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City of Monroe Employees' Retirement System v. Murdoch

Court of Chancery of Delaware

November 20, 2017

CITY OF MONROE EMPLOYEES' RETIREMENT SYSTEM, derivatively on behalf of TWENTY-FIRST CENTURY FOX, INC., Plaintiff,
v.
RUPERT MURDOCH, LACHLAN MURDOCH, JAMES MURDOCH, CHARLES G. CAREY, DAVID F. DEVOE, RODERICK I. EDDINGTON, ROGER S. SILBERMAN, JACQUES A. NASSER, JAMES W. BREYER, JEFFREY W. UBBEN, VIET DINH, DELPHINE ARNAULT, TIDJANE THIAME, AND THE ESTATE OF ROGER AILES, Defendants, and TWENTY-FIRST CENTURY FOX, INC., Nominal Defendant.

          Bernstein Litowitz Berger & Grossmann LLP Max W. Berger Mark Lebovitch David L. Wales Rebecca E. Boon David MacIsaac Grant & Eisenhofer P.A. Stuart M. Grant (Del. Bar No. 2526) Michael J. Barry (Del. Bar No. 4368) Counsel for Plaintiff

          Sullivan, Ward, Asher & Patton, P.C. Cynthia Billings-Dunn Counsel for Plaintiff

          Additional Counsel: Ira A. Schochet Ned Weinberger Marisa N. DeMato Mark D. Richardson Labaton Sucharow LLP Counsel for Seattle City Employees' Retirement System

          Gregory E. Del Gaizo Robbins Arroyo LLP Counsel for Henry Zwang

          Peter Safirstein Safirstein Metcalf LLP and Hung G. Ta HGT Law Counsel for Chaile Steinberg

          Amy Miller Levi & Korsinsky LLP and Nancy Kulesa Levi & Korsinsky LLP Counsel for IBEW Local 38 Pension Fund and Simcha Halberstam

          Emily Komlossy Komlossy Law P.A. and Gustavo F. Brucker Pomerantz LLP Counsel for MSS 12-09 Trust

          VERIFIED DERIVATIVE COMPLAINT

         TABLE OF CONTENTS

         Page

         NATURE OF THE ACTION .................................................................................... 2

         PARTIES .................................................................................................................... 8

         A. Proposed Lead Plaintiff .................................................................... 8

         B. Additional Plaintiffs ........................................................................ 8

         C. Nominal Defendant ........................................................................... 9

         D. The Individual Defendants .............................................................. 9

         SUBSTANTIVE ALLEGATIONS ......................................................................... 11

         I. THE CULTURE OF SEXUAL HARASSMENT AT FOX NEWS ............. 11

         A. The Decade-Long History Of Sexual Harassment At The Company ............................................................................................. 11

         1. Ailes Harasses A Student Intern And Another Fox News Employee .................................................................................. 12

         2. Mackris Accuses O'Reilly Of Sexual Harassment And The Company Protects Him ...................................................... 13

         3. The EEOC's Sexual Harassment Suit Against Joe Chillemi ..................................................................................... 14

         4. More Sexual Harassment Involving Ailes ................................ 14

         5. Rudi Bakhtiar Alleges Sexual Harassment By Ailes ................ 15

         6. Juliet Huddy Alleges Sexual Harassment By O'Reilly ............ 16

         7. Fox News Quietly Settles Additional Sexual Harassment Lawsuits .................................................................................... 17

         B. The Mistreatment Of Laura ("Laurie") Luhn ............................. 17

         II. GRETCHEN CARLSON PUBLICLY REVEALS FOX NEWS'S CULTURE OF RAMPANT SEXUAL HARASSMENT ............................. 21

         A. Carlson Sues Ailes For Sexual Harassment And Wrongful Termination ................................................................... 21

         B. Other Victims Emerge ..................................................................... 22

         III. THE COMPANY'S INCOMPLETE RESPONSE TO THE REVELATIONS OF SEXUAL HARASSMENT ........................................ 24

