Two weeks ago a group of pension schemes, with a stake in News Corporation, filed an amended complaint against the company tied to the media giant's role in the phone hacking scandal. Pension Funds Insider explores the case and its consequences

Initially filed in March, the case against Murdoch and News Corp's other board members focussed on the $615 million purchase of the Shine Group, owned by Murdoch's daughter, which took place earlier this year without "a valid strategic purpose" and showed a lack of good corporate governance according to the plaintiffs.

"This case alone would already proof that governance was not taken serious within News Corp's board," said a lawyer for the prosecution. However, in recent weeks the case has spread to phone-hacking, another sign of proof, according to the investors, that Murdoch, up until recently, always got 'his own way' and no-one stopped him until it was too late. "This to them shows a board with members who did nothing else than comply with the media 'mogul', they don't call him that without a reason," added the lawyer.

One of the amended complaints that was filed read as follows: "The News of the Word hacking scandal has brought light to the undeniable fact that the News Corp board of directors has also failed when it came to itself."

It continued: "News Corp has systematically embarked on an escalating series of illegal misconduct under the direction and control of Rupert Murdoch. As the depth of these wrongdoings continues to unfold daily across the world stage?at the company's expense?and the harm to the company has exponentially increased, it is clear that material corporate rights were not being protected by the board."

On top of the initial suit by Grant & Eisenhofer and Bernstein Litowitz Berger and Grossman, who together represent the Amalgamated Bank (a trustee for various LongView investment funds), the Central Laborers Pension Fund and the New Orleans Employees' Retirement System, other complaints have also been filed recently.

One of the complaints, led by Labaton Sucharow, which represents the Massachusetts laborers' pension and annuity fund, was filed in the same state, Delaware, as the original case and has now merged with it. Another however, filed by Glancy Binkow and Goldberg on behalf of an individual investor, was brought to a New York court, and varies from the other complaints. It includes a federal law claim that News Corp. failed to disclose the true nature of its internal controls to shareholders in proxy materials, and calls for a new board election.

Outcomes

So what is likely to happen with these cases? Pension Funds Insider has talked to the lawyers involved and they believe they have "a very strong case which has every chance to succeed".

First of all, one of the cases will be delayed, as the outcome of one will influence the other. Though traditionally Delaware has not been the most for investor-friendly when it comes to litigation of this nature, this case will be the first one to go ahead. It was filed early on, has a strong group of plaintiffs and three big law firms fighting for the case to go ahead in the State. The New York case would then be dealt with later on.

Every board member, if the judge rules in favour of the investors, will be individually accountable for the damage done to News Corp.

"They have gone along with everything Murdoch said and did and never once questioned his intentions. With the purpose of Shine he made it clear that he had a different agenda and nobody stopped him." According to the lawyers Murdoch himself even "proudly boasted that his goal was to bring his daughter back into the News Corp. fold so she could join his board," a source close to the case told Pension Funds Insider.

This, according to the experts, has the potential to clearly show to a judge that the board failed to exercise proper oversight and also took insufficient action since news of the hacking first surfaced at its subsidiary nearly six years ago. The board is now liable for the costs that these practices incurred by the company. "The money involved will run into the billions," Jay Eisenhofer, of Grant & Eisenhofer, told Pension Funds Insider.

It is also said by those involved, that "Murdoch will fight 'till he dies", adding to worries that the case might take forever to come to a conclusion.

Michael Stocker, partner at Labaton Sucharow, however explained the broader repercussions of the case, those that are imminent and some would say even positive. "This case shapes the current debate about corporate governance and will remain to do so for at least a generation," he says.

"Two issues have been raised and brought to the attention of board members all over. One is the significance for board independence and the other is about the long standing debate over whether or not there should be a split about the rule of the chairman and the role of the CEO. These two ideas have something in common; how do we best insure that management is being held accountable?

"If you look at News Corp," Stocker says, "nine out of the 16 members of the board are supposed to be, at least technically, independent. But when you look at who these people are you'll see that they are really making a joke out of independence."

Another lawyer working on the case said: "It might take years to hold News Corp's board accountable, the changes in other board rooms are already visible now."

And indeed, the case can be seen as a wake-up call for other boards around the US and the UK alike; a room full of 'yes' men is no longer acceptable. In turn, investors, such as pension schemes, will play a more active part in keeping an eye on the way corporate governance is carried out. After all, it is the power of money that makes accountability possible in cases like these.

azeevalkink@wilmington.co.uk

First published 28.07.11