Dispute over a Proposed Merger Escalates into Corporate Governance Saga among CBS, a Controlling Stockholder and Other Stockholders

On May 17, 2018, in CBS Corp., et al. v. National Amusements, Inc., et al., the Delaware Court of Chancery denied a motion by CBS and a special committee of its independent directors for a temporary restraining order to prevent Shari Redstone and National Amusements, Inc. (“NAI”) from taking actions to amend the corporate organizational documents or remove the CBS board. The current dispute has its roots in 2016, when Ms. Redstone began to pursue a merger of CBS and Viacom, another NAI-controlled entity and the former parent of CBS. The two sides could not reach an agreement and CBS claimed Ms. Redstone took a series of actions designed to assert NAI’s control over CBS and thwart CBS’s commitment to independent corporate governance. Through ownership of dual class voting stock, Ms. Redstone effectively controlled 79.6% of the voting power of CBS despite owning only a 10.3% economic stake in CBS. On May 13, after rejecting NAI’s most recent merger proposal, CBS scheduled a special board meeting for May 17 to consider issuing a stock dividend, pursuant to powers granted the board in the certificate of incorporation to issue dividends. The dividend CBS contemplated would have diluted NAI’s voting power in CBS to 17%, but was conditional on the Delaware court’s finding the measure legally and equitably permissible. The justification for the dividend was a concern that NAI would use its voting power to remove the board and force a merger with Viacom that the board believed was not in the non-NAI shareholders’ best interests. The board filed a complaint on the morning of May 14, 2018 seeking a declaration that the dividend was appropriate and a TRO preventing NAI from interfering with the board, its composition or any of its decisions (i.e. the dividend) until the Court could rule on the appropriateness of the board’s action. However, one hour after the complaint was filed, NAI delivered to CBS consents amending CBS’s bylaws to require the approval of 90% of the board to declare a dividend. If effective, this action would have ensured the outcome of the May 17 board meeting because NAI controlled three of the 14 seats on the CBS board. The Court denied the TRO application on the grounds that NAI had not yet taken any actions that were irreparable – the 90% bylaw could still be challenged as could any merger forced by NAI. Therefore, in the Court’s view, nothing was about to happen that would cause CBS irreversible injury. Yet, the Court did find CBS’s claim of a right to dilute NAI’s voting interest “colorable.” The Court contrasted CBS’s public promises of independent board governance with certain alleged actions of NAI and Ms. Redstone including: putting her personal lawyer on the CBS board; undermining the CBS management team; refusing to agree to typical public company governance measures in a merger with Viacom or to subject the merger to the approval of a vote of a majority of non-affiliated shareholders; deterring other bidders for CBS; and being prepared to remove members of the special board committee put in place to consider a Viacom merger. In denying the motion without ruling on the merits of the claim, the Court cited precedent which endorsed a controller’s right to make the first move preemptively to protect its controlling interest. The Court noted that protective, “self-help” actions by Ms. Redstone would not create irreparable harm because such actions would still be subject to judicial review, and the Court, if appropriate, could provide judicial relief in a case where Ms. Redstone breached her fiduciary duty to the minority. Since the ruling, the dispute has unfolded even further:

  • Later on May 17, CBS announced that the CBS board declared the dilutive dividend, “conditioned on a final determination by the Delaware courts, including a final decision on or the exhaustion of time for any appeals, that the dividend is permissible.”

  • CBS postponed its annual meeting from May 18 to August 10, 2018.

  • On May 29, Ms. Redstone filed suit alleging CBS improperly attempted to suppress her influence, thereby violating the bylaws.

  • On May 31, a large shareholder of CBS filed a complaint against Ms. Redstone and NAI claiming that interference with the stock dividend breached the defendants’ implied duty to the minority among other claims.

  • The Court set a trial date for the CBS-NAI suit for October 3, 2018.