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CBS Corporation v. National Amusements, Inc.

Court of Chancery of Delaware

May 17, 2018

CBS Corporation, et al.
National Amusements, Inc., et al.

          Submitted: May 16, 2018

         Dear Counsel:

         This letter constitutes the court's ruling on plaintiffs' motion for a temporary restraining order that was argued yesterday afternoon. Although a more extensive discussion of the issues would be desirable, the need for an immediate decision necessitates brevity. For the reasons explained below, the motion is denied, and the order that was entered at the conclusion of yesterday's hearing to protect the court's jurisdiction pending this ruling is hereby rescinded.

         I. Background[1]

         Plaintiffs consist of CBS Corporation and five independent members of its Board of Directors (the "Board") who serve on a Special Committee of the Board that was formed to consider a potential merger of CBS and Viacom, Inc.

         Defendants consist of Shari Redstone, her father Sumner Redstone, National Amusements, Inc. ("NAI"), NAI Entertainment Holdings LLC, and the Sumner M. Redstone National Amusements Trust. Ms. Redstone, through her control of NAI, effectively controls approximately 79.6% of the voting power of CBS, although NAI owns only approximately 10.3% of the economic stake in CBS.[2]

         Before 2005, CBS and Viacom were part of one company, which also was called Viacom. In 2005, CBS and Viacom were split into the standalone entities they are today. CBS has two classes of stock, both of which are publicly traded on the New York Stock Exchange. The Class A common stock has voting power; the Class B common stock does not. Viacom has a similar dual class structure that gives NAI a similar level of voting control.[3]

         According to the complaint, Ms. Redstone began to pursue a merger of CBS and Viacom in 2016 on the heels of removing Viacom's then-CEO and replacing a number of directors on Viacom's board. The proposed deal allegedly foundered because Ms. Redstone would not agree to "the combined CBS/Viacom entity [being] managed as a non-controlled public company with a majority-independent board for at least the next five years."[4]

         Over the next two years, Ms. Redstone took various actions, some of which are discussed below, that "have led the Special Committee to conclude that she presents a significant threat of irreparable and irreversible harm to the Company and its stockholders."[5] By early January 2018, Ms. Redstone again formally approached the boards of CBS and Viacom and pressed for a combination of the two companies.[6] In response, the CBS and Viacom boards each formed special committees to evaluate and negotiate a potential combination.[7] During negotiations, Ms. Redstone allegedly "refused to agree to typical public company governance or submit any potential transaction to a vote of all of the unaffiliated public stockholders of CBS."[8]

         On Sunday, May 13, 2018, the Special Committee determined that a CBS/Viacom merger is not in the best interests of CBS stockholders, other than NAI.[9] The Special Committee contends that, in response to this decision, Ms. Redstone may "immediately replace members of the Board and use the new directors to force through the merger . . . and make other changes to the CBS organizational documents" to impede the Board.[10]

         At the request of the Special Committee, CBS scheduled a special board meeting to begin at 5 p.m. on May 17, 2018 to consider potential responses to Ms. Redstone's conduct.[11] At that meeting, the Special Committee intends to recommend that the Board approve a stock dividend of Class A voting shares to all holders of Class A voting and Class B non-voting shares (the "Dividend Proposal").[12] If approved, the dividend would dilute NAI's voting power from approximately 80% to 17%, but would not dilute its economic stake or the economic stake of any other CBS stockholder.[13] By any reckoning, the Dividend Proposal is an extraordinary measure, presumably reflective of the depth of concern the independent members of the Special Committee have about Ms. Redstone's intentions.

         Importantly, if approved by the Board, "CBS will not issue any Class A shares distributable in the stock dividend, or otherwise cause that dividend to become effective, pending further order of the Court."[14] In other words, the stock dividend would be conditional "unless and until the Delaware courts decide on a record whether it is legally and equitably permissible."[15]

         On Monday, May 14, 2018, plaintiffs filed their complaint and a motion for a temporary restraining order. The complaint contains three claims. Count I asserts that NAI, Mr. Redstone, and Ms. Redstone have breached their fiduciary duties as the controlling stockholder of CBS. Count II asserts a claim for estoppel against these same defendants. Count III asserts a claim for aiding and abetting against the remaining two defendants. In their motion, plaintiffs request that the court temporarily restrain defendants and their agents from:

(a) interfering with the composition of CBS's Board (other than electing the slate currently nominated for election at CBS's May 18 annual meeting of stockholders) or modifying CBS's governance documents until any actions approved at the special board meeting called for May 17 become effective;
(b) taking any other actions to interfere with any decisions to be taken by CBS's Board at the May 17 special board meeting; and
(c) interfering with the issuance of any shares payable in a stock dividend.

