Starboard files proposal at News Corp, seeks to break Murdoch's grip

By Svea Herbst-Bayliss

NEW YORK (Reuters) - Hedge fund Starboard Value has filed a shareholder resolution to do away with the dual-class shares that allow Rupert Murdoch to control News Corp, the publisher of the Wall Street Journal, according to people familiar with the matter.

Starboard's move comes as the 93-year-old media tycoon is locked in a legal dispute with some of his children to try to ensure that his son Lachlan Murdoch will control News Corp and broadcasting giant Fox Corp after his death.

Starboard's resolution would not be binding on News Corp, and the company could try to stop it from being voted on at its next annual meeting of shareholders.

Still, the move represents a direct challenge to Murdoch's grip on the media conglomerate. While he has overcome such challenges in the past, it is the first he faces since he stepped away from an active role at the company by standing down as board chair last year.

Starboard called in October for News Corp to spin off its digital-real estate unit to unlock value for shareholders, a few days after Reuters was first to report that the activist investor had amassed a stake in the company.

Now, Starboard has filed privately for a shareholder resolution that calls for the abolition of News Corp's dual-class stock structure, which gives Murdoch 40% of the company's voting stock despite owning an equity stake of about 14%, the sources said.

Starboard Value, run by Jeffrey Smith, is one of the world's most prominent activist investors and has recently been pushing for changes at firms including online-dating company Match Group, design software maker Autodesk, and business software provider Salesforce.

As of June 30, Starboard owned 7.2 million Class A shares of News Corp equivalent to a 1.9% stake, as well as 8.7 million Class B shares, according to a regulatory filing.

The sources requested anonymity because the matter is confidential. News Corp did not respond to requests for comment. Starboard could not be reached for comment.

Since launching News Corp in 1980 as a holding company for his media empire, Murdoch has maintained a tight grip on the company's governance.

Companies are not obliged to heed the outcome of shareholder resolutions, though many do so if they attract a large number of votes.

"A company's failure to act on a shareholder proposal that is approved or that receives strong support can result in reputational damage to the company and could signal to shareholders and proxy advisory firms that the board is not responsive to a matter of significant shareholder concern," law firm Covington & Burling said in a note to clients last year.

Murdoch has ignored such votes in the past, including for much of the past decade, even when they were backed by two-thirds of voting shareholders not affiliated with him or his family.

This would be the first vote, however, since Lachlan Murdoch replaced his father as News Corp chairman. News Corp would have to argue that it is in the interest of shareholders for the Murdoch family to continue to control the company even if its founder is no longer involved.

It is unclear whether News Corp will ask the U.S. Securities and Exchange Commission to exclude Starboard's proposal from the agenda of its annual shareholder meeting, which is expected to take place in the fall.

Companies have asked the SEC to exclude about half the shareholder proposals they received in the latest proxy season, and the SEC granted more than two-thirds of these requests, according to law firm Skadden, Arps, Slate, Meagher & Flom. The SEC can strike down a shareholder proposal if it agrees with a company that it would micromanage it or cause it to violate the law.

RESISTING BREAK-UP

News Corp is valued at roughly $15.3 billion and its stock price has climbed 25.5% over the last 52 weeks. The company owns a real estate listing business, book publisher Harper Collins, and a range of newspapers including the Wall Street Journal, the New York Post, Britain's Times, Sunday Times and Sun, and The Australian.

Murdoch's other big media property, Fox News, is held separately by Fox Corp, since the publishing and broadcast assets were split into separate companies in 2013.

Starboard has argued that News Corp is trading at a discount to the value of its assets and should consider spinning off some of them. It has said the company could unlock more than $7 billion in value by separating Wall Street Journal publisher Dow Jones from the real estate division.

News Corp, however, has resisted such calls. Earlier this year, it reported fourth-quarter revenue and profit that beat Wall Street's estimates, driven by strength in its Dow Jones unit and strong performance in its real estate listing and book publishing businesses.

Last year, Murdoch scrapped a proposal to reunite News Corp with Fox Corp after several top shareholders voiced opposition to the move. The merger would have required the backing of a majority of shareholders excluding Murdoch.

(Reporting by Svea Herbst-Bayliss; Editing by Peter Graff)