The Guradian reports that:
Rupert Murdoch faces a growing legal challenge in the heart of his global media empire as lawyers representing alleged victims of phone hacking on US soil begin gathering evidence ahead of possible court action.
Mark Lewis, the English lawyer who has been a driving force behind phone-hacking revelations in the UK, and his American legal partner Norman Siegel, have revealed that they have been approached by at least 10 people bearing complaints relating to Murdoch's News Corporation.
The complaints relate largely to alleged hacking by News of the World journalists into phones in the US, but also extend to other News Corp holdings including Fox News.
Let's assume for the moment that News Corp and/or one or more of its subsidiaries ends up with major fines or civil liabilities arising out of the phone hacking scandal.
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.
Delaware courts have shown very little patience lately with supine boards dominated by imperial CEOs.
Second, plaintiff might allege that the board failed “to assure the existence of reasonable information and reporting systems.” We'll need to find out more about News Corps' internal controls to find out if this theory is in play.
Third, plaintiff might allege that red flags were raised by such systems or otherwise that the directors ignored. As an analysis of News Corps' potential FCPA liability explained:
We know of emails sent that copied in James Murdoch alerting him that the problem of hacking was more widespread than initially thought, although he claims not to have read the entire chain. We also know that the Operation Elvedon arrests were carried out on the basis of evidence provided by News Corp’s Management Standards Committee (“MSC”). Of course, timing will be key – when the information came to light and what steps were or could have been taken to prevent the corrupt practices are obviously relevant.
But what did the board know? And when?
All of this, of course, must be considered in the shadow of the Delaware Supreme Court's strong emphasis that “a claim that directors are subject to personal liability for employee failures is ‘possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.’” Stone v. Ritter, 911 A.2d 362, 372 (Del. 2006). The Supreme Court further emphasized the need for proof of a sustained or systematic failure by the board and the “quite high” bar to liability thereby established:
In the absence of red flags, good faith in the context of oversight must be measured by the directors’ actions “to assure a reasonable information and reporting system exists” and not by second-guessing after the occurrence of employee conduct that results in an unintended adverse outcome.
But this just brings us back to the question posed immediately above: Did the phone hacking scandal throw up red flags that were "numerous, serious, directly in front of the directors, and indicative of a corporate-wide problem"?
Inquiring minds want to know.