         No precedent has been cited in which this (or any other court) has granted such relief.

         Approximately two hours after the complaint was filed on May 14, the court scheduled a hearing on the motion for a temporary restraining order to begin on Wednesday, May 16 at 2 p.m. Approximately one hour before the hearing, defendants filed a letter informing the court that NAI had executed and delivered consents to amend CBS's bylaws to, among other things, require approval by 90% of the directors then in office at two separate meetings held at least twenty business days apart in order to declare a dividend (the "90% Bylaw"). Given that CBS's Board currently consists of fourteen members, three of which are NAI-designees, the 90% Bylaw (if valid) would allow NAI to block enactment of the Dividend Proposal.

         In light of NAI's act of self-help before the court could hear plaintiffs' motion for a temporary restraining order, the court entered the form of order submitted by plaintiffs in support of their motion at the conclusion of yesterday's hearing as an interim measure to protect the court's jurisdiction until it could rule on the motion (the "Interim Order").[16]

         II. Analysis

         A temporary restraining order may be issued when the movant demonstrates that: "[1] it has a colorable claim, [2] faces a likelihood of imminent, irreparable harm if relief is not granted, and [3] will suffer greater hardships if the TRO is not granted than the defendants would if the relief were granted."[17] The "colorable claim" requirement means that a plaintiff must state "essentially a non-frivolous cause of action."[18]

         Defendants make a threshold argument that a stronger showing should be required on the merits of plaintiffs' motion for two reasons. First, defendants contend that plaintiffs should be required to establish actual success on the merits on the theory that a temporary restraining order would not just maintain the status quo. Rather, according to defendants, a temporary restraining order would effectively provide plaintiffs with "final, irreversible relief" because, if the temporary restraining order were granted, defendants would lose forever the right to take corporate action before the Board votes on the Dividend Proposal.[19] A flaw in this argument is that the Dividend Proposal would not be "irreversible" if approved by the Board. To the contrary, as noted above, it is structured not to become effective until the resolution of any judicial challenge. The real issue underlying defendants' argument is who-a controller or a board of directors- should have "first-mover" advantage to take action and define the contours of a fight between them. I touch upon this issue briefly in my consideration of the balance of the equities.

         Second, defendants contend that plaintiffs at least should have to satisfy the reasonable likelihood of success standard necessary to obtain a preliminary injunction on the theory that plaintiffs delayed in seeking relief. I disagree with this contention. On the record before me, it appears that plaintiffs acted in a sensible and timely manner by filing their motion promptly after the Special Committee concluded on May 13 that a CBS/Viacom merger was not in the best interests of the Company, when the prospect of retributive action by the controlling stockholder became acute.

         A. Colorability of Plaintiffs' Claims

         The key premise of the complaint is that, since its separation from Viacom in 2005, CBS has held itself out as a company committed to independent board governance in order to assuage stockholder concerns about investing in a company controlled by the Redstones-the so-called "Redstone discount." To that end, CBS publicly has "touted the independence of its Board" and "represented that CBS was-and would be-governed by an independent Board despite being a 'controlled company.'"[20] For example, CBS stated in its registration statement in 2005, and repeated materially identical representations in its proxy statements every year between 2006 and 2018, that "a majority of the CBS Corp. directors must be independent, as 'independence' is defined in the NYSE listing standard and in the CBS Corp. Guidelines."[21]

         Indeed, according to plaintiffs, the fact that the certificate of incorporation of CBS (and Viacom), unlike those of some other controlled companies, authorizes the Board to approve a stock dividend that would dilute NAI's voting power is itself evidence of CBS's commitment to independent board governance. Defendants vigorously dispute this ...

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