Last week, we hosted the Fourth Annual Corporate Governance Summit at the Wynn in Las Vegas.  You can see the program here.  Stephen Bainbridge came in to give our keynote address in a talk focused on his new book, The Profit Motive.  We ended up drawing about 130 participants.  I’m incredibly grateful to Mike Bonner at Greenberg Traurig and the rest of the Greenberg team that helped put the event together.  We were also fortunate to have some great sponsors for the event: Joele Frank, Connor Group, Deloitte, J.P. Morgan Chase & Co., and Whittier Trust.  

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I previously blogged about the shareholder derivative claims against Fox Corp, alleging that it violated its Caremark/Massey duties by defaming Dominion.  And then I had a few follow ups on Caremark generally here and here.

This week, sorry, still more, because two additional shareholder plaintiffs filed complaints in Fox.  One group is led by the New York City Employees’ Retirement System and includes the Oregon Public Employees Retirement Fund; the other is led by Tredje AP-Fonden.  These complaints differ from the ones filed earlier in that the plaintiffs sought books and records under 220, and incorporated the results into their pleadings.

VC Laster has scheduled a hearing on November 9 to choose the leadership structure for the action – in other words, all the cases will be combined, some plaintiff(s) will be lead, and some counsel will be lead. If the parties don’t work that out amongst themselves (and they’ve had plenty of time so far), VC Laster will select one plaintiff/counsel group to control the action.

Under Delaware law, these decisions are made according to what are known as the Hirt factors, which evaluate which group can best represent the shareholders, based on size of stake, absence of conflict, competence of counsel, and quality and vigor of prosecution of the action.  I have no opinion on which group is “better” for Hirt purposes and I have no idea what VC Laster is likely to do, but what does interest me is that the two most recently filed complaints are adopting different strategies to pleading the case against the Fox board.  And it’s worth articulating what those are.

First, the two complaints offer different explanations for the fundamental failure of Fox’s systems to identify and prevent defamation.

The NYCRS complaint alleges that going back several years, Fox News has operated under a unique business model that advances political narratives regardless of the underlying facts.  Comparisons are made to other news organizations, many of which make their editorial guidelines and standards public, while Fox does not.  The Dominion defamation claim is treated as one set of allegations among many, including claims by Seth Rich’s family, Majed Khalil, Ray Epps, and Nina Jankowicz, to demonstrate an ongoing pattern by Fox.

The Tredje AP-Fonden complaint is a bit different.  It mentions the Rich scandal, but the theory is actually that after Fox was accused of hacking cell phones in 2013, Fox entered into a settlement of a shareholder derivative action that instituted various controls.  When Fox was then spun off in 2019 in connection with an asset sale to Disney, those controls were lifted – and that’s what precipitated the defamation of Dominion.

 Second, the two complaints differ with respect to the Murdochs.  As I said in my prior post on the earlier complaints, one of the interesting things about these lawsuits from a theoretical perspective is that they allege, pretty straightforwardly, that Fox defamed Dominion to avoid losing viewers.  In other words, this was a business decision, to protect the company’s revenues and maximize wealth for shareholders.  As I said in that post, normally, corporate boards are required to maximize shareholder profits – but there’s a hard limit of doing so by illegal means, which is what gives rise to the claims here. The prohibitions on breaking the law represent the outer limit of shareholder primacy, and therefore fit a bit uneasily within corporate law’s framework.

Well, the Tredje AP-Fonden plaintiffs apparently take that to heart, because their complaint, in addition to alleging that Fox’s board knowingly broke the law by allowing Dominion to be defamed and/or didn’t adopt proper systems to prevent it, also alleges that the Murdochs personally were trying to preserve their own status within the conservative movement, which they could not maintain if Fox lost viewers.  In other words, they claim that the Murdochs operated in bad faith by putting their personal interests in maintaining clout ahead of shareholder interests.  That possibility is mentioned a bit in the NYCRS complaint, but the Tredje AP-Fonden complaint leans into it much more.  That’s interesting because a claim that the Murdochs were, essentially, conflicted, and attempting to preserve their own status, is much more of a traditional type of claim – rather than pursuing shareholder wealth, is the allegation, the Murdochs were pursuing their own interests.  That theory doesn’t depart from shareholder primacy at all. 

Also, Tredje AP-Fonden alleges that the Murdochs’ interests in maintaining political influence qualifies as a “personal benefit” justifying demand excusal, so I guess we may find out how far that concept stretches.

And the final thing that jumped out – and this actually is a similarity rather than a difference – is that both complaints mention that, after the Dominion lawsuit, an advocacy organization filed a petition to cause Fox to lose its broadcast license in Philadelphia.  I am … skeptical … that Fox will lose its license, but the allegation that Fox put its broadcast licenses in jeopardy helps bolster one of the aspects of the case that previously stood out to me as a little novel, namely, that the “law” being broken was a common law tort.  Allegations about violating the terms of regulatory benefits put the whole dispute much more firmly in traditional Caremark territory.

A while ago, the National Center for Public Policy Research – a conservative organization that focuses its advocacy in the corporate and securities space – filed a lawsuit against Starbucks, arguing that its diversity equity and inclusion program ran afoul of Title VII of the Civil Rights Act of 1964, and Section 1981.

