Top CBS Investor Hints at Lawsuit Over Viacom Merger

Sumner Redstone and Mario Gabelli - H 2015
Frederick M. Brown/Getty Images; Hal Horowitz/WireImage

The worst-kept secret in the media business is official: Viacom and CBS Corp. are merging again, with Shari Redstone becoming chair of the combined entity. But will shareholder litigation get in the way?

Upon the announcement, Mario Gabelli, the biggest independent holder of voting stock in the two companies, wasn't happy. He tweeted, "Breach of Fiduciary duties.........lawyers at work."

The history of CBS/Viacom is, in many ways, a tale of corporate and media law.

Viacom exists, in the first place, because the FCC came out with rules in 1970 that forbid television networks from holding interest in companies that produced or syndicated content. Those fin-syn rules caused CBS to spin off Viacom, even if Sumner Redstone eventually regained control in a proxy fight. The relaxation of fin-syn rules in the 1980s, and subsequent repeal in the early 1990s, eventually resulted in a Viacom/CBS reunion in 1999. The "Humpty-Dumpty" merger, as The New York Times put it at the time, had some complications as Viacom had amassed its own local station holdings (remember UPN?) and thus the '99 merger had to negotiate the FCC's then-35 percent cap on national television ownership.

Redstone managed his way past that tangle, even if he did have to appear before Congress to testify about media competition and consolidation. But the reunion would only last a few years. In 2006, the companies decided to split again.

It wasn't therapists intervening to cause the divorcees to re-explore their love for one another. Instead, Shari Redstone's ascendency and an unquenchable need for "scale" in the digital era has caused yet another reunion in this on-again, off-again, on-again relationship.

This time, thanks to the rise of digital giants like Netflix and Amazon and the perception that Viacom and CBS are stewards of a struggling legacy operation in the entertainment business, analysts don't expect regulators to put up a fight this time.

Instead, if there are any hiccups at all, it could be from shareholders.

The Redstones control CBS and Viacom through National Amusements, Inc., and it's a dual-class voting structure that has largely allowed the family ultimate power, even if public stockholders hold 90 percent of CBS’s equity. Nevertheless, Redstone has fiduciary duties to all shareholders of CBS and Viacom.

For months, Gabelli has been cold and hot about a deal.  

Last year, he told CNBC that the companies should remain separate for now with the opinion that CBS was a "loaded laggard" and Viacom a "doubly loaded laggard." But just two weeks ago, he apparently changed his mind by expressing to that same network that the merger has “got to” happen and “should come together for scale.”

But maybe the details count.

On Twitter, Gabelli raises the issue of "appraisal rights for voting shares," which basically is code for how a corporation's minority shareholder has the right for an independent valuation of stock price for repurchased shares. 

If he files suit, it's likely coming in Delaware Chancery Court and may include some of the backstory behind the merger including the Redstones' successful battle against Leslie Moonves over control of CBS.

In the meantime, CBS and Viacom tout synergies, with analysts weighing in about why this time it's different. All the king's horses and all the king's men gathered to put Humpty back together again.