Extract from ABC News
The Murdoch family brawl playing out in a courtroom in Reno, Nevada, has rattled investors in both Fox and News Corporations, and now the sharks are circling.
It's a perilous moment for one of the world's most powerful media empires.
The family is bitterly divided over the governance of the secret Murdoch Family Trust (MFT) which gives them control of Fox and News, and is facing a revolt from News Corp shareholders mounting a direct challenge to the mechanism by which the Murdochs run the empire.
At the next annual meeting of News Corporation in a few weeks' time, investors will vote on a resolution to abolish the so-called dual-class share structure.
As it stands, there are two classes of News Corp shares: voting shares and non-voting shares.
Although the MFT only has a 14 per cent economic stake in News Corp, the family can control the company because it owns 41 per cent of the voting shares.
Activist hedge fund Starboard Value, which has accumulated a substantial stake in News Corp over the past year and put forward the resolution, has proposed a one-share-one-vote system.
Background Briefing has spoken to a number of institutional investors likely to vote in favour of the resolution.
While the result is non-binding, a majority in favour would put the board, chaired by Lachlan Murdoch, under significant pressure to strike a deal with shareholders.
A finance industry source told Background Briefing that News Corp, which opposes the Starboard resolution, is arguing to investors that if the resolution succeeded, a one-share-one-vote system could only be introduced by striking a deal between voting and non-voting shareholders.
With founder Rupert Murdoch, who retired last year, now 93 years old, industry experts say the vote could mark the beginning of the end of the century-old Murdoch dynasty.
Sharks are circling
Starboard Value points to the ongoing MFT dispute in its proxy resolution, and takes aim at Rupert's squabbling children.
"The situation at News Corp is a textbook example of one of the worst forms of a dual-class share structure — one that extends beyond any reasonable timeline and one in which super-voting rights are moving from a visionary founder to the founder's children," the resolution reads.
"The four Murdoch siblings with voting rights within the MFT are reported to have widely differing world views, which, collectively, could be paralyzing to the strategic direction of the Company. More importantly, we are not sure why their perspectives should carry greater weight than the views of other stockholders."
Background Briefing has reached out to News Corporation for comment, and has approached or spoken to a number of institutional investors, whose votes could sway the result.
The Australian Council of Superannuation Investors, whose members include Australia's biggest super funds, has a long-standing position in favour of one-share-one-vote, and voted in favour of a similar resolution in 2015.
Back then, it was supported by more than 90 per cent of non-Murdoch shareholders and 49.5 per cent of all voting shareholders — just short of success.
Another investor, Matt Williams, head of Australian equities at Airlie Funds Management — one of the largest holders of News Corp's voting shares with a 2 per cent stake — is also planning to back the resolution.
"Philosophically, we always support one share equals one vote," Mr Williams said.
"In terms of News Corp itself, I think Lachlan has been a very good chairman. I think the management team have done a great job of changing the business over the last 10 years.
"So, whilst philosophically we agree with the Starboard resolution and we'll probably vote for it because of that, I think the rhetoric around the resolution is somewhat overblown."
Mr Williams acknowledged News Corp could simply ignore the non-binding resolution, but said if it was to secure majority shareholder support, it would "definitely give those independent directors on the board of News Corp something to think about".
"And I think it would have to promote a very healthy discussion at the board level," he said.
If the Starboard resolution achieves majority shareholder support, there would be pressure on the Murdoch family to relinquish control.
At the same time, there is a push from some investors to break up News Corp, and separate profitable assets — like Dow Jones, REA Group, and book publisher Harper Collins — from struggling or unprofitable assets including newspapers and Foxtel.
Family dispute 'goes nuclear'
The Starboard resolution comes as the Murdochs await a decision from the Nevada court.
It was supposed to be a secret, but in July New York Times reporters Jim Rutenberg and Jonathan Mahler revealed that Rupert was trying to amend the "irrevocable" MFT.
As it stands, the trust gives his four eldest children an equal say over the future of the empire after he dies. But he now wants to expand the voting power of his chosen successor, eldest son Lachlan, so he would be able to outvote his more politically moderate siblings.
If successful, the move would give Lachlan unassailable control of the staunchly conservative media empire.
Rupert called it "Project Harmony", but the three siblings — Prudence, Elisabeth, and James — were outraged at being disenfranchised "for their own good" and have joined together to fight Rupert and Lachlan in court.