         A. Senior Management Decides Not To Fire Ailes For Cause ....... 24

         B. The Board Is Only Updated After-the-Fact ............................... 26

         C. Senior Management Replaces Ailes With Shine ......................... 27

         D. The Failure To Fully Investigate O'Reilly Until Early 2017 ..................................................................................................... 28

         E. Sexual Harassment Lawsuits Continue To The Present ........... 29

         1. More Allegations Of Sexual Harassment Against Ailes And O'Reilly ............................................................................. 29

         2. Fox Gave O'Reilly Contractual Protection For Sexual Harassment ................................................................................ 31

         3. A Second Paul Weiss Investigation Into Sexual Harassment At Fox News ......................................................... 32

         4. Senior Management Negotiates O'Reilly's Exit Only After Facing Public Pressure And Losing Advertisers ............. 32

         5. Women Continue To Speak Out About Sexual Harassment And Retaliation By Other Fox Executives ........... 33

         F. Racial Discrimination At Fox News ............................................. 34

         1. Discrimination In The Fox News Hair And Makeup Department ................................................................................ 34

         2. Fox News Comptroller Slater Is Sued For Racial Discrimination In New York State Court ................................. 35

         3. Anchor Kelly Wright Comes Forward With Racial Discrimination Allegations Against O'Reilly ........................... 36

         4. Racial Discrimination Allegations Against Ailes ..................... 37

         5. More Allegations Of Racial Discrimination By Slater In New York Federal Court ........................................................... 37

         IV. THE BOARD'S ABDICATION OF OVERSIGHT ALLOWED AILES TO RUN FOX NEWS AS A FIEFDOM, FACILITATING HIS DECADES-LONG SEXUAL HARASSMENT .................................... 38

         A. Ailes's Budgets And Millions In "Friends Of Roger" Payments ............................................................................................ 39

         B. "Key Man" Contractual Provisions For Top News Anchors Cost The Company Many Millions ............................... 40

         C. Ailes's Email Surveillance And The "Black Room" .................. 41

         V. DEFENDANTS' BREACHES OF DUTY RESULT IN AND EXACERBATE HARM TO THE COMPANY ........................................... 44

         A. The Company Pays Over $75 Million In Severance To Ailes And O'Reilly Instead Of Terminating Them For Cause .................................................................................................. 44

         B. The Company Pays Over $55 Million In Sexual Harassment Settlements ................................................................ 44

         C. The Threat To The Company's $14 Billion Bid For Sky ............. 44

         D. The Board's Failure To Recognize The Company's Broader Culture Problems Notwithstanding The Hacking Scandal .............................................................................. 48

         E. Advertisers Pull Out And Ratings Drop In The Wake Of The Scandal ...................................................................................... 49

         F. The Company Incurs Additional Litigation Costs From Pending Harassment And Discrimination Lawsuits ................... 49

         G. "Friends of Roger" Payments ......................................................... 50

         H. Greta Van Susteren Exercises Her "Key Man" Clause For Many Millions ........................................................................... 50

         I. Loss of Talent .................................................................................. 50

         J. The Hostile Work Environment At Fox News ............................. 50

         K. Fox Is Now At The Center Of A Criminal Investigation ........... 51

         DERIVATIVE ALLEGATIONS ............................................................................. 52

         DEMAND FUTILITY ALLEGATIONS ................................................................ 52

         A. Presuit Demand Is Excused Because Defendant R. Murdoch Dominates And Controls The Board .......................... 53

         B. Presuit Demand Is Excused Because A Majority Of The Board Lacks Independence ............................................................. 57

         CLAIMS FOR RELIEF ........................................................................................... 65

         COUNT I .................................................................................................................. 64

         BREACH OF FIDUCIARY DUTY

         (Against Rupert Murdoch in His Capacity As Controlling Stockholder)

         COUNT II ................................................................................................................ 65

         BREACH OF FIDUCIARY DUTY

         (Against the Director Defendants Other Than Rupert Murdoch, Lachlan Murdoch and James Murdoch)

