A Delaware Chancery Court judge put a brief pause Wednesday on the legal battle between CBS and Shari Redstone. Following a hearing, Chancellor Andre Bouchard promised to issue a ruling before a special meeting of the CBS board, which is set to be held on Thursday afternoon. He also granted a restraining order that will temporarily freeze the case in place until then.
News of the judge’s limited decision landed just minutes before CBS held its annual upfront presentation for advertisers at Carnegie Hall. The bulk of CBS’ executive team was gathered at Carnegie Hall and were energized by the decision. Moonves got a standing ovation as he came out for his opening remarks.
“So how’s your week been?” he deadpanned.
The legal war erupted on Monday when CBS Corp. filed a lawsuit against National Amusements, Inc. (NAI) accusing it and Shari Redstone of breaching its fiduciary duty to CBS shareholders by pushing for the merger of CBS Corp. and Viacom, the media conglom that NAI also controls. CBS has been cool to the merger on strategic grounds, given Viacom’s weaknesses.
The sides are squaring off over CBS Corp.’s request for a temporary restraining order barring NAI from replacing CBS board members, or making changes to the company’s charter and bylaws before a judge can weigh in on the merits of CBS’ suit. As part of the legal maneuver, CBS has proposed that board members vote on a plan to issue a special stock dividend that would have the effect of diluting NAI’s voting shares from 79.5% to about 17%.
CBS sought a restraining order barring NAI from blocking that meeting. About a half-hour before the hearing was scheduled to start, NAI issued a change to the bylaws requiring a 90% majority of board members to approve the issuance of dividends or changes to the CBS bylaws. Shari Redstone serves on the 14-member CBS board, as does Robert Klieger, the Redstone family’s lawyer. Two “no” votes on the dividend would be enough to deprive the motion of a 90% supermajority.
In court, Bouchard appeared irritated by the last-minute change to the bylaws, though it was not clear how that might affect his ruling.
“I’ve never seen anything like what transpired here in terms of moving parts before TRO hearing and I need to protect my jurisdiction,” he said, according to Reuters.
As of now, it appears the special meeting will go forward on Thursday afternoon. If the board approves the dividend by a simple majority, then the validity of the dividend would once again wind up before the Delaware court. NAI could argue that the motion failed to reach the 90% threshold required under the amended bylaws, while CBS would challenge the legitimacy of those amendments.
CBS is “seeking the protection of the Delaware court to allow this to be a controlled process,” said Neil Wertlieb, a professor of law at UCLA who specializes in corporate governance matters. “It acknowledges there is kind of a mess here, and some uncertainty, and they’re trying to provide for a smooth path to allow this to be properly presented to a Delaware court.”
After the suit was filed, lawyers for CBS and NAI had sought to reach detente via a standstill agreement in which both sides agreed not to take any dramatic steps before a judge could weigh in on the suit. But the sides could not come to terms.
In legal filings, CBS and NAI are battling over the legality of CBS’ proposed stock dividend. CBS maintains it is allowed under the company’s charter. NAI counters that CBS is misinterpreting the clause and that any special dividend would have to result in NAI receiving preferred voting shares commensurate with the shares it now holds.
At present, NAI holds about 10.3% of the economic interest in the company. CBS argues that the voting control gives NAI inordinate sway over the board and other decisions, and that it has proven to pursue its own agenda at the expense of other shareholders. CBS’ suit cites as an example of the fiduciary breach Redstone’s comment that had the effect of waving off a potential acquisition overture from a company believed to be Verizon, although Redstone’s camp disputes that characterization.
The CBS-NAI case is going before the same judge that presided over the 2016 legal battle between Redstone and former Viacom CEO Philippe Dauman. In that case, Redstone battled Dauman and others for control of Viacom and the trust that will inherit the NAI interests held by her father, Sumner Redstone, the ailing 94-year-old mogul. Redstone replaced five board members of Viacom in an effort to remove Dauman as CEO, and she made changes among the trustees of the Redstone family trust. CBS has cited those moves as evidence that Redstone has a track record of exerting her will on the company.
At the time of the Viacom dust-up, Moonves was a supporter of Redstone’s moves given that Viacom had been struggling for years under Dauman’s leadership, yet the board continued to back him as CEO. CBS Corp., on the other hand, has performed well during Moonves’ 12-year tenure as CEO.
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