Delaware Chancery Court Denies News Corp's Motion to Dismiss

· The claims are based on the plaintiffs’ allegations that the board of News Corp entered into a binding contract with shareholders by promising in conversations, a press release and a letter to shareholders that the board would adopt a rights plan only if it expired within one year absent shareholder ratification. These communications also included a statement that the board would not “roll over” one-year pills. These promises were allegedly made to induce shareholder approval of the reincorporation of News Corp from Australia to Delaware. None of News Corp’s initial public statements about this policy included any reference to a “fiduciary out” or a possibility that the policy might be amended or revoked.

· After the board’s adoption of this policy and shareholder approval of the reincorporation, Liberty Media increased its holdings to just over 17% of the voting stock of News Corp. The board then adopted a one-year poison pill and later renewed the plan for two additional years without shareholder ratification.

· While recognizing the general rule that board policies, like board resolutions, are typically revocable by a board at will, the Chancellor held that this rule may not be applicable when the policy is adopted as part of a contractual arrangement with shareholders. The Chancellor then concluded that plaintiffs had pled sufficient facts supporting the existence of a contract to survive a motion to dismiss, but also noted his doubts that the plaintiffs would be able to adduce sufficient evidence during discovery to establish that a contract was in fact in place.

· In addition to arguing that there was no contract, News Corp argued that any agreement by the board would be unenforceable under the long-standing principle that a board may not cede control to others, especially on such integral matters as takeover defense. But the Chancellor rejected this argument, finding that it overstated the principle of board control. Reasoning that “the board’s power -- which is that of an agent’s with regard to its principal -- derives from the shareholders,” the Chancellor concluded that a ceding of control by the board to shareholders generally is permitted.

· The Chancellor further distinguished decisions that limited board discretion in the take-over context (Paramount, Quickturn and Omnicare) as efforts by the Delaware Supreme Court to prevent boards from entering into arrangements that took power out of the hands of shareholders or, in the case of Omnicare, minority shareholders. By contrast, the alleged contract here is with the shareholders. In the words of the Chancellor, “Where the principal [the shareholders] makes known to the agent [the board] exactly which actions the principal wishes to be taken, the agent must act in accordance with those instructions.”

1. Many issuers have received, and continue to receive, shareholder proposals that the board approve a policy that it would adopt a poison pill only if it provides for expiration within one year unless there has been shareholder ratification. A common response to these proposals is the adoption of just such a policy, but with a proviso that permits the board to vary from the policy if it believes it is necessary to do so in the exercise of its fiduciary duties. We believe that, even under the reasoning of the News Corp decision, these policies should survive any challenge because the argument that such policies are the result of a “contract” would be much weaker than in the News Corp situation, where the policy allegedly resulted from specific negotiations with shareholders who were being asked to support News Corp’s reincorporation. In addition, the inclusion of fiduciary outs in most of these policies further distinguishes them from the policy at issue in News Corp.

2. Issuers should include a provision in their existing governance guidelines that permits them to be amended or revoked by the board (or the applicable committee) at any time.

3. The decision should not affect current law on the inability of shareholders to adopt a resolution that restricts the board -- absent a resolution that amends the charter (which would require prior board approval in Delaware) or by-laws (which would be subject to subsequent amendment by the board in Delaware). In other words, the News Corp decision stands, at most, only for the proposition that a meeting of the minds between shareholders and the board, as opposed to a unilateral action by either, creates a binding obligation on the part of the board that, unlike a typical board resolution or policy, is not readily revocable at will.

4. Finally, and possibly most importantly, the court’s discussion of the role of directors as simply “agents” for the shareholder “principals” could have potentially far-reaching consequences if followed by other courts. For example, most practitioners believe that a board may take actions that appear to be inconsistent with the wishes of a majority of the shareholders if the board believes in good faith that such actions are nonetheless in the best interests of the shareholders. Examples of such actions include the approval by the board of a merger that does not constitute a change of control in the face of a tender offer from a hostile bidder at a higher price (Time - Warner ) or the failure of a board to redeem a poison pill in the face of a hostile tender offer (PeopleSoft -- Oracle), even if a majority of the issuer’s shares have been tendered into the hostile offer. To the extent that the News Corp decision is viewed as limiting the ability of boards to take these and similar actions, it could have profound implications for takeover defense planning going forward. A strong argument can be made, however, that the Chancellor’s comments in this regard were made in the unusual circumstances of an alleged contract between the directors and the shareholders and, in the absence of such a contract, traditional principles -- which do not treat directors as mere agents -- should govern.