         COUNT III ............................................................................................................... 67

         BREACH OF FIDUCIARY DUTY

         (Against Defendants Rupert Murdoch, Lachlan Murdoch, and James Murdoch In Their Capacity as Directors)

         COUNT IV ............................................................................................................... 68

         BREACH OF FIDUCIARY DUTY

         (Against Defendants Rupert Murdoch, Lachlan Murdoch, James Murdoch, and Charles G. Carey In Their Capacity as Officers)

         COUNT V ................................................................................................................ 70

         BREACH OF FIDUCIARY DUTY (Against Defendant the Estate of Roger Ailes in His Capacity as Officer)

         COUNT VI ............................................................................................................... 70

         UNJUST ENRICHMENT

         (Against Defendant the Estate of Roger Ailes)

         PRAYER FOR RELIEF .......................................................................................... 72

         Proposed Lead Plaintiff City of Monroe Employees' Retirement System ("Plaintiff"), derivatively on behalf of Twenty-First Century Fox, Inc. ("Twenty-First Century Fox" or the "Company") and along with the Additional Plaintiffs (defined below, and together, "Plaintiffs"), brings the following Verified Derivative Complaint (the "Complaint") against Rupert Murdoch, his two sons Lachlan and James, the other members of the Board of Directors of the Company (the "Board"), and the Estate of Roger Ailes ("Ailes") for breaches of fiduciary duty, as well as for unjust enrichment against the Estate of Ailes. Except for allegations specifically pertaining to Plaintiffs and Plaintiffs' own acts, the allegations in the Complaint are based upon information and belief, which include but are not limited to: (i) documents and other information obtained from the Company pursuant to Section 220 of the Delaware General Corporation Law (the "Section 220 Production"); (ii) depositions and interviews conducted by Plaintiffs' Counsel; (iii) the Company's public filings with the United States Securities and Exchange Commission (the "SEC"); (iv) media reports; and (v) other public sources.

         Pursuant to Section 220 and Delaware Supreme Court guidelines, counsel for Plaintiff and Defendants entered into a non-waiver agreement to allow Twenty-First Century Fox to provide in the context of this stockholder derivative action certain information that could be subject to claims of attorney-client privilege.

         NATURE OF THE ACTION

         1. This case arises from the systematic, decades-long culture of sexual harassment, racial discrimination, and retaliation that led to a hostile work environment at Fox News Channel ("Fox News"). That hostile work environment was created and facilitated by senior executives at Fox News. The Board and senior executives of the Company, while moving to enhance governance in 2012 as part of a settlement with the same lead counsel that has appeared in this case, did not take steps to address workplace issues such as sexual harassment and racial discrimination at the same time. They failed to implement controls sufficient to prevent the creation and maintenance of this hostile work environment. The public revelations of the toxic culture since July 2016 have led not only to numerous sexual harassment settlements and racial discrimination lawsuits, but to departures of talent and damage to good will. This, in turn, has caused damage to the Company's reputation and good will, as well as significant financial harm.

         2. The hostile work environment at Fox News claimed multiple victims; revelations in the media since July 2016 as well as internal investigations have identified more than a dozen women who claimed some form of sexual harassment, and another dozen Fox News employees have asserted claims of racial discrimination, and are seeking class certification on behalf of still others. Many of those who have come forward only recently have explained that they were previously deterred from complaining of their mistreatment by a fear of retaliation. This fear was cultivated as an essential element of the hostile work environment at Fox News.

         3. The most infamous perpetrator of sexual harassment at Fox News was Ailes, Chief Executive of Fox News from 1996 through 2016, who sexually harassed female employees and contributors with impunity for at least a decade. Ailes's victims were not limited to low-level employees. Rather, seemingly all women at Fox News were at risk. Ailes's targets included prominent Fox News talent such as Megyn Kelly, Gretchen Carlson, and Rudi Bakhtiar.

