CBS Corp.’s board of directors late Thursday voted to strip its controlling stockholder of most of her voting power, setting up the next showdown in the media giant’s ongoing struggle with Shari Redstone and her family’s National Amusements Inc. for control of the company.
At a special board meeting, the CBS directors made good on their promise to issue a dividend to dilute Redstone’s voting power from 80 percent to approximately 20 percent. However, the move was subject to court approval and is expected to be the focus of intense litigation in the coming weeks.
CBS said in a statement that it had cancelled its annual meeting of stockholders, scheduled for Friday, where investors were expected to vote on a slate of directors to the board.
National Amusements, meanwhile, dismissed the move as “pure pretext,” saying that it had the authority to shoot the dividend down after amending the company’s bylaws earlier in the week.
“CBS management and the special committee cannot wish away the reality that CBS has a controlling shareholder,” the company said in a statement.
“NAI yesterday exercised its legal right to amend the company’s bylaws to require a supermajority vote on certain board actions with respect to dividends, effective immediately. In light of the board’s action today, that action was plainly necessary, and it is valid.”
The late drama followed a Delaware Chancery Court judge’s decision earlier in the day to deny CBS’s request for a temporary restraining order against Redstone. And it added to a whirlwind week of litigation and corporate posturing, as both CBS and its controlling shareholder tried to outmaneuver each other in a high-stakes battle with potentially wide-ranging consequences for the future of CBS.
Just a day prior, Chancellor Andre G. Bouchard had ordered a brief standstill in CBS’s lawsuit until he could issue a full decision on the company’s motion to block Redstone from making any changes to the CBS board, amid fears that she would use her influence to overhaul the CBS board in order to force a merger with CBS sister media company Viacom Inc.
National Amusements and attorneys for Redstone have denied any intention to replace CBS directors.
Earlier on Wednesday, National Amusements had abruptly changed the CBS bylaws to require 90 percent of CBS’s 14 directors to approve board actions that would threaten Redstone’s control, giving her an effective veto over a planned dividend. The supermajority requirement is in effect, and CBS would need to challenge the provision in order for it to be found invalid.
In his ruling Thursday morning, Bouchard said National Amusements’ “act of self-help” Wednesday afternoon “belies” Redstone’s claims that she does not intend to overhaul the CBS board in pursuit of a merger with Viacom, but found that CBS would not suffer irreparable harm without a restraining order.
“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,” Bouchard said, adding that CBS had made a “colorable claim” for breaches of fiduciary duty by Redstone and National Amusements.
While there was no precedent for CBS’s request, Bouchard said Chancery Court case law does allow Redstone to act pre-emptively to protect her controlling interest. Under Delaware law, CBS would still be able to challenge Wednesday’s bylaw changes, he said.
In a statement, CBS vowed to continue its fight in court.
“While we are disappointed that the judge did not grant a TRO, 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 do so,” the company said. “We remain confident that we will prevail in the lawsuit previously filed by CBS and the members of its special committee.”
National Amusements, meanwhile, dug in on Thursday, saying it was pleased with the court’s decision to deny an “unprecedented motion” from CBS to “deprive a shareholder of its fundamental voting rights.”
“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 and a special committee of five independent directors filed the lawsuit Monday morning, accusing Redstone of actively trying to undermine the company’s management team by seeking a recombination of Viacom and CBS, which are both controlled by the Redstone family and National Amusements.
According to court documents, the special committee had determined on Sunday night that the deal was not in the best interest of CBS or its shareholders.
In the complaint, CBS said Shari Redstone was planning to oust board members in order to pursue a deal with Viacom, which split from CBS in 2005 under the tenure of Shari Redstone’s ailing father, Sumner Redstone, who relinquished his role as chairman of CBS two years ago. Shari Redstone and National Amusements retained 80-percent voting power in both CBS and Viacom, despite holding a 10-percent stake in each company.
CBS said Redstone first attempted a Viacom-CBS merger in early 2016, but the deal foundered when CBS demanded protections that would limit National Amusements’ influence over the combined company.
However, CBS said Redstone relaunched her efforts in January, causing Viacom’s stock to soar while CBS’s stock plummeted 28 percent from its 52-week high in April, representing a $7 billion loss in market capitalization for CBS’s public investors. Meanwhile, CBS accused Redstone of eschewing a third-party offer for the company and refusing to submit the suggested deal with Viacom to a stockholder vote.
National Amusements earlier this week called the suit “outrageous” and denied any intention of replacing CBS’s board to force a deal that was not supported by both companies.
At a Wednesday afternoon hearing, an attorney for Redstone decried the suit as a “Monday morning ambush,” meant to permanently strip Redstone of her controller status. Counsel for CBS countered that the company’s request for a temporary restraining offer was narrowly tailored and would not take effect until the court had ruled on its legality.
After two hours of argument in a Wilmington courtroom, Bouchard entered an interim order pausing the case, saying he had “never seen anything quite like what transpired here.”
In his ruling, published just before noon Thursday, Bouchard said CBS had acted in a “sensible and timely” manner, but the case had raised the question of whether a company’s controller or its board should have “first-mover” advantage to take action in a corporate dispute.
The clearest precedent, he said, “expressly endorsed” a controller’s right to pre-emptively protect its interest.
“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,” he wrote.
A team of attorneys from Wachtell, Lipton, Rosen & Katz in New York is representing CBS in the case. The five independent directors—Gary L. Countryman, Charles K. Gifford, Bruce S. Gordon, Linda M. Griego and Martha L. Minow— are represented by attorneys from Weil, Gotshal & Manges in New York.
Ross Aronstam & Moritz in Wilmington is acting as local counsel for the plaintiffs.
The Redstones and National Amusements are represented by Cleary Gottlieb Steen & Hamilton in New York and Potter Anderson & Corroon in Wilmington.
The case is captioned CBS v. National Amusements.