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A version of this story first appeared in the Dec. 11 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.
When Sumner Redstone’s former companion Manuela Herzer marched into Los Angeles Superior Court on Thanksgiving eve with a lawsuit detailing his allegedly floundering mental state, representatives for the Viacom and CBS Corp. executive chairman quickly fired back that the gambit amounted to nothing more than a “preposterous” money grab from a jilted lover. And even if Herzer’s intentions are pure, and she simply wants to remain his caretaker, those representing Redstone insisted that the fight over who makes health-care decisions for the ailing 92-year-old billionaire would have no impact on the media empire he controls.
“Money is not what all of this is all about,” O’Donnell (center) said of Herzer. “She is spending a substantial amount of money on lawyers to vindicate his rights.”
While it’s true Herzer, 46, has scant hope of gaining any stake in Viacom or CBS through her efforts to have Redstone declared incompetent, her swift expulsion from his life — after nearly two decades, Herzer was thrown out of Redstone’s Beverly Park estate Oct. 12, days after another companion, Sydney Holland, suffered the same fate — indeed could have crucial implications for the two entertainment giants with a combined market cap of $45 billion.
First, Redstone’s controlling stake in both Viacom and CBS is protected by an irrevocable trust set up decades ago. As acknowledged by a CBS filing with the FCC earlier this year, Redstone controls this trust until his “incapacity or death.” In the event of either situation, seven trustees, including a lawyer for his first wife, Phyllis, daughter Shari Redstone, Viacom chief executive Philippe Dauman and attorneys with close ties to the Redstone family will gain voting power. Put another (indelicate) way, Redstone doesn’t need to die for the keys of the kingdom to be transferred. If he is deemed incapacitated, it could be enough of a trigger to set the trust in motion. So how is incapacity determined? The answer can be tricky, say several probate attorneys.
The trust instrument itself can spell out who makes the call, but according to lawyer Burt Levitch, an expert in estate planning, “No matter what the trust says about incapacity, a determination by a court could well be dispositive of the issue and could provide for transfer of control.”
Hence, the significant stakes of Herzer’s efforts.
A Viacom insider doesn’t dispute this assessment, merely calling it speculative based on the “unlikely” event that Herzer is successful in getting a physician to examine and declare Redstone mentally incompetent and Probate Judge Clifford Klein backing up that assessment. Redstone’s attorneys have been working overtime to head this off, submitting declarations by his primary care physician Richard Gold and Dauman attesting to Redstone’s continued fitness. On Nov. 30, after hearing from Herzer’s lawyers Bert Fields and Pierce O’Donnell (who repped Shelly Sterling in her successful effort to have L.A. Clippers owner Donald Sterling declared incompetent) how Redstone is confused, cries, demands sex and steak daily and is emotionally distraught when told by doctors that he can’t indulge his “prurient urges,” Judge Klein rejected Herzer’s demand for an expedited schedule, determining there was “no urgency” since Redstone has full-time care with no indication of critical health issues.
Still, the prospect of Redstone eventually being declared incapacitated isn’t going away. His legal team, led by Gabrielle Vidal, has presented the media mogul as “engaged and attentive” but has admitted he’s an elderly man with speech troubles and the need of an “A team” to monitor his condition, even going so far as to give him a brain scan. Sources close to Redstone’s staff at his estate paint a more dire picture, telling THR his health has deteriorated significantly in the months since Herzer and Holland threw him a 92nd birthday bash in May with a “passion to party” theme. Herzer is building her case for a hearing scheduled early next year. Others with a stake in the Viacom and CBS empire also are poised to cause disruption.
Redstone’s trust, said to be modeled after the one that was once set up to manage Edward W. Scripps’ media empire, anticipates certain issues upon the transfer of power. For instance, because it is a “generation-skipping” trust (the beneficiaries are Redstone’s grandchildren instead of his children), Redstone has avoided potential estate tax liabilities that might force the sale of his companies.
