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In re CBS Corp. Litigation

Court of Chancery of Delaware

July 13, 2018

In re CBS Corporation Litigation

          Submitted: July 9, 2018

          David E. Ross, Esquire Bradley R. Aronstam, Esquire Garrett B. Moritz, Esquire S. Michael Sirkin, Esquire Roger S. Stronach, Esquire Ross Aronstam & Moritz LLP

          Myron T. Steele, Esquire Donald J. Wolfe, Jr., Esquire Matthew E. Fischer, Esquire Michael A. Pittenger, Esquire Jacqueline A. Rogers, Esquire Potter Anderson & Corroon LLP

         Dear Counsel:

         This letter constitutes the court's ruling on the motion of National Amusements, Inc. ("National Amusements" or "NAI"), NAI Entertainment Holdings LLC, Sumner M. Redstone, and Shari Redstone (collectively, the "NAI Parties") to compel CBS Corporation and eleven members of its board of directors not affiliated with NAI (collectively, the "CBS Parties") to produce certain documents that are expected to be withheld on privilege grounds.[1] For the reasons explained below, the motion is granted in part and denied in part.

         I. Background

         CBS Corporation and Viacom Inc. were part of one company before they were split into standalone entities in 2005. 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. Ms. Redstone, through her control of NAI, effectively controls approximately 79.7% of the voting power of CBS. In contrast to its voting power, NAI owns only approximately 10.3% of the economic stake in CBS.

         Since 2006, the law firm of Wachtell, Lipton, Rosen & Katz has served as outside counsel to CBS and, from time to time, served as counsel to the nominating and governance committee and the compensation committee of the CBS board of directors (the "Board").[2] Martin Lipton, a founding partner of Wachtell Lipton, has been the primary partner handling the CBS representation.

         Wachtell Lipton has represented CBS in connection with a range of matters, some of which have implicated the relationship between CBS and its controlling stockholder and some of which have not.[3] With respect to the latter category, for example, Wachtell Lipton represented CBS in the divestiture of CBS Radio in 2017, in the split-off of its billboard advertising business in 2014, and in various "typical corporate finance matters as well as disclosure and SEC filing questions that arise in the ordinary course."[4] With respect to the former category, Mr. Lipton described Wachtell Lipton's role, in relevant part, as follows:

Wachtell Lipton has also advised CBS regarding the company's control relationship with National Amusements and individuals who control or could potentially control National Amusements, namely, Sumner Redstone and Shari Redstone. The topics of that advice have included the options available to the company vis-à-vis its controller as a legal matter, encompassing both National Amusements' obligations to the company and the company's other stockholders as a matter of Delaware law and the options available to CBS in dealing with its controller under Delaware law and the company's bylaws and certificate of incorporation. There were any number of times over the years when the company sought legal advice arising from concern that National Amusements and its principals might take actions that were not in the best interests of CBS and its stockholders and that would go against the long-standing and public representations regarding CBS's independent governance under an independent board of directors.[5]

         On September 27, 2016, NAI's outside counsel (Cleary Gottlieb Steen & Hamilton LLP) sent Wachtell Lipton a draft of a letter from NAI requesting that CBS consider a potential combination with Viacom.[6] The draft letter stated: "In light of [NAI's] controlling interest in each of [CBS] and [Viacom], we expect that each company will establish a special committee to evaluate, explore, consider and, if they determine advisable, negotiate a potential combination[.]"[7]

         On September 29, 2016, the Board adopted resolutions authorizing a special committee of independent directors (the "2016 Special Committee") "to act as a disinterested body for the purpose of considering, negotiating and overseeing the Potential Transaction, including if appropriate recommending in favor of or against the Potential Transaction to the Board and stockholders (the 'Special Committee Matters')."[8] The Board resolutions included a broad delegation of authority to the 2016 Special Committee:

[T]he Committee shall have the full powers, authorities, duties, rights and responsibilities of the Board with respect to matters relating to, or arising from, any Special Committee Matters including, without limitation, that the Committee shall be authorized and empowered to (a)take such actions as it may deem necessary or desirable to consider, negotiate and oversee the Potential Transaction, including with respect to making recommendations to the Board and stockholders with respect to the Potential Transaction to do or not to do the Potential Transaction, (b)determine whether any such Special Committee Matters are in the best interest of the Corporation and its stockholders and to report its recommendation to the Board and/or the stockholders of the Corporation, and (c) assist in the preparation and filing of any documents as may be required with respect to matters relating to, or arising from, any such Special Committee Matters[.][9]

         The Board resolutions authorizing the 2016 Special Committee and the charter for the committee that the Board approved both required that the directors, officers, and agents of CBS cooperate with it so that it could carry out its duties:

[T]he directors, officers, employees and agents of the Corporation . . . hereby are authorized and directed to cooperate fully with the Committee and its advisors to facilitate the matters within the scope of its authorities and responsibilities, including to provide the Committee with business, financial and other information as reasonably requested by the Committee[.][10]
* * * * *
All officers, employees and agents of the Corporation shall supply any information and take all appropriate actions as reasonably requested by the Committee or its representatives and to otherwise assist the Committee in carrying out its duties pursuant to this Charter.[11]

         The work of the 2016 Special Committee apparently ended in December 2016.[12]

         By early January 2018, Ms. Redstone again formally approached the boards of CBS and Viacom and pressed for a combination of the two companies.[13] On February 1, 2018, the Board adopted resolutions to form a second special committee (the "2018 Special Committee") "for the purpose of considering, negotiating and overseeing the potential combination" of CBS and Viacom.[14] The delegation of authority to the 2018 Special Committee is substantively the same as the delegation of authority to the 2016 Special Committee.[15] The Board resolutions authorizing, and the charter for, the 2018 Special Committee also contain identical directives requiring the full cooperation of directors, officers, employees, and agents of CBS as were adopted for the 2016 Special Committee.[16]

         The 2018 Special Committee remains active.[17] I refer to the 2016 and 2018 Special Committees hereafter collectively as the "Special Committees."

         On or about May 13, 2018, the 2018 Special Committee determined that a CBS/Viacom merger is not in the best interests of CBS stockholders, other than NAI.[18] The 2018 Special Committee also recommended that the Board consider the issuance of a dividend of Class A voting stock to all holders of Class A voting and Class B non-voting stock (the "Stock Dividend").[19] The Stock Dividend, the implementation of which is subject to judicial approval, [20] would have the effect of reducing NAI's voting power from approximately 80% to 20% if implemented, but would not dilute the economic ownership interests of any CBS stockholder, including NAI.[21]

         On May 16, the day before a Board meeting requested by the 2018 Special Committee, NAI executed and delivered written 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"). On May 17, the Board voted to approve the Stock Dividend by a vote of 11-3.[22] NAI's three designees to the fourteen-person Board- Ms. Redstone, David Andelman, and Robert Klieger (the "NAI Affiliated Directors")-cast the only dissenting votes.[23]

         This litigation commenced on May 14, 2018. An expedited trial to adjudicate the validity of the Stock Dividend and 90% Bylaw, among other matters, is scheduled to commence on October 3, 2018.

         II. The Parties' Contentions

         In its motion, the NAI Parties seek to compel the CBS Parties to produce two categories "of privileged materials involving communications with CBS Counsel from before May 14, 2018:"

1. Communications with and between CBS Counsel and any officer or director of CBS.
2. Communications between the (i) members of the special committees of the CBS Board formed to consider a potential CBS/Viacom transaction or committee counsel, on the one hand, and (ii) CBS Counsel, on the other hand.[24]

         The term "CBS Counsel" is defined as "in-house and outside counsel to CBS and its board, "[25] which means, for purposes of this motion, in-house counsel and Wachtell Lipton.[26] The NAI Parties contend that the NAI Affiliated Directors are entitled to the above two categories of documents on the theory that they have a right as directors of a Delaware corporation to unfettered access to any legal advice rendered to CBS or other members of its Board as joint clients of CBS Counsel.

         The CBS Parties advance essentially four arguments in response. First, they contend that the NAI Parties have no right to privileged communications concerning the "use or abuse of NAI control" from 2005 forward because NAI and its designees on the Board would have been adverse to CBS on this issue "from the get-go" and thus "could not have reasonably expected that they were represented by CBS's outside counsel as to these issues."[27]

         Second, focusing on a shorter time period beginning in September 2016, the CBS Parties contend that "the NAI Parties have no right to CBS's privileged documents concerning the CBS/Viacom merger proposals, whether emanating from the Special Committee or not" because "[a]dversity on that subject was obvious from the moment in 2016 when NAI first placed itself across the negotiating table from CBS."[28]

         Third, in a narrower variation of its second argument, the CBS Parties contend that the "NAI Parties have no right to privileged documents related to the Special Committees' processes," meaning "privileged communications (1) between the Special Committee and CBS's inside and outside counsel and (2) between CBS management and CBS's counsel in aid of the Special Committee process."[29]According to the CBS Parties, these communications are protected by the Special Committees' privilege because the Special Committees were "explicitly authorized to work with and direct 'directors, officers, employees and agents'" of CBS.[30]

         Finally, the CBS Parties contend that "even if certain NAI Affiliated Directors were entitled to access CBS's privileged documents in their capacities as directors, the other NAI Parties-including NAI and its counsel-have no right to such information [because] NAI lacks the contractual designation rights required to access such information."[31]

         III.Anal ...

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