WILMINGTON, Del. (Legal Newsline) - Viacom shareholders can sue Shari Redstone and her allies on the board of directors for forcing through a 2019 merger with CBS in order to fulfill her longstanding desire to create an entertainment conglomerate, a Delaware court ruled.
The decision by Chancery Court Judge Joseph Slights III rejected Redstone’s argument that plaintiffs needed to show more than the fact she controlled both companies through her ownership of Class A voting shares. When a controlling shareholder stands on both sides of a transaction, the judge ruled, courts can examine the terms of the deal to make sure all investors were treated fairly.
In this case, shareholders accuse Redstone of ousting directors at Viacom and replacing them with her own candidates in order to maintain control of both companies and keep CBS out of the hands of a feared technology-company buyer. Viacom and CBS ultimately merged in December 2019 in an all-stock transaction valued at $11.9 billion, about $1 billion less than a deal CBS rejected in 2018.
Shari Redstone’s father, Sumner Redstone, built Viacom from his father’s movie theater chain, National Amusements Inc., eventually acquiring control of CBS but maintaining its status as a separate company in part to avoid litigation over allegations of self-dealing, the judge found. Sumner Redstone also required the boards of both companies to approve his successor, the judge said, in an effort to prevent his daughter from taking charge.
After Sumner Redstone grew ill and withdrew from the company in 2016, Shari Redstone “began to whittle away at the governance protections her father had installed,” the judge wrote, first replacing executives and trustees of the trust that controlled NAI with her own candidates, then removing five of the 11 directors at Viacom. Soon after, she began trying to merge CBS and Viacom, while wary CBS directors rejected her overtures. Shari Redstone controlled both companies through her control of NAI, which owns 80% of the voting shares of Viacom and CBS.
Delaware courts consider it a “conflicted transaction” when a controlling shareholder competes with common stockholders for the benefits of the deal, whether that is money or other considerations. When that happens, the transaction is assessed under the “entire fairness” standard, a rigorous level of review most executives and corporate directors seek to avoid at all costs. When an entire fairness review is inevitable, however, the surest way to survive is to appoint an independent committee of directors to negotiate the terms of the transaction and require a majority of the minority shareholders to approve it.
Shari Redstone’s appointees on the negotiating committee refused to approve a “majority of the minority” vote, partly because they feared it would subject the transaction to entire fairness review. When shareholders sued over the merger, her lawyers argued Shari’s “mere presence” on both sides of the deal didn’t merit judicial scrutiny without more evidence of self-dealing. But Judge Slight disagreed, saying it was enough for shareholders to allege she prized control of the combined company and was willing to push through a transaction that was unfair to minority shareholders to achieve it.
The judge allowed the lawsuit to proceed against Shari Redstone and four directors, although he dismissed claims against ViacomCBS Chief Executive Robert Bakish, saying there wasn’t evidence he violated his duty of loyalty to shareholders.