Also, some wonder whether Viacom or CBS has a duty per SEC regulations to disclose Redstone’s medical condition, but the company isn’t controlled directly by Redstone. His trust is the majority stakeholder, through a subsidiary of National Amusements. Dead or alive, Redstone’s condition doesn’t technically change ownership of the public companies. Redstone also is a very different type of executive than, say, Apple co-founder Steve Jobs, who was criticized for not disclosing medical issues while running the company. Redstone, by contrast, does not take a daily role in corporate activity, leading several legal observers to doubt his condition qualifies as having an adverse material corporate impact. (It’s also not a secret he’s elderly.)
Though some like University of Delaware professor Charles Elson believe that Redstone’s mental difficulties qualifies as a material event, Irwin Kishner, an attorney specializing in securities law at Herrick Feinstein doesn’t believe his companies need to file any disclosures with the SEC. “You can’t tell me anybody is buying or selling stock based on Redstone’s health. And to say a 92-year-old is experiencing these medical issues approaches common sense.”
Nonetheless, once Redstone exits the picture, a fuse will be lit. For example, both Dauman, 61, and CBS chief Leslie Moonves, 66, have provisions in their employment agreements that allow them substantial severance if they are not made chairman after Redstone’s departure. This could force quick decisions from the newly empowered Redstone trustees about leadership and direction of the companies.
It certainly has been a challenging year for Viacom, fueled by ratings woes at such networks as Nickelodeon, MTV and VH1, advertising declines and distributor pressures. Viacom’s share price is off 33 percent in calendar 2015 compared with a 1 percent gain for the S&P 500. The company’s reported revenue fell 4 percent to $13.27 billion in the most recent fiscal year. CBS has done better by comparison, but its share price is down 8 percent and revenue is off 1.5 percent to $10 billion. Cord-cutting, ad-skipping and other shifts have necessitated nimble thinking in the TV industry, making this an inopportune time for leadership uncertainty.
Said Redstone lawyer Vidal of Herzer’s effort: “This has nothing to do with Ms. Herzer’s concern for Sumner Redstone, and everything to do with … her own financial agenda.”
Wall Street analysts care more about the larger industry challenges than the Redstone drama, but they acknowledge it has left a pall of uncertainty over the companies. “It is so vague and unknown exactly what will happen after his death … so it is very difficult for investors to game out,” says Steven Birenberg of Northlake Capital Management. Adds Benjamin Swinburne at Morgan Stanley, “It is important, but we have no insights into the situation.” At least two analysts have raised the topic of Redstone’s departure in the context of possible sales of the companies. “His death would be greeted by an initial pop in Viacom and CBS [stock] as it could move one step closer to eventual involvement of either company in mergers and acquisitions,” says Birenberg. Adds Barton Crockett at FBR Capital Markets in a note published Nov. 25, the same day Herzer filed court papers: “We believe ignoring a premium-priced merger or breakup offer could prompt litigation from a family that understands the value of lawsuits. So the bear thesis that Dauman could force the trust to resist a sale to protect his job looks implausible.”
Crockett touches on a developing dynamic that fascinates those watching how this morbid drama plays out. The trustees are dominated by such nonfamily members as Dauman and long-time Redstone lawyer George Abrams. But Shari and her son Tyler Korff, who also will become trustees, hold big sway because the trust has been established for the grandchildren. Shari, 61, is said to be positioning herself to assert more control over her father’s affairs despite their often frayed relationship. One insider suggests she was heavily involved in “cleaning house” this fall by ousting her father’s girlfriends.
It’s notable that when Herzer filed her lawsuit, Shari put out a statement saying she was “actively involved in Sumner’s care,” distancing herself from Herzer’s efforts. At least publicly, those who are set to take over for Redstone agree that now isn’t the time yet. But the situation seems likely to change swiftly.
Paul Bond and Kim Masters contributed to this report.
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