CBS Upgrades Stakes in Feud With Redstones -- WSJ
By Joe Flint and Keach Hagey
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 15, 2018).
CBS Corp. moved to break free from the Redstone family's grip and thwart what it fears would be a forced merger with Viacom Inc., escalating a yearslong power struggle over the fate of the two media giants.
CBS filed a lawsuit Monday against the Redstones and their family holding company and invoked a little-known provision in the CBS corporate charter that it claims would allow it to issue voting shares to all stockholders, significantly diluting the voting power that the Redstones have held over CBS for nearly two decades.
The maneuver amounts to the triggering of what has been described as a "nuclear option" in the long-running power struggle between Shari Redstone and CBS Chief Executive Leslie Moonves, who has resisted her efforts to merge CBS and Viacom for two years.
In the lawsuit filed in a Delaware court, CBS and a special committee of independent directors sued Ms. Redstone, her father, Sumner Redstone, and their National Amusements Inc. holding company. CBS and the committee say they are seeking to prevent the Redstones and their company from breaching their fiduciary duties and causing irreparable harm by forcing a merger of CBS and Viacom, among other issues.
National Amusements controls almost 80% of the voting stock in both companies, giving it power to decide shareholder votes and elect directors.
Over the weekend, the CBS special committee, tasked with evaluating the possible recombination with Viacom, decided the merger wouldn't be in the best interests of all CBS investors, according to the suit.
CBS said it is seeking a temporary restraining order to prevent Ms. Redstone, president of National Amusements and vice chairman of both CBS and Viacom, from replacing CBS board members and forcing through a merger.
In recent weeks, merger talks have come to a standstill as Mr. Moonves and Ms. Redstone clashed over Ms. Redstone's insistence that Viacom CEO Bob Bakish be given a significant role in the merged company. "It was getting to a place where it was either do the deal or start to replace the board," said one person close to Ms. Redstone.
The lawsuit took Ms. Redstone by surprise, according to a person familiar with her thinking. National Amusements called both the suit and the attempt to wrest voting control from the holding company "outrageous." It contested CBS's characterization of events, and said it would vigorously defend itself in court.
National Amusements said it "had absolutely no intention of replacing the CBS board or forcing a deal that was not supported by both companies."
The temporary restraining order would buy time for CBS's board to consider a proposed dividend that would issue new Class A voting shares to all stockholders, reducing National Amusements' voting power to 17% from almost 80%. The dividend wouldn't reduce any shareholder's economic interest, including that of National Amusements, which holds about a 10% equity stake through voting and nonvoting shares. CBS's board is set to meet Thursday, ahead of the company's Friday annual meeting. A hearing on the restraining order is expected Wednesday.
The special dividend provision was inserted in the two companies' charters in 2005, when then-Chairman Sumner Redstone decided to split CBS from Viacom. Mr. Redstone was concerned about any appearance that voting shareholders at the companies were favored over nonvoting shareholders, because of the potential drag that could create on the stock prices, according to people familiar with the matter. He wasn't concerned about the threat the provision posed to his voting control because he knew that, at any time, he could overhaul either board before it voted for such a dividend, the people said.
Mr. Redstone is still CEO of National Amusements but no longer sits on the boards of CBS and Viacom. The 94-year-old is in ill health and no longer able to speak. His lawyer didn't respond to requests for comment.
CBS was aware of the charter provision for some time but only in recent weeks decided to use it to attempt to thwart Ms. Redstone's plans to re-merge the company with Viacom, a person familiar with the company's thinking said.
A National Amusements spokeswoman said the company "strongly disagrees with CBS's interpretation of this provision."
Even with the provision, CBS could face a high legal hurdle as courts have typically been reluctant to allow a board to "torpedo controlling ownership" except in "really compelling circumstances," said Lawrence Hamermesh, a professor of corporate and business law at Widener University Delaware Law School.
In 2016, Ms. Redstone's longtime rival, then-Viacom CEO Philippe Dauman, was ousted in a power struggle that included the overhaul of Viacom's board.
At the time, the former management of Viacom, which has similar language in its charter, weighed triggering the provision but ultimately decided against such a "nuclear option," according to a person familiar with the matter, in part because Viacom's former management didn't have the same standing on Wall Street that CBS's management currently has.
If CBS fails in its legal pursuit and reduction of National Amusements' control, Ms. Redstone will still have the power to overhaul the company's board and replace management, including Mr. Moonves.
"CBS has committed itself to a path that is a lot more binary. If management's chosen path is successful, CBS's strategic options would open up considerably," Barclays analysts wrote in a note Monday. "However, if CBS loses the case, the deal would more likely happen on Viacom's terms, and Viacom management would likely gain control of CBS."
The five independent directors on the special committee, who are listed as plaintiffs on the lawsuit along with CBS Corp., are Bruce S. Gordon, Gary L. Countryman, Charles K. Gifford, Linda M. Griego and Martha L. Minow. CBS says that nine of its 14 board members qualify as independent.
If the stock dividend is approved, these directors said in court documents, they are prepared to step down from the board and not stand for re-election, allowing public shareholders of CBS to elect the board of their choice. The dividend wouldn't be effective until the court has ruled.
CBS shares rose 2.2% Monday, while Viacom shares fell 4.9%.
CBS says in its complaint that Ms. Redstone took control of her father's trust, National Amusements and Viacom "under circumstances that have been and continue to be the subject of litigation." A lawyer for Ms. Redstone has called the claims against her "fanciful."
The CBS suit accuses Ms. Redstone of interfering with governance at CBS and putting a lawyer who represents the Redstones on its board.
The court filing also says Ms. Redstone in the past year told the CEO of a potential acquirer of CBS to not make an offer to the board, which the board should have been able to evaluate and use as leverage in other negotiations. Verizon Communications Inc. was the interested party, according to a person familiar with the matter.
In response to the lawsuit, National Amusements accused CBS of retaliating against Ms. Redstone for her complaints of "bullying and intimidation" by a CBS board member dating back to 2016. Ms. Redstone has discussed her concerns with CBS over the course of many months, and there was a provisional agreement that the director would either not be part of the merged company or, in the event of no deal, be removed from CBS's board, according to a person familiar with the matter.
Ms. Redstone had brought up her concerns again at the end of last week, the person said.
CBS declined to comment on the accusation.
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