The 2019 Viacom-CBS merger will undergo strict legal scrutiny now that a Delaware Chancery Court judge has allowed a lawsuit to proceed from shareholders who say they were shortchanged in the transaction because of pressure applied by ViacomCBS controlling shareholder Shari Redstone.
Judge Joseph Slights ruled that the plaintiffs made a credible enough case, or as he put it, a “reasonably conceivable basis,” that there were irregularities that benefitted Redstone and thus a review of the process for “entire fairness” was warranted. He also noted that the transaction was expected to face a deeper look simply because of the nature of the Redstone family’s preferred shares.
The Redstones’ National Amusements Inc., or NAI, controlled about 80% of the voting shares of Viacom and CBS and the commensurate amount in successor ViacomCBS. Those preferred shares, which are increasingly out of favor for public companies, allowed the late mogul Sumner Redstone and now his daughter Shari to have iron-clad control of two traditional media giants.
“This court is, and should be, skeptical when a controlling stockholder seeks a pleading stage dismissal of breach of fiduciary duty claims brought on behalf of public stockholders who challenge the bona fides of a transaction where the controller indisputably stands on both sides of the transaction,” Slights wrote in his opinion published Dec. 29. “This case, involving one of the more visible, hotly contested instances of alleged controlling stockholder self-dealing in recent memory, is no exception.”
The case was filed against Redstone and the board members of Viacom at the time of the merger. A separate but similar lawsuit has been filed against the CBS Corp. board of directors at the time of the merger. One person who was expressly dismissed from the proceedings by Slights’ ruling was Bob Bakish, ViacomCBS president-CEO because of the lack of direct allegations against the Viacom veteran.
“Regardless of the applicable standard of review, our law requires that a plaintiff plead a factual basis to support a claim of breach of fiduciary duty. In other words, the complaint must put the fiduciary on notice of what he is alleged to have done wrong,” Slights wrote.
The ruling is a headache for ViacomCBS and chairman Shari Redstone. It’s an echo of nearly three years of fierce litigation from 2015 through 2018 that revolved around control of Viacom, NAI, CBS and the family trust that inherited Sumner Redstone’s interests in Viacom and CBS. It also revives the suggestion that Shari Redstone used her clout to drive a merger not for business reasons but to enhance her profile in the media world — a characterization that has been criticized as sexist given Redstone’s background as an executive and investor.
“Plaintiffs allege that the willingness of the fiduciaries who served on Viacom’s transaction committee to allow Ms. Redstone to dominate their decision-making rendered them servile tools in Ms. Redstone’s relentless pursuit of a Viacom/CBS combination to advance her interests,” Slights wrote in his ruling.
ViacomCBS declined to comment.