WILMINGTON, Del. (CN) - News Corp. has indefinitely suspended half of the voting rights of foreign stockholders to cover up its own willful noncompliance with federal law, shareholders claim in Delaware Chancery Court.
Although News Corp. "claimed the suspension was necessary to allow News Corp. to remain compliant with U.S. law requiring that Non-U.S. Stockholders not own more than 25% of the capital stock or vote more than 25% of the voting stock of a corporation holding U.S. broadcast station licenses," the suspension effectively increased CEO Rupert Murdoch's control of the company on April 12, the complaint states.
Non-U.S. citizens hold 36 percent of News Corp.'s outstanding Class B shares, and Murdoch holds another 39.7 percent, the company claims.
But lead plaintiff Forsta Ap-Fonden says the suspension could increase Murdoch's voting power to 48.5 percent. Class B shares of News Corp. usually carry one vote per share while Class A shares have no voting power.
News Corp.'s suspension announcement came the same day that the company reached a letter agreement with Murdoch, his minor children and certain Murdoch trusts, to waive their voting rights for so called "excess shares," which would otherwise boost their voting power.
But investors say the agreement "does not eliminate the voting power of the excess shares."
It "is merely an agreement by the Murdoch Holders not to vote such shares, [although they] will be counted for quorum purposes," according to the complaint. Though that agreement had allegedly been "carefully crafted to make it appear that the suspension will not increase Murdoch's voting control and entrench News Corp.'s board and management," the investors say the net result leaves Murdoch holding 48.5 percent of voting Class B shares.
"In a clear case of shooting first and asking questions later," News Corp. waited weeks to request certification of citizenship from stockholders, according to the complaint.
This happened "only after unilaterally taking away the voting power of 50% of the Class B shares it claims, based on undisclosed information and unidentified criteria, are held by non-U.S. stockholders," the lawsuit states.
Furthermore, "News Corp. has announced that any stockholder who does not respond or provide certification of U.S. citizen status will be deemed a non-U.S. stockholder and will be subject to the suspension," Ap-Fonden says.
News Corp. and its board could have avoided conflict with foreign ownership limitations by monitoring stock ownership, the complaint states. Investors call this failure to do so a breach of fiduciary duty.
When News Corp. reincorporated into Delaware from Australia in 2004, it "expressly recognized the need to avoid violations of applicable law" in its restated certificate, according to the complaint.
The company's Class B stock continues to trade on the Australian stock exchanges, and Murdoch became a naturalized U.S. citizen in 1985 to reduce News Corp.'s foreign-ownership stake, the investors say.
They also point out that the Federal Communications Commission urged News Corp. to seek a waiver on the 25 percent limit on foreign ownership of broadcast stations because the "FCC was eager to see a fourth TV network emerge, feeling that it would benefit the public interest."
A missed opportunity to check on the 25 percent threshold occurred in 2008 when Saudi Arabia increased its ownership stake in News Corp. Class B stock to 7 percent through state-owned companies, according to the lawsuit.
The class wants to rescind or reform the improper suspension and restore full voting power. It is represented by Michael Hanrahan of Prickett, Jones & Elliott and Marc Topaz with Kessler Topaz Meltzer & Check.