Delaware Court Dismisses Fox Stockholder's Suit Over Disney Deal

Before Fox and Disney reached their agreement, Fox's board of directors approved stock benefits to be given to the executives named as defendants in the case: CEO James Murdoch; executive co-chairmen Rupert and Lachlan Murdoch; and James W. Breyer, Roderick I. Eddington, Jacques Nasser and Robert S. Silberman, who served on Fox's board of directors and on the committee that awarded stocks to the Murdochs and others within the company.

That included restricted stock units valued at more than $72 million, 77.2% of which were distributed to the Murdochs, as well as $34 million in Fox Class A common stock, of which the Murdochs were issued 78.5% of all shares.

The original court complaint, filed in October 2018 by a trust benefiting Jamie Komen, which has held Fox shares since 2017, argued there was no reason for the Murdochs, who were top Fox employees and together owned more than $11.7 billion in company stock, to receive restricted stock units that were set aside as incentives for Fox employees "experienc[ing] uncertainty about their future roles" within the company.

Additionally, the legal complaint stated that giving out the Class A shares, designated for performance incentives, prior to Fox's transaction with Disney being finalized and during a time when Fox's performance goals were not expected to be met was executives' way of using "announcement of the transactions as the perfect opportunity to provide themselves with a windfall by paying themselves for failing to meet their performance goals."

After the deal closed in March 2019, an amended complaint was filed as a class-action lawsuit or, in the alternative, a derivative complaint. The defendants moved in July 2019 to dismiss the claims. The motion was argued in February 2020.

Chancellor Bouchard found that the claims brought against the Fox executives could not be pursued either directly or derivatively. He wrote that the plaintiff's claims are styled as direct but are actually derivative in nature and could not be turned into direct claims, based on the decision made in Parnes v. Bally Entertainment Corp., 722 A.2d 1243 (Del. 1999), because they didn't adequately question the validity of the merger itself, only the dealings made around the merger.

"Insofar as the Murdochs are concerned," the chancellor explained, "the critical deficiency in the Complaint is the lack of any factual allegations suggesting a causal link between the Murdochs' receipt of the challenged compensation awards and any unfair dealing in negotiating the terms of the Transaction. Significantly, the Complaint is devoid of factual allegations challenging the bona fides of the sale process, which involved a heated bidding contest between Disney and Comcast. The Complaint does not contend, for example, that the Old Fox board played favorites between the bidders or that the process failed to yield a fair price.

"Instead, the factual allegations of the Complaint focus on the Compensation Committee's internal process, which Plaintiff alleges was hasty and superficial, and the allegedly 'absurd' rationale for awarding the Murdochs 'additional compensation awards as incentives' given that they owned 'over $11.7 billion of Old Fox common stock.' But both of these criticisms are plead without regard to, and independent of, the sale process and the negotiations that resulted in the Transaction. Put another way, Plaintiff has not alleged facts that support a reasonable inference that Defendants 'improperly diverted proceeds that would have, if they had acted properly, ended up in the consideration paid to the target stockholders.'"

Chancellor Bouchard concluded: "The court finds nothing in the complaint to support the notion that defendants tainted the sale process or the negotiations of the transaction such that they caused anything to be taken off the table that otherwise would have gone to all of (21st Century Fox's) stockholders."

Delaware law requires that someone be a stockholder both at the time of alleged wrongdoing and throughout the litigation process in order to hold standing as a stockholder and proceed with derivative claims. There are two exceptions to that rule: the merger itself has to either be the subject of a fraud claim or a reorganization that doesn't affect the stockholder's position.

Chancellor Bouchard ruled that because neither of those exceptions applied in the Fox case, all of the plaintiff's claims were dismissed with prejudice.

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Ellen Bardash writes for Delaware Business Court Insider, an ALM sibling of Entertainment Law & Finance. She can be reached at [email protected].