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CBS Board Majority Supports Bid to Dilute Shari Redstone’s Voting Power, Annual Meeting Postponed

The board of CBS Corp. voted 11-3 on Thursday to dilute the voting power of Shari Redstone, in a striking rebuke to the company’s controlling shareholder.

The dilution — which some have termed the “nuclear option” — would strip Redstone of her control of the $20 billion company. The vote will not take effect, however, unless it is approved by a Delaware court.

Anticipating the vote, Redstone moved on Wednesday to amend the company’s bylaws to require a 90% supermajority of the board to issue a dividend of voting shares. With three board seats controlled by her company, National Amusements Inc. (NAI), that would give her effective veto power over the dilution. The three NAI directors on the CBS board — Redstone, Robert Klieger, and David Andelman — all voted no on Thursday.

“The Board of Directors has taken this step because it believes it is in the best interests of all CBS stockholders, is necessary to protect stockholders’ interests and would unlock significant stockholder value,” CBS said in a statement. “If consummated, the dividend would enable the Company to operate as an independent, non-controlled company and more fully evaluate strategic alternatives.”

In light of the extraordinary public brawling, CBS has opted to postpone its annual shareholders meeting, which had been set for Friday in New York.

Redstone attended Thursday’s meeting in person, undoubtedly squaring off in the board room against Leslie Moonves, the company’s chairman and CEO. The two have been at odds for months over Redstone’s desire for CBS and Viacom to reunite as a combined entity. CBS filed suit on Monday in Delaware Chancery Court to prevent NAI from replacing CBS board members in order to clear the path for the CBS-Viacom merger. NAI has repeatedly stated it has no intention of taking that step.

“As National Amusements has repeatedly stated, it has no intention of forcing a merger that is not supported by both CBS and Viacom,” NAI said. “Today’s board vote, while couched as an effort to prevent such a transaction, was pure pretext. CBS management and the special committee cannot wish away the reality that CBS has a controlling shareholder. NAI yesterday exercised its legal right to amend the company’s bylaws to require a supermajority vote on certain board actions with respect to dividends, effective immediately. In light of the Board’s action today, that action was plainly necessary, and it is valid.”

The CBS board vote comes on the same day that Delaware Chancery Court Chancellor Andre Bouchard denied CBS’ request for a restraining order against NAI to prevent it from replacing directors or making changes to the bylaws. NAI implemented the 90% approval threshold change less than an hour before Wednesday’s hearing on the restraining order request.

At present, both sides are limited in their next moves as Bouchard has made it clear he has the authority to address any issues that are violations of fiduciary duty. Even before the restraining order was denied and the bylaws were changed, CBS stated in court filings that it would not actually issue the stock until it had a green light to do so from a judge, given the pending litigation.

The CBS proposal called for the company to issue a special dividend of stock to all shareholders, a move that would have the effect of diluting NAI’s voting power in the company from about 80% to about 20%. NAI at present owns about 10% of the equity in CBS, which would not be changed by the stock dividend. CBS maintains that NAI is pushing the CBS-Viacom merger out of self-interest in shoring up Viacom. NAI has blasted CBS for what it views as disregard of long-term shareholder value in launching the legal gambit.

In his ruling on the restraining order, Bouchard noted there is no legal precedent for CBS’ bid to summarily strip away the voting power of a controlling shareholder.

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