A recent Delaware Court of Chancery opinion clarifies how and when a majority of directors may lack independence from its CEO, and finds Rupert Murdoch’s financial or personal influence could have skewed the objectivity of another three key Fox Corp. directors as to whether a shareholder derivative suit passes Delaware’s pre-suit demand test, in In Re Fox Corporation Deriv. Litig, No. 2023-0418-JTL (Del. Ch. Dec. 27, 2024).

In his December 27 opinion, Vice Chancellor Travis Laster rejected the defendant directors’ motion to dismiss the breach-of-duty suit. He rejected the argument that the plaintiffs failed to show that CEO/Board Chairman Murdoch’s influence swayed the judgment of his son Lachlan and two other directors, depriving the eight-member Fox board of the five objective directors it needs to make the call on the suit’s merit.

A Massey claim

The vice chancellor found that the plaintiffs alleged a viable Massey claim against CEO Murdoch and three Fox Corp. directors who supported his decision to bring deserting viewers back to Fox News’ 2020 election coverage by knowingly airing Donald Trump’s claims that his re-election victory was “stolen” by rigged voting machines. When Murdoch refused to retract, the two suppliers of those machines – Dominion Voting Systems and Smartmatic USA – sued, and one won a $787 million settlement while the other’s suit continues, triggering the investor suit.

Those consolidated plaintiffs sought to shift the Company’s losses onto the individuals who they say caused the Company to violate the law and suffer harm. They contend that Fox’s senior officers—including K. Rupert and Lachlan K. Murdoch—and the other directors decided to violate the law by having Fox News defame Dominion and Smartmatic. 

They argued that Chancery had ruled in the Massey case that any board decision to profit by violating the law—as was the case here—is automatically a breach of the directors’ duty of loyalty. In re Massey Energy Co., 2011 WL 2176479, *20 (Del. Ch. May 31, 2011).

The derivative suit decision

The investor suit decision set out the demand test standard to decide whether “the board in place when the complaint was filed had a majority of directors who could make an independent and disinterested decision about whether to assert the claims articulated in the complaint” including:

(i) Did the director receive a material personal benefit from the alleged misconduct that is the subject of the claim?

(ii) Does the director face a substantial likelihood of liability on the claim?

(iii) Does the director lack independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the claim or who would face a substantial likelihood of liability on the claim?

Pre-suit demand review

The vice chancellor said his required director-by-director examination for demand purposes need not go further than the question of CEO Murdoch’s liability for deciding to air false content for profit and the three directors’ willingness to support an illegal action out of loyalty to him. He said Murdoch controlled Fox through the Murdoch Family Trust, which owns 43.4% of Fox’s powerful Class B voting shares, so the motion to dismiss hinged on whether there was proof that his son Lachlan Murdoch and fellow directors Charles Carey and Jaques Nassar supported that decision because of their financial or personal ties to him.

Lachlan

Vice Chancellor Laster said, “First, he is not independent because he is Murdoch’s son. Second, he is not disinterested. If anything, the claim against Lachlan is stronger, because Lachlan engaged in more frequent communication with director Suzane Scott, his direct report, about Fox News and its content, and he regularly texted comments to Scott about Fox News’ coverage.”

Carey

The court said Carey is an example of the axiom that “[l]ongstanding business affiliations, particularly those based on mutual respect, are of the sort that can undermine a director’s independence. Directors who owe their success to another will conceivably feel as though they owe a ‘debt of gratitude’ to the individual.” 

The court noted that “[t]he relationship between Carey and Murdoch is inferably closer than what the Delaware Supreme Court found adequate in Match”, referring to the decision in In re Match Gp., Inc. Deriv. Litig., 315 A.3d 446, 472 (Del. 2024).

Nassar

Regarding the independence of Nassar, the court said, “[i]n addition to pleading longstanding business affiliations, a complaint may plead facts providing reason to doubt a director’s independence by pointing to shared, membership in “elite and selective clubs,” but “the complaint pleads a constellation of facts” that goes beyond what was sufficient in BGC, referring to the Court’s decision in In re BGC P’rs, Inc., 2019 WL 4745121 (Del. Ch. Sept. 30, 2019).

In summary

The court said that while Delaware-chartered companies have wide latitude as to how to make money, “What a corporate fiduciary cannot do, however, is make a business judgment to cause or allow the corporation to break the law.“ Delaware law does not charter law breakers.” as the Massey decision explained.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.