20 May 2018

CBS Goes On Attack Against Redstones

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CBS Corp. has declared war on its controlling shareholder, suing Shari Redstone and her family’s National Amusements Inc. holding company for trying to force CBS to merge with Viacom Inc.   

The lawsuit is a move by the media company and its independent directors to reject the suggested merger, prevent Ms. Redstone from retaliating against the board for refusing the deal, and reduce National Amusements’ voting power.

Filed Monday in the Chancery Court in Delaware, the suit seeks to block National Amusements and its president, Ms. Redstone, from forcing a recombination of CBS and Viacom, which are both controlled by the Redstones. Ms. Redstone has been advocating such a combination over the past two years.

CBS and the five independent directors on its special committee say they filed the suit to prevent National Amusements, media mogul Sumner Redstone and his daughter Shari “from breaching their fiduciary duties and harming the Company and its public stockholders.”

The special committee, which was formed to evaluate a potential merger, said it has decided the proposed Viacom deal isn’t in the best interest of CBS shareholders and says Ms. Redstone poses “a serious threat of imminent, irreparable harm” to public stockholders.

In response, National Amusements said it would vigorously defend itself in court.

“National Amusements (NAI) is outraged by the action taken by CBS and strongly refutes its characterization of recent events,” the holding company said in a statement. “NAI had absolutely no intention of replacing the CBS board or forcing a deal that was not supported by both companies.”

Viacom declined to comment.

National Amusements controls CBS through a dual-class stock structure that gives National Amusements 80% voting power despite only owning about 10% of the company’s Class A and Class B shares. CBS said it has scheduled a board meeting this Thursday to consider issuing a dividend of voting Class A shares to all stockholders that would reduce National Amusements’ voting power to only 17%.

“The contemplated dividend would dilute NAI’s voting control so that Ms. Redstone is no longer able to block the CBS Board from considering appropriate corporate strategies in the best interest of all stockholders,” the suit said. Reducing the voting power would also prevent Ms. Redstone from replacing CBS’s independent board members.

CBS says the issuance of the stock dividend, which wouldn’t reduce any shareholders’ economic ownership, is “expressly permitted” by the company’s charter. If the dividend goes through, all CBS shareholders would then be able to elect the board of their choice, the lawsuit states.

CBS is seeking a temporary restraining order to block Ms. Redstone from making any changes to the board before Thursday’s meeting. The company’s annual meeting is Friday where some board members will be elected.

The lawsuit took Ms. Redstone by surprise, according to a person familiar with her thinking.

“This precipitous lawsuit, and the efforts of CBS management and its ‘independent’ directors to wrest voting control from NAI, are outrageous,” National Amusements said in the statement.

The holding company said it “believes CBS’s action today was precipitated following NAI raising specific concerns about incidents of bullying and intimidation in relation to one CBS director, dating back to 2016.” National Amusements didn’t identify the director, but a person familiar with the matter said the director in question sits on the CBS board’s special committee.

Ms. Redstone has discussed her concerns about this board member with CBS over the course of many months, and there was a provisional agreement that the board member would either not be part of the merged company or, in the event of no deal, be removed from the CBS board, according to a person familiar with the matter. As the merger talks dragged on and CBS’s annual meeting loomed, Ms. Redstone brought up her concerns about this board member again at the end of last week, the person said.

CBS declined to comment on National Amusements’ accusation.

Monday’s lawsuit is far from the first time that a power struggle over the Redstone family’s media empire has played out in court. Ms. Redstone rose to prominence two years ago in the wake of a power struggle at Viacom that led to the ouster of Viacom CEO Philippe Dauman and the replacement of some board members.

The legal proceedings around that fight also raised questions aboutMr. Redstone’s mental capacity. Soon after gaining power, Ms. Redstone pushed for the exploration of a merger between CBS and Viacom, which her father had split apart in 2006. After CBS proved reluctant unless it was granted various measures of control, National Amusements soon dropped the effort. It rekindled its merger efforts earlier this year in the wake of the announcement of several large media acquisitions.

CBS’s suit accuses Ms. Redstone, who is vice chairman of CBS and Viacom, of interfering with governance at the company and putting a lawyer who represents the Redstones on its board. She is also accused of seeking to replace CBS Chairman and Chief Executive Leslie Moonves and threatening to overhaul the CBS board so she can force a merger with Viacom.

Ms. Redstone also told a potential acquirer of CBS to not make an offer, “thereby depriving CBS stockholders of a potentially value-enhancing opportunity that the Board or Special Committee should have been free to evaluate,” the suit said.

The five independent directors, 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. If the dividend is approved, these directors said in court documents, they are prepared to step down from the board and not stand for re-election.

Since beginning to contemplate a merger earlier this year, CBS, Viacom and Ms. Redstone have been clashing over issues of leadership and valuation.

CBS wants management control of the combined entity, while Ms. Redstone had advocated that Viacom CEO Bob Bakish have a significant operating role. Ms. Redstone had recently backed off her demand for an executive role for Mr. Bakish that would put him in consideration to be the successor to Mr. Moonves, instead suggesting that he be offered a board seat, according to people familiar with the matter. A board seat for Mr. Bakish was also a non-starter for CBS, according to people close to the company.

CBS shares have declined since talks were rekindled with Viacom, as shareholders question the financial benefits of acquiring Viacom’s assets, which include about two dozen cable networks and the Paramount Pictures studio. Viacom’s stock has underperformed in recent years as the media company tries to improve its channels’ ratings and relationships with pay-TV distributors as well as rebuild struggling Paramount.

CBS shares rose 2.8% in midafternoon trading Monday, while Viacom dropped 7.1%.

Click here for the original article from The Wall Street Journal.

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