Sumner Redstone seized control of Viacom in a hostile takeover in 1987. He then made sure that no other corporate raider could take it from him, dividing the company’s stock into voting and nonvoting shares.
Thirty years later, Redstone’s absolute control is under threat not from an external foe but from within. CBS chairman and CEO Leslie Moonves voted with 10 other board members last week to strip parent company National Amusements, now run by Shari Redstone, of its control over CBS.
The audacious move — if it succeeds — would mark a revolution in corporate history. Delaware law holds a controller’s power to be almost sacrosanct. Moonves contends that Redstone has abused her power to such an extent that she has essentially forfeited it.
“These are the kinds of things that set precedents,” said David Larcker, a professor at the Stanford Graduate School of Business. “What will the courts allow a company to do to get out from under the thumb of a controlling shareholder?”
The case is being closely watched in legal and academic circles, where dual-class stock structures are a source of unending controversy. Supporters argue the arrangement fosters innovation by shielding companies from public markets. But opponents argue that divorcing economic ownership from control undermines basic principles of shareholder democracy and harms companies over the long run. Their prime example is the Redstones.
“This is not good for anybody,” said Gregory Shill, a professor of law at the University of Iowa. “It’s not good for Shari Redstone. It’s certainly not good for the public stockholders. … It points up the need for companies like CBS that have dual-class shares to adopt some limitations to the controlling stockholder structure.”
CBS filed a 42-page complaint last week that reads like a corporate Declaration of Independence. It lists grievances against Redstone and argues that management and the public stockholders deserve to be free from her control.
“No management team can perform in the shadow of the dangerous power Ms. Redstone wields,” the lawsuit states.
The complaint is long on principles, like freedom and equality, and short on precedents. At a hearing last week in the Delaware Court of Chancery, Chancellor Andre Bouchard was clearly uneasy with the idea of breaking new ground.
“Are you aware of any case where anybody’s actually diluted the controller?” he asked one CBS attorney. He asked another, Theodore Mirvis, “Do you know of any court granting the kind of relief that you’re seeking right now?”
“We don’t have a case,” Mirvis answered before arguing that the proposed dilution is unprecedented because the situation is unprecedented. “This was an unusual circumstance: a special committee with this kind of courage. Remarkable.”
CBS’ attorneys contend that control is not absolute, that it can be taken away if the controlling stockholder breaches its obligations to public stockholders. They cite the case of Conrad Black, the former media mogul who was sued by the directors of Hollinger International. In that case, a Delaware court ruled that Black, the controlling owner, had exceeded his powers in trying to undo a sale process. He would later be sent to prison for fraud.
“What will the courts allow a company to do to get out from under the thumb of a controlling shareholder?”
David Larcker, Stanford business professor
Mirvis argued that Redstone’s behavior is so far beyond the pale that it conjures “shades, at least shades, of Hollinger.” That’s a strong claim, and it has to be to justify diluting the Redstones’ stake from 80% of the company’s voting control to 17%. Mirvis argued that the effect of the board’s action would be to “treat all shareholders equally,” which sounds like a noble sentiment but is radical in practice.
Bouchard seemed intrigued but skeptical. In asking whether it would genuinely cause irreparable damage if Redstone were allowed to remove board members, he noted, “There’s no God-given right to sit as a director.”
Indeed, a controlling owner generally has the power to appoint and remove directors. And in fact, many of the abuses CBS attributes to Redstone seem to fall within her range of power, or appear to be speculative. CBS contends that she will force a merger of CBS and Viacom, for example, but she has not done it yet.
“It makes sense that if you have voting control, you’d have to do something fairly egregious to be prevented from exercising it,” said Francis Pileggi, a corporate litigator at Eckert Seamans in Wilmington, Del.
Nevertheless, in his ruling denying CBS an injunction last week, Bouchard called out Redstone’s behavior, saying the allegations against her were “sufficient to state a colorable claim for breach of fiduciary duty against Ms. Redstone.”
If the judge pursues that thought, it could have sweeping effects across the business world. Many tech companies, including Facebook, Google and Snap, are set up with dual-class structures. If Delaware judges start reining in controlling owners, it could change how those companies are run. “It’s a ray of light,” said Yaron Nili, a professor at the University of Wisconsin Law School, who has raised concerns about dual-class structures.
Charles Elson, chair of the corporate governance center at the University of Delaware, has long argued against dual-class shares.
“What this does is point out the whole problem of dual-class stock,” he said. “Honestly I think at some point the state legislature and the courts are going to have to rule that this structure isn’t appropriate for public companies.”