         4. The culture of sexual harassment conduct at Fox News was not limited to Ailes. Instead, among others, the most prominent on-air talent at Fox News, Bill O'Reilly, also harassed multiple women employees at Fox News. Not only did Ailes set the wrong tone at the top of Fox News, but he surrounded himself with loyalists who were discouraged from disclosing the truth about the work environment at Fox News to Human Resources professionals at the Company.

         5. The toxic environment at Fox News should not have been invisible to the Company. Ailes was hired by Rupert Murdoch ("R. Murdoch"), the Chairman and CEO of the Company, after having been implicated in claims of abusive behavior at his prior employer. The Company also shelled out millions of dollars to "Friends of Roger," who worked to protect Ailes (even ahead of the Company), including against Ailes's victims.

         6. Moreover, in 2004, Bill O'Reilly was publicly charged with sexual harassment by Andrea Mackris. While O'Reilly was forced to fund the multi-million dollar Mackris settlement personally, neither R. Murdoch, nor the Board, conducted inquiry into what kind of workplace conditions allowed O'Reilly to believe that harassment of Mackris was acceptable.

         7. Then, in 2006, the EEOC settled a charge of sexual harassment arising from the behavior of a mid-level Fox News executive. This settlement was reported to the Legal Department of the Company, and it represented another red flag. Again, senior management and the Board did not investigate or remediate the hostile work environment at Fox News.

         8. In 2011, Fox News entered a separation agreement with a long-time employee named Laura ("Laurie") Luhn. Luhn alleged that she had been sexually harassed by Ailes for decades. Neither the Company, nor the Board, had taken the necessary steps to ensure that information about a sexual harassment claim against the CEO of Fox News would be disclosed and assessed by the Company. Senior executives of the Company and the Board failed to implement sufficient oversight over the workplace at this critical business unit to prevent massive damage to the Company.

         9. On July 6, 2016, Gretchen Carlson filed a lawsuit against Ailes for sexual harassment and wrongful termination. The filing of her public lawsuit triggered an investigation by the Company and other victims came forward with their own experiences of sexual harassment at Fox News.

         10. Given the risk that Ailes was preying on other female employees, among other business considerations, the Company directed an outside law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP ("Paul Weiss"), to expedite its investigation with a focus on Ailes's interactions with female talent at Fox News. In just over one week, Paul Weiss interviewed dozens of women and succeeded in developing sufficient evidence for the Company to remove Ailes from Fox News within 13 days of the Carlson complaint. The investigation was not directed to the entire culture of Fox News and did not expose all of the historic instances of sexual harassment at Fox News. The Company suffered from serial revelations over the year that followed.

         11. Ailes's harassment extended well beyond Gretchen Carlson, including but not limited to women who had confided in Carlson, but chose not to go public. The Company entered into an eight figure settlement with Carlson, and issued a public apology. The Company then proceeded to settle other claims arising from Ailes's conduct. To date, between settlements for sexual harassment and racial discrimination, the Company has paid over $55 million.

         12. Despite findings of serious wrongdoing that warranted firing Ailes for cause, the Company negotiated Ailes's exit. The Company agreed to pay Ailes $46 million more than he would have received had he been terminated for cause in exchange for his immediate departure, and a non-compete. The Company has not yet fully addressed the historic culture of harassment, discrimination and retaliation that had taken hold due to years of Ailes's unchecked behavior.

         13. Moreover, the Company left in place some of Ailes's loyalists, securing long-time employee and recent Co-President of Fox News, William ("Bill") Shine's ("Shine"), departure only in May 2017. The Company also took months to come to grips with Bill O'Reilly's history of harassment, securing his departure in April 2017, after an advertising boycott and public revelations in the New York Times that injured Fox News. And the losses to the Company that flowed from the historic wrongdoing have only mounted. Talent such as Megyn Kelly and Greta Van Susteren left Fox News in 2016.

