10.24.05
News Corp: Written in Wind and Running Water- October 24, 2005
Over 2,000 years ago, the Latin poet Catullus, betrayed by his mistress, made the sour observation that “what a woman in passion tells her lover should be written in wind and running water.” Down through the centuries, many lovers of both sexes, disappointed by promises unkept, have echoed these sentiments. Nonetheless, it took deliberate action on the part of all the Common Law legislatures—so-called “heartbalm statutes”—to make such lovers’ promises unenforceable at law. But now we have News Corp.’s lawyers making the interesting argument that a company chairman’s word is even less to be relied upon than a lover’s promise. They are arguing that a chairman’s promises to his shareholders regarding their company’s governance are inherently unenforceable, even without a statute being necessary.
The case, Unisuper et al. v. News Corporation, is now before the Delaware Court of Chancery because in 2004, when Rupert Murdoch wanted to transfer the domicile of News Corp. from Australia to Delaware, he encountered substantial opposition from his minority shareholders, especially the Australian institutions. They threatened to scuttle the move because they felt that the Australian rules on corporate governance gave them more protection than the minimum guaranteed by the State of Delaware. Murdoch’s initial impulse was to tell them to pound sand, but as more major U.S. and European institutions began to weigh in, Murdoch became fearful that he would not attain the required 75% assent.
So three weeks before the vote, he reversed course, and promised the company’s shareholders that the company would retain various protections that shareholders had enjoyed in Australia, including inter alia the right to vote on any poison pill within one year of its enaction. This was not merely some offhand remark made by the company’s chairman: a board resolution was passed, and the text was broadcast in press releases, on the company’s website, in filings to the U.S. courts and regulators, and in an amended proxy statement to shareholders. Relying upon the promise, shareholders dropped their opposition to News Corp.’s move. The concessions were repeated at the meeting where shareholders voted to support the change in domicile.
The day after News Corp. began trading as an American company, however, and as predictably as a shark following a porpoise in the act of birth, John Malone of Liberty Media announced he had doubled his voting stake in the company to 18%. Since the Murdoch family has only 28% the company was understandably alarmed, and in accordance with the agreement with shareholders, enacted a poison pill having a duration of only one year.
Fast forward to last August. On the 11th, with the AGM set for October 21st, and the agenda not yet sent out, Murdoch announced that the News Corp. board had decided to extend the poison pill by another two years, in flat violation of the promise to shareholders. He said nothing about the promise, and made no justification for this precipitous action, three months before the pill was due to expire. There was absolutely nothing to prevent his putting the pill on the agenda for the AGM.
Those shareholders not away on vacation were understandably up in arms, but nothing was said to calm them down, or to justify the company’s unilateral abandonment of the agreement. With time running out before the AGM, a delay occasioned by the difficulty in consulting other institutional shareholders during the vacation month of August, and the necessity to enlist several plaintiffs to make any action more credible, a subgroup of the shareholders opposing violation of the agreement went to court to seek an injunction against the poison pill extension on October 6th.
The plaintiffs alleged that News Corp. had made an agreement with shareholders in order to obtain their assent for the transfer of domicile, that even if the court were to find that this agreement did not constitute an enforceable contract, that plaintiffs had relied upon the company’s promise to their detriment (“promissory estoppel”), and that News Corp. had either made the promise in bad faith, or that they had been in violation of their duty to shareholders by failing to keep their promises. The shareholders expressed no opposition to the pill itself, and indeed, many would be likely to support it if it were allowed to come to a vote, if the purpose were to prevent only a creeping takeover iof the company, without a full bid. But they were never given the option of agreeing to the pill, or to its duration. Now, they simply want to compel News Corp. to keep its corporate governance promises.
News Corp.’s response has been interesting. They have argued that the promise was not a promise, merely a statement of a change in current practice, presumably addressed to no one in particular, revocable at any time for any reason, and that shareholders had no business considering this a promise. Further, they have argued that a board cannot bind itself by a promise to shareholders, and that absent a change in the company by-laws, shareholders are being unreasonable in assuming that a promise made by a board and by its chief executive was in any way to be depended upon, no matter how solemnly given, in any circumstances whatsoever. The promise is literally not worth the paper it is printed upon.
