The News Corp case illustrates the impact that US and non-US investors can have when acting together. In August 2005, News Corp's board unilaterally extended the term of the company's ‘poison pill', despite having reached an agreement the previous year with a group of international institutional investors to submit any such extensions to a shareholder vote. The prior agreement had facilitated the investors' acceptance of Rupert Murdoch's proposal to relocate the company from Australia to the more corporate-friendly US state of Delaware.


Unhappy with News Corp's failure to meet the terms of the agreement, the shareholders sought dialogue with Murdoch and News Corp's Board, but to no avail. Left with no other viable recourse, the institutional investors from Australia, the Netherlands, the UK and the US filed a suit on October 2005 in the Chancery Court of Delaware.

The main aim of the suit was to get the ‘poison pill' Murdoch had initiated put to a shareholder vote, in line with the original agreement between the two sides. Murdoch and other board members tried to dismiss the suit on the grounds that notwithstanding any formal agreement with shareholders, the board has ultimate decision-making power. The judge rejected that argument in an interim ruling in December 2005, allowing the case to go forward to trial. In a state renowned for its pro-business legal framework, this alone was a major victory for shareholder rights.

Murdoch and the board members asked the Delaware Supreme Court to hear an immediate appeal of that decision, but the court declined to do so.

Murdoch could still have filed an appeal after trial, but in a dramatic turnaround ahead of the scheduled 24 April 2006 trial date, the News Corp board suddenly backed down and agreed to a settlement whereby it will refer the extension of the ‘poison pill' to shareholders at the 2006 annual general meeting being held this month. The settlement means that the judge's decision will stand and cannot be appealed.

The judge's recognition that management and directors are accountable to shareholders under Delaware law has ramifications for corporate behaviour across the whole of the US.

The News Corp case exemplifies how some CEOs view shareholders and their referenced pursuit of high standards of corporate governance in investees; and on the other hand, how determined shareholders, both US and non-US, can use American law to protect their rights and interests. That certainly seems to be the view of Michael O'Sullivan, president of the Australian Council of Superannuation Investors, who took a lead role in co-ordinating the shareholder campaign, when he commented: "Our decision to pursue the action in the Delaware court, is a message to News Corp and to other companies, that long-term investors expect agreements between companies and shareholders to be honoured."

Perhaps the major achievement for shareholders is the demonstration that international co-operation between institutional investors gets results. Notwithstanding the above, there are some who argue that the correct market response is for investors to sell their shares, and to walk away from their responsibilities - to ‘vote with their feet'. However, this ‘exit strategy' approach undermines the strategic principle of active and responsible engagement (to invest for the long term and to engage, when necessary, to voice concerns and/or to bring about change). Moreover, such an approach could increase equity volatility, and in a world of indexing is not always feasible.