Bloomberg News

News Corp. Holders' Poison-Pill Suit Headed to Trial

December 20, 2005

News Corp. shareholders can proceed with a lawsuit that says Chairman Rupert Murdoch reneged on an agreement to let them vote on a ``poison pill'' takeover defense, a judge ruled.

Delaware Chancery Court Chief Judge William B. Chandler III found that News Corp. directors had agreed not to change the poison pill without shareholders' support when they switched the company's place of incorporation to Delaware from Australia. That allows investors to go forward with breach of contract claims over the board's extension of the takeover defense.

``Both sides should have the opportunity to present evidence and make legal arguments concerning the proper interpretation of the agreement,'' Chandler said in a 27-page decision released late today. He threw out fraud and misrepresentation claims.

News Corp., the fourth-largest U.S. media company, has said the poison-pill plan was aimed at stopping John Malone's Liberty Media Corp. from increasing its 18 percent voting stake. Malone, News Corp.'s second-largest investor behind the Murdoch family, has pressed the New York-based company to boost its stock price by buying back shares.

Rachel Webber, a News Corp. spokeswoman, wasn't immediately available to comment on Chandler's ruling.

Stuart Grant, a partner in Wilmington, Delaware-based Grant & Eisenhofer who represents News Corp. shareholders, said he was pleased to get an opportunity to present his case to Chandler at trial.

Broken Promise?

``The main focus of our case has always been that they'd made us a promise,'' Grant said in an interview. ``Now, it's our job to prove at trial that they broke that promise.''

Poison-pill defenses are designed to make hostile takeovers too expensive by letting existing shareholders buy stock at a discount when the bid is made. Delaware courts have found such defenses to be legal unless used to restrict a board's power to consider buyout offers, said Larry Hamermesh, a Widener University law professor.

News Corp. investors such as UniSuper Ltd., a $15 billion Australian retirement fund for higher-education workers, aren't challenging the validity of the poison pill in their suit. They say instead that Murdoch and other directors violated an agreement not to alter the defense without shareholder approval.

Under Australian law, News Corp. officials had to get shareholder approval to switch their corporate home, according to the suit. Some institutional investors balked, worried they would lose protections they had in Australia, such as a requirement that poison-pill plans be put to a shareholder vote.

To allay the concerns, News Corp. (NWSA:US) officials agreed that if they set up a poison pill defense without investors' support, it would expire after one year and couldn't be extended without ``stockholder ratification,'' the suit said.

News Corp. officials' two-year extension of the defense in August showed they ``never intended to honor'' their promise, Grant said in the suit.

Policy Change

Chandler said News Corp. officials acknowledged that statements they made in press releases and a letter to shareholders about the poison-pill defense amounted to a promise to adopt a policy calling for shareholder approval of any changes.

News Corp. officials counter that Delaware law allows directors to change board policies at any time. The company's board did just that in deciding to extend the defense, News Corp.'s lawyers argue.

Investors have a right to make arguments that ``the board was contractually bound'' to keep the policy requiring shareholder approval in place, Chandler found.

News Corp.'s Class A shares fell 31 cents to $16.52 in New York Stock Exchange composite trading today. The shares have fallen 13 percent during the past 12 months.

The case is Unisuper Ltd. et al. v. News Corp. et al., CA No. 1699-N, Delaware Chancery Court, Wilmington.

To contact the reporter on this story: Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net.

To contact the editor responsible for this story: Patrick Oster at poster@bloomberg.net.


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