The legal offensive launched Monday by CBS Corp. against its controlling shareholder, Shari Redstone’s National Amusements, came like a third-act plot twist that few viewers of the CBS-Viacom soap opera saw coming.
The outcome of the maneuver to dilute Redstone’s voting power in the company raises a host of questions, most of which are unanswerable until a Delaware Chancery Court judge weighs in on the epic corporate dispute. But what is clear is that there is no longer a path for CBS and Viacom as they currently exist to come together in a merger. The water in the moat separating the two halves of the Redstone media empire is too poisoned, starting with the relationship between CBS chairman-CEO Leslie Moonves and Redstone.
“The probability of a CBS-Viacom re-merger is close to zero, for many years to come,” wrote Bernstein & Co. analyst Todd Juenger in a research note May 15.
The legal battle is a gambit for Moonves, who will likely have no choice but to leave or be fired from CBS if the courts side with National Amusements Inc. (NAI). CBS Corp. is seeking the right to issue a special stock dividend to CBS shareholders that would have the effect of diluting NAI’s voting shares, which stand at nearly 80% of voting power in the company, down to 17%. It’s a hail-mary pass that relies on an interpretation of a clause in CBS’ charter, one that NAI disputes and has vowed to fight vigorously in court.
The attempt to dilute Redstone’s preferred voting shares is an attack on the foundation of Redstone’s power. It’s hard, if not impossible, to see how the two could patch things up no matter which way a judge comes down on the complex questions of fiduciary duty and motivations alleged in CBS’ lawsuit.
The lawsuit seeks a legal ruling on a proposal for the CBS board to vote on issuing the stock dividend on May 17, and it included a request for a temporary restraining order to block NAI from making changes to CBS’ board or its charter prior to that vote. On Tuesday, there were rumblings that the sides would avoid the spectacle of a TRO hearing — which is scheduled for May 16 — by reaching a legal “standstill” agreement in which both sides vow not to take any dramatic steps until a judge has weighed in on the merits of CBS’ lawsuit.
The latest eruption in the drama surrounding Redstone’s empire and the fate of Viacom and CBS has rattled investors. CBS’ stock was up about 1.5% on Tuesday, while Viacom was down by 1.5%. Translation: Wall Street doesn’t know what to make of CBS’ lawsuit effort.
“For both CBS and Viacom, this lawsuit is likely to result in a period of uncertainty and a lack of closure one way or the other for some time. While the lawsuit and proposed changes are likely to be seen as a more immediate negative for Viacom than for CBS, we believe CBS management has in effect given up its negotiating leverage longer term, which may make the deal more do-able on Viacom’s terms,” Barclays analyst Kannan Venkateshwar wrote in a research note May 14.
Moonves has gone out on a limb, but in so doing he has also narrowed the options for Redstone in her response. NAI has vehemently denied that it had any intention of forcing a CBS-Viacom merger or replacing CBS board members in order to do so. Nonetheless the airing of CBS’ complaints in a legal forum puts a hot light on NAI’s next moves, whatever they may be.
The extraordinarily combative relationship between CBS and NAI raises big questions about fiduciary duty. CBS maintains NAI is using its clout to pursue a deal that is not in the best interest of all CBS shareholders. NAI, meanwhile, questions whether CBS’ actions are good for shareholders, including Redstone, who is vice chair of CBS and Viacom and president of National Amusements.
CBS in its suit maintains that the special board committee evaluating a possible re-merger with Viacom — the companies brought together in 2006 by Redstone’s father, Sumner Redstone, but were split up again in January 2006 — came to the conclusion that the deal would not build value for CBS shareholders. CBS took the extraordinary step of suing in an effort to prevent NAI from using its voting power to replace board members in order to clear the path for a new vote on a Viacom merger.
Sources close to Redstone maintain that her interest in the composition of the CBS board has always been to insure that CBS has strong corporate governance and a board composed of independent-minded directors with relevant experience.
It’s no secret that Redstone has concerns that the CBS board has been too cozy with Moonves, given his success in leading the company during the past dozen years. But that’s still a far cry from threatening to use her voting clout to replace those who disagree with her views.
CBS board member Martha Minow, former Harvard Law School dean, has come into the spotlight amid the brawl as she is one of CBS’ five independent directors on the special committee who voted against a merger with Viacom and signed on to Monday’s lawsuit. Minow was suggested to the board last year by Redstone.
The NAI camp cites Minow as a sign that Redstone is focused on appointing strong directors, not those who “do her bidding,” as CBS’ lawsuit contends. CBS, on the other hand, points to Minow’s law background as evidence of the merits of its legal theory in the case against NAI.
CBS in its suit outlined complaints against what it described as Redstone’s “interference” with the work of the special committee and in the management by waving off a potential acquisition offer from a company believed to be Verizon. The suits cite these as examples of NAI’s breach of fiduciary duty to all of CBS’ shareholders. Sources close to NAI dispute this characterization of Redstone’s brief discussion with a CEO in a social setting.
The scenarios for the near term are all murky. Numerous observers predict a legal process could drag on for four to six months. Given that NAI has now publicly stated it has no intention of forcing a merger or replacing CBS directors, its options in the near term are limited. The same goes for CBS and the possibility of M&A discussions with other companies — as merger mania grips the media world — given the fraught relations with Redstone. Industry veterans speculated that Viacom could turn the tables and make an unsolicited offer for CBS, but that also seems like a non-starter given the CBS board’s stated position.
“We believe the outcome of the dilution is unclear, but the outcome of the Viacom deal is settled,” Bernstein Co.’s Juenger wrote. “Even if NAI remains in voting control after the dust settles, we don’t believe they could replace the independent board members with a new group who would be willing to reverse the unanimous decision of their predecessors. Even NAI, in their statement reacting to the CBS filings, has said they had no intention of doing that.”
But there are still questions of whether CBS’ legal strategy will win out. Both sides are backed into a corner unless by chance an accord can be reached out of court. Given the public nature of the Moonves vs. Redstone fight, that seems a remote chance.