Fox also may be able to split the tab with its insurance company. Corporations typically have policies that protect them against various losses. For media companies, that means coverage for defamation and libel penalties. A Fox spokesman declined to comment.
Whatever financial hit Fox ultimately absorbs will also be deductible on its federal income tax return. Like the cost of makeup and hair spray for its prime-time anchors, payments in most courtroom settlements are regarded by the Internal Revenue Service as an “ordinary and necessary business expense.”
None of this is to say that Fox executives are unfazed by the dollars involved in making the Dominion affair go away.
The $787.5 million settlement effectively erases more than half of the profits the company earned last year. And for Fox, this is just the start of its reckoning with the cost of election lies. Additional lawsuits that could vaporize another chunk of earnings are pending from Smartmatic, a maker of electronic voting systems, as well as several Fox shareholders.
“These could be incredibly calamitous,” said Jeffrey Sonnenfeld, senior associate dean of the Yale School of Management. “Profits are not a nice-to-have, icing-on-the-cake. They’re fundamental. If profits disappear, then the share price plummets and the whole value of the company plummets and you get into a question of the viability of the enterprise.”
To be sure, Fox is in no immediate danger. The corporation reported $1.5 billion in profits for 2022 on more than $14 billion in revenue. It has weathered numerous scandals, including costly lawsuits over sexual harassment allegations against Roger Ailes, former head of Fox News, and Bill O’Reilly, a longtime network star.
Investors last week took the Dominion settlement in stride. Shares of Fox Corp. ended the week largely unchanged.
A Fox spokesman, who spoke on the condition of anonymity, said the company did not “expect significant operational effects or changes to our business given our cash flow, strong balance sheet and the health of our business.”
By opting to settle rather than proceed to trial, Fox avoided exposing Murdoch or prime-time stars such as Tucker Carlson or Sean Hannity to embarrassing questions about the conflict between the election lies they aired and their private scorn for such claims, which was evident in material Dominion obtained in discovery.
“We believe that Fox views the settlement as a win and possibly just the cost of doing business,” wrote Neil Macker, a Morningstar stock analyst.
That doesn’t mean Wall Street was unruffled by the Dominion episode. Since the voting machine company sued Fox in March 2021, accusing it of defamation for the evidence-free claims it aired about an alleged conspiracy to rig the 2020 presidential election, Fox shares have lost nearly 16 percent of their value — even as the overall stock market gained 6 percent.
Fox today is worth roughly $3.6 billion less than when news of the Dominion suit became public.
The entire decline in the company’s market value cannot be attributed to reputational damage from Fox’s election reporting. But some of it certainly is, according to Haran Segram, an adjunct finance professor at Columbia Business School in New York.
“That’s why when they settled for $800 million, the market didn’t react,” he said. “The market has priced in most of the lawsuit payment.”
The big Dominion payout could force Fox to slow a $7 billion share buyback scheme it has implemented for several years, Segram said. As the company repurchased shares, its available cash fell to around $4 billion at the end of last year from $5.9 billion in mid-2021.
How much of the Dominion settlement is covered by Fox’s insurer will depend upon the details of its policy, which the company declined to discuss. Tom Baker, a law professor at the University of Pennsylvania Carey Law School, said media companies typically carry liability insurance that covers defamation claims.
“I’m not aware of any standard exclusions that would knock this claim out from coverage,” said Baker, an insurance law specialist.
The next financial headache for Fox will likely be the $2.7 billion lawsuit that Smartmatic filed in February 2021 against Fox, cable hosts Lou Dobbs, Maria Bartiromo, Jeanine Pirro, and frequent Fox guests Rudy Giuliani and Sidney Powell.
Fox repeatedly aired false claims by Giuliani and Powell that Smartmatic was a Venezuelan company that had flipped votes across the nation to steal the election from President Donald Trump, according to court documents.
In fact, Smartmatic was incorporated in Delaware and provided election technology and software in the 2020 election only in Los Angeles County, Calif., the documents said.
Fox expects the case will not go to trial until 2025, according to a company official who requested anonymity to discuss pending legal matters. Whenever Smartmatic gets to court, it will benefit from the internal Fox texts and emails disclosed in the Dominion case, which showed the networks’ biggest stars often privately ridiculed the election claims they were airing.
Another legal threat looms in the form of lawsuits filed by Fox shareholders on behalf of the corporation accusing members of the board of directors of failing to oversee the news operation’s handling of false election claims.
Insurance coverage could become an issue in lawsuits that target members of the Fox board.
On April 11, Robert Schwarz, a Fox shareholder, sued Murdoch, his son Lachlan, and three other Fox directors, saying they “knowingly allowed the news channel to broadcast, promote, and perpetuate a false election fraud story in connection with the 2020 U.S. Presidential election to maintain the network’s ratings and viewers, who were known to be supporters of Donald Trump,” according to court documents.
The suit in Delaware’s court of chancery seeks unspecified damages from the directors on behalf of the company along with corporate governance reforms.
Along with Murdoch and his eldest son, the named directors include Chase Carey, former vice chairman of the board of 21st Century Fox; Roland Hernandez, former chief executive of Telemundo Group; and Jacques Nasser, former CEO of Ford Motor Co.
Directors Paul D. Ryan, a former House speaker, and Anne Dias, founder of Aragon Global Management, are not named in the suit, which notes they “took steps to put an end to the false reporting at Fox News.”
The lack of oversight by Fox’s directors — as demonstrated in the material unearthed during the Dominion proceedings — leaves board members open to charges that they failed to meet their fiduciary duties to shareholders, according to Sonnenfeld. Such gross negligence might allow Fox’s insurance carrier to escape responsibility for paying claims.
In some previous courtroom battles, corporate insurers have refused to shield directors from shareholder claims. In 2005, for example, 10 directors of WorldCom, a telecommunications company that collapsed amid charges of accounting irregularities, personally paid one-third of a $54 million settlement.
The directors agreed to pay after WorldCom’s insurers insisted their policies were null and void because company executives, including CEO Bernie Ebbers, had committed fraud.
There appears to be less uncertainty about the tax treatment of any Fox payments to Dominion.
The IRS permits deductions for such settlements with few exceptions, such as in cases involving allegations of sexual harassment. The precise tax benefit for Fox will depend upon the details of the payment schedule and its tax returns, according to a veteran tax attorney who asked not to be identified because of business links with Fox.
But as a rough guide, given the corporate tax rate of 21 percent, the deduction could be worth $165 million, if Fox paid the entire $787 million itself.
