8:42am PT by Eriq Gardner
CBS Can't Stop Shari Redstone From Interfering With Key Board Meeting
A special committee of the board of directors at CBS won't be able to stop Shari Redstone from interfering with its meeting where it will consider a proposal to dilute the voting power of National Amusements, Inc., otherwise known as the entity by which Redstone exerts stockholder authority over CBS and Viacom. On Thursday, a judge in Delaware Chancery Court decided to reject CBS' motion for a restraining order.
Chancellor Andre Bouchard says that CBS does have a good case.
"In my opinion, particularly given CBS’s proclaimed commitment to independent board governance, these allegations are sufficient to state a colorable claim for breach of fiduciary duty against Ms. Redstone and NAI as CBS’s controlling stockholder," he writes.
Nevertheless, CBS fails on the second prong of irreparable harm.
"Plaintiffs’ theory of irreparable harm has been somewhat elusive," he continues. "As I understand it, plaintiffs’ basic contention is that, if the court does not grant the unprecedented relief they are seeking in order to prevent Ms. Redstone from interfering with the Board’s consideration of the Dividend Proposal (or other matters that may arise) during the special board meeting scheduled for later today, Ms. Redstone would have 'the unfettered ability to replace the Board and cram down a merger with Viacom, or otherwise take action that is detrimental to the public stockholders who hold 90% of CBS’s equity.' Although NAI’s execution of consents to implement the 90% Bylaw within hours of the court’s hearing on the instant motion belies defendants’ contention that plaintiffs’ concerns about Ms. Redstone are hypothetical or speculative, I am not convinced that the harm plaintiffs fear would be irreparable. To the contrary, the court has extensive power to provide redress if Ms. Redstone takes action(s) inconsistent with the fiduciary obligations owed by a controlling stockholder."
The development comes after CBS, currently led by CEO Leslie Moonves, filed a surprise lawsuit on Monday that alleges Redstone has breached fiduciary duties in her alleged attempt to force a merger between CBS and Viacom. Worried that Redstone might wish to interfere with the planned meeting or begin replacing directors on the board (as happened a couple years ago at Viacom), CBS demanded the judge intervene and protect the independence of the board. Redstone responded she isn't attempting to force anything.
On Wednesday, shortly before a hearing on the matter, Redstone engaged in what's being characterized as "self-help relief." National Amusements looked to ensure that their voting power — currently 79 percent even though NAI only owns a 10 percent economic stake in CBS — couldn't be diluted through an issuance of a dividend to common stockholders. NAI announced that CBS bylaws had been amended so that board proposals could only pass with a supermajority of votes.
The proposal to dilute the voting power of the controlling stockholder is audacious. The idea to take Redstone's voting interest from 79 percent to 17 percent been called the "nuclear option," and at Wednesday's hearing, Bouchard asked CBS' lawyer, "Why am I not going to have a slew of cases with people setting up the same kind of challenges to the exercise by a controller of what they can do whenever there's tension in the boardroom? Why am I not opening the door?"
Legal observers have pointed to Facebook and Google as two other companies with dual-class structures where a controller like Mark Zuckerberg holds Class A stock and has ultimate say while others hold Class B stock and benefit financially from the company's performance. In the middle are the directors of a corporate board. This case examines this power dynamic.
While the judge seems to be aware of the stakes and what may be a precedential decision when it comes time to rule on the underlying merits of CBS' complaint, he also had to consider Redstone's "self-help," which commanded a lot of attention at the hearing, Bouchard also wondered about the harm in allowing the meeting to go forward.
"What is NAI afraid of?" he asked.
NAI attorney Meredith Kotler responded, "Because the controller has the right to get in front and take preventative action... What happened here was an ambush... They said, 'In three days — we'll give you one day to prepare papers and one day to come into court; but in three days, we're going to hold a meeting and go nuclear on you. As Your Honor said, full on, all out, wipe away, dilute, take away the control."
The judge replied that nothing would be effective until the court reviewed it.
Kotler acknowledged this point as being true.
Nevertheless, in the decision Thursday, Bouchard says there is no precedent for CBS' request and believes that ultimately, the matter will be back before the court for consideration of whatever happens at the meeting. The judge also examines the balance of equities, noting the inherent tension in law between a controlling stockholder's right to protect its control and the right of independent directors to respond to a threat from controlling stockholder. The judge is sympathetic to a request for "breathing space" so that a board might deliberate on options free of preemptive power plays from the controller, but that's not enough.
"No precedent has been identified, however, in which the court has ever entertained, much less sanctioned, the type of request for relief that plaintiffs make here," writes Bourchard in the decision (read here). "In and of itself, this suggests that a truly extraordinary set of circumstances would be necessary to grant such a request. The exigency of plaintiffs’ application precludes further consideration of this point of tension. Adlerstein, which expressly endorsed a controller’s right to make the first move preemptively to protect its control interest, is the clearest precedent and weighs heavily in defendants’ favor. Exercise of that right, of course, is subject to judicial review, which can afford full relief in this circumstance in my opinion to vindicate the interests of CBS and its stockholders, if appropriate."
A statement from NAI reacts to the ruling: “We are pleased by the court’s decision to deny CBS and its special committee’s unprecedented motion to try to deprive a shareholder of its fundamental voting rights. The court’s ruling today represents a vindication of National Amusements’ right to protect its interests. As we intend to demonstrate as the case proceeds, the actions of CBS and its special committee amount to a grievous breach of fiduciary duties and show no regard for the significant risk posed to CBS and its investors.”
CBS issued its own statement:
“Today’s ruling does not alter in any way the unyielding commitment of CBS and its Board of Directors to continue to act in and to protect the best interests of all CBS shareholders. Notably, the ruling clearly recognizes that we may bring further legal action to challenge any actions by NAI that we consider to be unlawful, and we will bring such action if needed to protect the interests of all shareholders. We remain confident that we will prevail in the lawsuit previously filed by CBS and the members of its Special Committee. As previously announced, the CBS Board will hold a meeting at 5PM today to consider declaring a dividend of shares of Class A common stock to all of the Company’s Class A and Class B stockholders, as is permitted under CBS’ charter. This dividend would more closely align economic and voting interests of CBS stockholders without diluting the economic interests of any stockholder."
CBS shares were down 6.5 percent at $50.32 soon after the decision was announced.