To institutional investors, accustomed as they are to exchanging millions of shares of stock and tens or hundreds of millions of dollars upon a simple phrase spoken over the telephone, this position is triply dismaying. If business cannot be conducted without negotiated contracts in every instance, no one can trust anyone, and transactions must slow almost to a stop. If the research and due diligence they are obligated to perform on behalf of their beneficiaries cannot rely upon verbal assurances, almost any investment not based entirely upon a company’s already audited results could be deemed ‘imprudent.’ And if any discussion involving corporate governance must require a change in a company’s charter or by-laws, most of the advances made in governance in most countries since the 1930s may be discarded, and any future discussions would have to take place entirely through an army of lawyers and with the threat of an outright proxy battle. In order to avoid the minor inconvenience of consulting and possibly having to persuade their shareholders, News Corp. is instead proposing that relations between shareholders and boards henceforth take place under circumstances more appropriate for war than for a discussion between property owners and their managers. It is a complete throw-back.
News Corp. has tried to argue publicly that the plaintiffs in this action are few and unimportant, with no more than 1% of the company’s equity, and that the majority of shareholders support their behavior in this matter. Aside from the fact that the justice of a case should not depend upon a referendum of all possible parties in interest, there is the fact that many more shareholders are upset by this case than the company will admit. First of all, at least two of the plaintiffs—the Netherlands’ ABP, the world’s largest pension fund, and Britain’s Hermes, the largest institutional investor in the U.K. and possessor of by far the largest and most proactive corporate governance staff in the world—are not to be so casually dismissed. Britain’s USS, the U.K. counterpart to TIAA-CREF, and Australia’s UniSuper and PSS/CSS are similarly not to be written off casually as ‘small institutions.’
Institutional Shareholder Services and Glass Lewis, American-based, and the two largest proxy advisors in the world, were so concerned by the the revocation of the shareholders’ agreement that they both recommended that shareholders withhold their votes from the four board members up for re-election this year on that basis alone. As the company reported, 15% of the votes cast were “Withhold” votes (U.S. practice does not currently permit a “No” vote). To put this in perspective, Murdoch and allied interests, and Liberty Media, had already announced that they were voting for the four board members. Of the remaining 50%, at least 30% voted to withhold, and this does not allow for the individual shareholders, most of whose votes were not cast, or were cast by their broker/nominees in automatic support of management. This means that a majority of institutional shareholders were angry enough to demonstrate their lack of support for four non-cotroversial board members’ re-election because of the board’s actions in reneging on their promise—in an election where board members customarily receive 98 – 99% of votes cast.
Yet so far, neither the majority of American institutional investors nor the media have shown much interest in the court case. Perhaps this is because investors, not being lawyers, are not sensitive to the the legal implications of a negative decision here. The financial media certainly won’t pay attention to anything that doesn’t seem to move markets on a day-to-day basis, especially when they may be angering a media mogul by looking too closely at a case of personal importance to him.
One must also consider the possibility that for many American managers, News Corp. may still be in the ghetto reserved for foreign stocks. Just as a major outperformance by a foreign holding is seen as less important by many American fund managers than a more minor move in a domestic holding, governance problems which would outrage an institutional investor if they took place in the U.S. are frequently ignored when they are situated beyond our borders: many Americans simply do not take the rest of the world seriously. There is also the fact that some of the trustees of American public pension funds are elected officials, or have political ambitions. Politicians are generally chary of any course of action which might give them unfavorable media coverage, and News Corp. is a major media company.
Whatever the reason, foreign investors have been far more vocal in expressing their displeasure than their American counterparts, although the displeasure of American investors is clear. You hear it when you discuss the matter with them, you can deduce it from their “Withhold” votes, and you can infer it from News Corp.’s disappointing share price performance, which lags that of its peers even in this out-of-favor sector. Presumably, shareholders continue to mistrust Murdoch, and are afraid, above all, that whatever accommodation he does reach with Malone will be at their own expense.
But most frightening of all, and going far beyond the situation in News Corp., would be to enshrine in the law the notion that whatever a chairman says to his shareholders when he is trying to win their votes, is of no more consequence than what one “in the throes of passion” may say to a lover, and that like the words of Catullus’ Lesbia, it should be recorded only “in wind and rapidly running water.”