April 26, 2023

Many Lessons to Come from Suit Against Fox Board

The first of what may be many shareholder derivative suits related to the Fox News coverage of the 2020 Presidential election was filed on April 11, and multiple legal minds have already weighed in on why this may be one for the books. Over on the Business Law Prof Blog, Ann Lipton discusses whether these allegations should appropriately be the basis of a Caremark claim.

She points out that Caremark’s original principle—that that a corporation might fail to comply with the law, and suffer related penalties, due to bad faith neglect by the directors—was subsequently expanded to encompass the concept that illegal conduct can’t be permissible corporate behavior even if the directors reasonably concluded that lawbreaking could have been profitable. Massey claims, she points out, can apply when directors are pursuing the best interest of the corporation but doing so in an impermissible way, and this view represents the outer limit of shareholder primacy in that it’s “rooted in concern for the welfare of nonshareholder constituencies.”

But the derivative claims against the Fox directors and officers involve defamation. Here’s an excerpt from her blog:

Given this frame, the question becomes, where does “defamation” fit on this scale?  Does it count as illegal, ultra vires conduct?  Or can it be a legitimate business decision that becomes a breach of duty only in “prong one” situations, or, I could imagine, if defamation is permitted not because directors believe it to be wealth-maximizing for the firm, but because directors are advancing their own political commitments?  In the Fox case, the stockholder plaintiff alleges that the Fox Corp board intentionally permitted false claims to air because it was fearful of losing viewers.  In other words, the actual allegation is that the board was trying to maximize shareholder wealth – not that it neglected its duties, and not even that false political claims benefitted board members personally.

Further, Delaware allows “efficient breach” of contract—directors can choose to break a contract if they decide it’s profitable to do so. In asking whether it’s logical to treat tort law differently than contract law, she points out that tort claims permit punitive damages, so perhaps defamation should be treated as unauthorized behavior and a contract breach can be distinguished as priced behavior.

Following last week’s announcement that Fox agreed to settle with Dominion, Kevin LaCroix also blogged about these claims on The D&O Diary. He notes that, while Caremark claims are notoriously difficult to sustain, after the settlement, there’s more support for the argument that the alleged misconduct harmed Fox.

 Meredith Ervine