate information.” Accordingly, the board of directors’ duty to be attentive to the business of the corporation “includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards.” (In re Caremark Intern. Inc. Derivative Litigation, 698 A.2d 959, 970 (Del. Ch. 1996).)
Failure to ensure that internal controls were in place to prevent corporate employees from breaking the law in conducting the corporation’s affairs is a basic Caremark violation. See In re Citigroup Inc. Shareholder Litig., 2009 WL 481906 at 10 (Del. Ch. 2009) (“In a typical Caremark case, plaintiffs argue that the defendants are liable for damages that arise from a failure to properly monitor or oversee employee misconduct or violations of law.”).
A Caremark claim can be prosecuted on any or all of three theories. First, plaintiff can argue the directors were interested in the relevant subject matter or were not independent of persons with such an interest. Here, News Corp may have problems. As an earlier Guardian article detailed, “News Corp’s ‘independent’ directors have strong links to Rupert Murdoch.” And as the Economist opined in late 2011:
Today only a handful of big firms have the sort of board that seems hand-picked to be loyal to the boss, chief among them being News Corporation, says Paul Hodgson of GMI, a corporate-governance ratings firm. Mr Hodgson describes recent changes to News Corporation’s board as “cosmetic” and points to an unusually large number of directors who are corporate insiders and thus likely to be loyal to the chief executive, Rupert Murdoch.