WILMINGTON, Del. (Legal Newsline) - Former CBS shareholders can sue Shari Redstone and directors who rubber-stamped the company’s merger with Viacom, a Delaware judge ruled, less than a month after he allowed Viacom shareholders to sue over the same transaction.
Acknowledging it was a “rare, but not unheard of twist,” Chancery Court Judge Joseph Slights III said CBS investors had adequately pled claims that Redstone’s hand-picked directors and former CBS Chief Executive Joseph Ianiello had beached their fiduciary duties by approving the combination. CBS shares immediately tanked after the merger was announced in August 2019, losing billions of dollars in market value before the deal closed four months later.
Redstone controlled both Viacom and CBS through a trust established by her father, Sumner Redstone. Sumner Redstone maintained CBS as a separate company with an independent board of directors but as he became incompetent with old age Shari repeatedly tried to combine the two companies over the objections of CBS directors, finally succeeding in 2019.
“The well-documented history of Ms. Redstone’s past attempts at merging Viacom with CBS regardless of the transaction’s economic merit, and past boards’ fervent resistance to her efforts, must color the lens through which the Court scrutinizes the faithfulness with which the CBS Board executed its fiduciary duty during the third, and successful, attempt at a merger,” Judge Slight wrote, in a colorful decision packed with references to the Beach Boys, Greek mythology and Delaware corporate law.
Redstone and ViacomCBS argued the lawsuit should be dismissed because it presented derivative claims against officers and directors that legally belong to the company itself unless it authorizes the plaintiffs to sue. The judge disagreed, ruling that it would be futile for the plaintiffs to ask the board to effectively sue itself, since the directors face personal liability on allegations of breaching their duty of loyalty.
The defendants also argued the plaintiffs failed to show the Redstone derived benefits from the merger that weren’t shared by CBS’s minority shareholders. The judge refused to dismiss on that basis, citing the declining stock performance of Viacom before the merger, suggesting Redstone had strong financial reasons to fold struggling Viacom into CBS even if that shortchanged CBS investors.
While it was still independent, CBS’s board rejected Redstone’s first attempt to merge the two because they believed she was trying to “thrust a foundering Viacom” into CBS and wouldn’t agree to put it to a vote of CBS’s minority shareholders, the judge wrote. When she tried again, CBS proposed a special dividend that would dilute Redstone’s controlling 80% position to 17%.
Viacom sued CBS to prevent the dividend and gained board control in a 2018 settlement. Under that settlement Redstone was supposed to wait two years before attempting another merger but she immediately began again, the plaintiffs claim.
Normally under Delaware law, officers and directors are protected against lawsuits over corporate strategy by the “business judgment rule,” which gives corporate management wide leeway to make decisions, even if they look foolish in hindsight. But when a single shareholder controls both companies seeking to merge, the safest course is to allow an independent panel of directors approve the deal and subject it to a “majority of the minority” vote of non-controlling shareholders.
Redstone refused either concession, opening herself and the directors to what is called entire fairness review, where the court examines all the facts surrounding the transaction to determine if it was fair to minority shareholders.
Bucks County filed a request to inspect CBS’s records in September 2019 and sued the following February. Judge Slight said there was enough evidence to allow claims against Redstone and directors who approved the merger to proceed, as well as claims that Ianiello violated his fiduciary duty to CBS shareholders in exchange for a richly renegotiated pay package.
Buying loyalty from her executives “is a well-worn play in Ms. Redstone’s playbook,” the judge wrote.
“Ms. Redstone paid off former Viacom CEO Dauman with $72 million in severance to settle a lawsuit prompted by her unilateral replacement of six Viacom directors with her own selections shortly after seizing control of NAI and the SMR Trust,” the judge wrote, so it is not unreasonable to assume she did the same with Ianiello.
The decision allows the case to proceed to discovery, as with the lawsuit by Viacom shareholders over the same transaction.