New investor liability case for contract interference
A recent California state appeals court decision reminds us that investor liability can arise based on various types of tort claims, in addition to the widely-publicized infringement claims. In Woods v. Fox Broadcasting Sub., Inc., Download file, the court held that a shareholder can be liable for tortious interference with contract and prospective economic advantage based on its influence over the dealings of the company in which it has invested.
Fox was a 49.5% owner of Fox Family Worldwide Inc., a joint venture with Haim Saban of “Power Rangers” fame. The venture was sold to Disney in 2001 for $5.3 billion. The sales price reflected a $400 million discount because Disney agreed to assume Fox’s contractual obligations to carry cable broadcasts of Major League Baseball games, which were valued at a $600 million loss.
Two individuals who were each entitled to 1% of the sales proceeds based on stock option rights sued Fox, on the grounds that Fox engineered the deal to result in the price reduction that reduced their proceeds by $4 million each. They also alleged that Fox knew of their rights and intentionally structured the deal to interfere with them.
Because a party to a contract cannot be liable for interfering with it (the action must be for breach of contract), Fox argued that as a major shareholder it should not be liable for interference because it was not a true “stranger” to the contract due to its general economic interest in it. The court stated however that shareholders should not be automatically immune from liability for interference, especially “where a powerful shareholder allegedly interferes in a contract between the corporation whose shares it owns and some other person or entity.”
According to the court,
“our courts have allowed contract interference claims to be stated against owners, officers, and directors of the company whose contract was the subject of the litigation. While those defendants may attempt to prove that their conduct was privileged or justified, that is a defense which must be pleaded and proved. . . . . As a result, we hold that the trial court erred in sustaining the demurrer on the ground that Fox was not a stranger to appellants’ contracts.”
The court stated that even though there was no contractual obligation to sell the business at the highest possible price, “we do not believe that Fox Family has unlimited discretion to intentionally act to defeat or diminish those rights by rigging the sale terms in a way that would hold down the sales price. Such conduct, if properly alleged and proven, could well violate the implied covenant of good faith and fair dealing.”
The court also questioned, but did not decide, whether the releases signed by the individuals were valid, on the grounds that the stock options might be wages under California law Under the Labor Code, an employer cannot require a release as a condition to receiving wages. While the Ninth Circuit has held that stock options are not wages under California law, this issue has not been decided by the California courts.
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