Rutenberg said the probate commissioner did not have to decide the best way to maximise the commercial value of the conservative editorial stance of Murdoch media outlets like Fox News. He only had to decide whether Rupert was acting in good faith and in the interests of all beneficiaries of the trust.
"James, Prudence and Elisabeth have a very simple case here, that the trust was written to treat all children equally, and now it's not the case," Rutenberg said.
"Now one is being advantaged against the rest.
"If they can prove that it was [not done] in good faith, it would appear that they would win the trial."
In September, the Murdoch family members filed into a courtroom in Reno for a week-long trial behind closed doors. The case in Nevada is so secret that we may not know the outcome from the court itself, but it is possible the judgement will be leaked to the media.
One former senior News executive told Background Briefing the case in Nevada appeared to be a "lay-down misere" for Rupert and Lachlan, given the potential economic damage to the businesses that would be done by a shift to a more centrist editorial line at Fox and News Corporation.
The former executive, speaking on condition of anonymity, said while there had frequently been disputes in the Murdoch family, eldest daughter Prudence had always sat comfortably on the fence and the fact that she was now teamed up with James and Elisabeth showed the conflict had "gone nuclear".
Rutenberg said Lachlan "won the crown" but now found himself estranged from his family.
"This is a story directly out of Shakespeare," he said.
"This is still, at the end of the day, a family and now it's really broken. And it's broken over things that no other family would contend with."
Will Rupert and Lachlan just sell?
Background Briefing has spoken to Sydney stockbroker Angus Aitken, who counts Lachlan as a friend, and hosted him at a private dinner with a dozen fund managers last year at high-end Paddington restaurant, Fred's.
Aitken said it would be "economic suicide" for Lachlan's three siblings to win in Nevada, outvote him and drag Fox News, which is the empire's crown jewel, to the left.
"My view is, if you replace Lachlan with James, hypothetically tomorrow, and James said, 'I want to pivot this business', I think the profits would drop enormously," he said.
"If they fired all the on-air talent that rates and replaced it and said it's all former MSNBC-style of people, I honestly believe the earnings would halve, and the value would halve."
Aitken said if Rupert and Lachlan were to lose, they were unlikely to sit around waiting for James, Prudence and Elisabeth to take over the empire.
He believes they would sell parts of the business and points to the $US71 billion sale of the bulk of their 21st Century Fox business to Disney in 2019, to show how unsentimental the Murdochs can be about businesses they own.
"Lachlan and everyone, they're all beneficiaries of those trusts … why wouldn't you maximise the value for yourself?" Atkins said.
"You don't want your legacy to be James changing these businesses."
A turning point for the Murdoch empire
Of all Murdoch's children, only Lachlan shares Rupert's conservative political views, and has racked up some solid wins in his business career.
He was also not implicated in the UK phone hacking scandal that divided his family and tarnished the reputation of James, who had been a viable successor in his own right until that point.
Since Rupert's retirement a year ago, Lachlan has been chairman of both Fox and News Corporation. But he has suffered a string of setbacks in recent years, from the shelving of a proposed merger of Fox and News to last year's record payout of $US787.5 million to settle the Dominion defamation case stemming from the 2020 US presidential election.
Lachlan is also facing unprecedented disruption — politically, a decade of populism is reaching a crescendo with next month's US presidential election; commercially, traditional business models are collapsing as the legacy print and television media grapples with digital transformation from streaming to AI.
While Fox Corporation is well-placed financially, and poised to benefit from timely investments in free streaming service Tubi, and sports betting giant Flutter, News Corp is more of a work in progress.
The company continues to reap rewards from Lachlan's investment in the REA Group, although it was rebuffed in a recent takeover for UK property website Rightmove.
What could be the beginning of the end
Financial analyst for Morningstar Brian Han, who has covered the media industry for more than 25 years, agrees that if Rupert and Lachlan lose in Nevada, the possibility of a break-up of the empire increases.
He says that's because there are extremely valuable businesses like Fox News and Dow Jones sitting inside Fox and News.
Han believes the stakes are too high to allow a single probate commissioner in Nevada to decide the future of the empire, suggesting any verdict is likely to be appealed.
"We will see a lot of lawyers get rich for a very, very long time," he said.
The empire is not falling, Han says, because "Fox and News Crop are fundamentally still very healthy companies".
"They've got great balance sheets, which means no matter how bad the structural headwinds are, they're not going to go broke," he said.
"Is there going to be the fall of [the Murdoch] dynasty? That's a different question.
"We may have that, because we certainly don't have a set of siblings who are harmonious."
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