Conservative organizations have been launching a number of Section 1981-based challenges to DEI programs, but usually these are on behalf of workers.  The NCPPR case was unusual in that it brought its claims derivatively, as a Starbucks shareholder, on the ground that the directors’ illegal conduct violated their fiduciary duties to the company.

The judge dismissed NCPPR’s complaint a while back, but only now just got around to issuing the opinion, and I find it fascinating.

Starbucks’s key argument was that NCPPR did not, in fact, represent the interests of Starbucks shareholders, and therefore was not a proper representative in a derivative action.  In particular, Starbucks argued that the NCPPR’s concerns were personal, due to its general opposition to DEI policies, and that Starbucks’s major shareholders supported its DEI efforts.  Starbucks cited the fact that BlackRock and Vanguard have both argued that companies should address DEI risks, and that NCPPR’s anti-diversity shareholder proposals had been voted down in prior years.  (In response, NCPPR argued among other things that BlackRock and Vanguard may not in fact be representing the interests of the investors in its funds.)

The judge agreed with Starbucks.  He relied on Larson v. Dumke, 900 F.2d 1363 (9th Cir. 1990) for the proposition that derivative plaintiffs are not appropriate representatives if they are advancing their personal interests, demonstrate vindictiveness, and hold only a few shares.  Here, that combination of factors was met:

This Court is not an investment counselor. Nor is it a political attaché. Courts of law have no business involving themselves with reasonable and legal decisions made by the board of directors of public corporations…It is clear Plaintiff is pursuing its personal interests rather than those of Starbucks. It has shown obvious vindictiveness toward Starbucks, that it would rather cause significant harm to Starbucks and other investors in the form of a declaratory judgment, and that it lacks the support of the vast majority of Starbucks shareholders.

Plaintiff has a clear goal of dismantling what it sees as destructive DEI and ESG initiatives in corporate America. Contempt for DEI and ESG programming and practices is clear in Plaintiff’s publications and literature. In fact, Plaintiff specifically calls for voting against every current member of Starbucks Board based primarily on support for these DEI Initiatives. Based on the briefing and nature of Plaintiff’s self-described political interests, it is clear to the Court that Plaintiff did not file this action to enforce the interests of Starbucks, but to advance its own political and public policy agendas.

Furthermore, Plaintiff owns only 56 shares of approximately 1.15 billion outstanding shares of Starbucks stock. Plaintiff’s shares are worth approximately $6,000 of a company with a market capitalization of more than $121 billion. Plaintiff’s dislike of DEI and ESG Initiatives has little support from Starbucks’ other shareholders and no support from Starbucks’ Board. In this action, Plaintiff seeks to override the authority of the Starbucks Board and obtain disproportionate control of Starbucks’ decision making to advance its own agenda….

Plaintiff is apparently unhappy with its investment decisions in so-called “woke” corporations. This Court is uncertain what that term means but Plaintiff uses it repeatedly as somehow negative. This Complaint has no business being before this Court and resembles nothing more than a political platform. Whether DEI and ESG initiatives are good for addressing long simmering inequalities in American society is up for the political branches to decide. If Plaintiff remains so concerned with Starbucks’ DEI and ESG initiatives and programs, the American version of capitalism allows them to freely reallocate their capital elsewhere…

I can’t say I disagree with this, exactly, but I do wonder how it gels with a Caremark claim of the type brought by NCPPR.  Now, Starbucks is not organized in Delaware – it’s a Washington company – but NCPPR claims that Washington law, like Delaware’s, provides illegal action is a violation of fiduciary duty, and for the purposes of this blog post, I’ll assume the laws are similar.

As I previously explained in connection with the shareholder derivative claims against Fox Corp., corporate boards are prohibited from engaging in illegal conduct, even if they conclude it’s ex ante beneficial for the company.  That is, they are not permitted to make a calculation that, given the expected benefits and the likelihood of detection, it is in fact profit-maximizing to break the law.  This was actually something that VC Laster just recently articulated:

In one hypothetical scenario, the lawyers say: “Although there is some room for doubt and hence some risk that our regulator may disagree, we believe the company is complying with its legal obligations and will remain in compliance if you make the business decision to pursue this project.”

In the other hypothetical scenario, the lawyers say: “The company is not currently in compliance with its legal obligations and faces the risk of enforcement action, and if you make the business decision to pursue this project, the company is likely to remain out of compliance and to continue to face the risk of an enforcement action. But the regulators are so understaffed and overworked that the likelihood of an enforcement action is quite low, and we can probably settle anything that comes at minimal cost and with no admission of wrongdoing.”

In the former case, the directors can make a business judgment to pursue the project. In the latter case, the decision to pursue the project would constitute a conscious decision to violate the law, the business judgment rule would not apply, and the directors would be acting in bad faith.

So, as I said in my blog post, fiduciary prohibitions on illegal conduct represent the outer limits of shareholder primacy; directors must forego profit maximizing actions in order to benefit stakeholders who are protected by positive law.  Caremark/Massey claims are therefore an odd duck in corporate law, because they are brought by shareholders, but, strictly speaking, they do not vindicate shareholders’ interests.  Liability will be imposed even if the conduct was, in fact, ex ante beneficial for shareholders. 

So, you see where I’m going with this in the Starbucks case.  I absolutely agree that the NCPPR does not represent the interests of Starbucks shareholders, and is, in fact, antagonistic to those interests.  But is that the right frame for a Caremark/Massey claim in the first place?