         14. The Company has also incurred the expense of an investigation by the United States Attorney's Office for the Southern District of New York, focusing in part on the reporting and disclosure of the Luhn sexual harassment settlement. And the Company's attempt to acquire the balance of Sky, a European pay-tv platform, is in serious jeopardy, as opponents of the acquisition have cited sexual harassment and racial discrimination issues at Fox News as grounds for further investigation and delay of the transaction. All of this has already imposed expense and caused damage to the Company, and threatens ongoing significant harm.

         15. The hostile work environment that was left unaddressed for years also included racial discrimination. In March 2017, Fox News Comptroller Judith Slater ("Slater") was alleged to have inflicted racially charged abusive language on her subordinates at the network. While Slater has been terminated, Fox News now faces a dozen lawsuits and a class action. Again, the allegations include charges that other Fox News executives enabled or failed to control Slater. Regardless of the outcome of the lawsuit, Fox News has already been damaged, along with the Company's reputation and good will.

         16. Neither the Company's senior management nor its Board met its fiduciary duty to monitor developments at its most important business unit, investigate when red flags appeared, or put in place protocols that would have ensured greater visibility into the hostile work environment at Fox News. Their breaches helped ensure that the toxic culture created by Ailes only festered, and the resulting damage to the Company has been profound. Plaintiffs seek judicial intervention to hold Defendants accountable and to impose reforms to end the misconduct.

         PARTIES

         A. Proposed Lead Plaintiff

         17. Proposed Lead Plaintiff City of Monroe Employees' Retirement System ("Plaintiff") is a current stockholder of the Company and has held Company stock since January 2014. On July 29, 2016, Plaintiff served a demand to inspect the books and records of Twenty-First Century Fox pursuant to Section 220 of the Delaware General Corporation Law relating to Fox News.

         B. Additional Plaintiffs

         18. Additional Plaintiff Seattle City Employees' Retirement System is a current stockholder of the Company and has held Company stock since January 2010.

         19. Additional Plaintiff Henry Zwang is a current stockholder of the Company and has held Company stock since July 2013.

         20. Additional Plaintiff Chaile Steinberg is a current stockholder of the Company and has held Company stock since July 2013.

         21. Additional Plaintiff IBEW Local 38 Pension Fund is a current stockholder of the Company and has held Company stock since July 2013.

         22. Additional Plaintiff Simcha Halberstam is a current stockholder of the Company and has held Company stock since 2015.

         23. Additional Plaintiff MSS 12-09 Trust is a current stockholder of the Company and has held Company stock since May 2010.

         C. Nominal Defendant

         24. Nominal Defendant Twenty-First Century Fox, Inc. ("Twenty-First Century Fox" or the "Company") is a Delaware corporation, with its principal offices located in New York, NY.

         D. The Individual Defendants

         25. Rupert Murdoch ("R. Murdoch") has served as a member of the Board of Twenty-First Century Fox (and its predecessor company, News Corp.) since 1979. R. Murdoch is the founder of News Corp. and controlling stockholder of Twenty-First Century Fox.

         26. Lachlan Murdoch ("L. Murdoch") is the son of R. Murdoch and the brother of James Murdoch. L. Murdoch has served as a member of the Board of Twenty-First Century Fox (and its predecessor company, News Corp.) since 1996 and as Executive Chairman since July 2015.

         27. James Murdoch ("J. Murdoch") is the son of R. Murdoch and the brother of L. Murdoch. J. Murdoch has been a director of the Company since 2007 and its CEO since 2014. J. Murdoch has held a variety of leadership roles over nearly 20 years at Twenty-First Century Fox, which include serving as Co-Chief Operating Officer ("COO") from 2014 to 2015.

         28. Charles G. ("Chase") Carey has served as a member of the Board of Twenty-First Century Fox (and its predecessor company, News Corp.) since 2009, and was formerly the President and Chief Operating Officer of News Corp. and Twenty-First Century Fox.

         29. David Francis DeVoe has served as a member of the Board of Twenty-First Century Fox (and its predecessor company, News Corp.) since 1990. DeVoe was formerly the Senior Executive Vice President and Chief Financial Officer of Fox ...


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