In a high-profile expedited control contest covered on the front page of The Wall Street Journal and most of the major media outlets covering business, law or Hollywood, the Court of Chancery denied the request for a TRO by a minority stockholder that sought to thwart the efforts of the Redstone family from exercising its voting control regarding a potential deal with Viacom, in an opinion styled CBS Corp. v. National Amusements, Inc., C.A. No. 2018-0342-AGB (Del. Ch. May 17, 2018).
The issues in this opinion and the detailed facts could be the topic of a law review article. The intent of this short blog post is more modest and will rely on bullet points for busy readers, but a careful reading of the short decision of the court linked above is necessary for anyone who seeks to be current on the latest rulings impacting Delaware corporate litigation.
- Shari Redstone and her family have voting control of CBS even though they own a small percentage of the stock. A Special Committee of the CBS board was concerned that Ms. Redstone would use her voting power to replace the CBS directors who were not in favor of a merger with Viacom.
- The Special Committee planned a dividend of voting stock that would dilute the voting power of Ms. Redstone but purportedly would not impact the economic interests of her or any other stockholders.
- On Monday, May 14, the Special Committee sought a TRO. On May 16 a hearing was held on the TRO. On May 17, the above linked opinion denied the TRO.
- One hour before the May 16 hearing, Ms. Redstone, by written consent, amended the bylaws to require a vote of 90% of board members before any dividends could be issued (which would prevent the dividend of voting stock that the directors had planned–unless Ms. Redstone consented.)
Key Aspects of Court’s Legal Analysis
- The court recited the familiar requirements for a TRO. Slip Op. at 7. But, the defendants argued for the slightly higher standard applicable to a preliminary injunction which requires a likelihood of success on the merits.
- The key legal issue arose in connection with the right of a controller to be a “first mover” to protect its control position and the right of independent directors to manage the company pursuant to DGCL Section 141(a).
- Although there was one case arguably suggesting a contrary position, the court relied on two cases that more directly support the rights of a controller to be a “first mover” to protect its control position: Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401, 407 (Del. 1985), and Adlerstein v. Wertheimer, 2002 WL 205684, at *9 (Del. Ch. Jan. 25, 2002). Compare Hollinger Int’l Inc. v. Black, 844 A.2d 1022, 1029 (Del. Ch. 2004), aff’d 872 A.2d 559 (Del. 2005)(granting injunction to prevent a controller, Lord Black, from reneging on a prior agreement to grant authority to independent directors in connection with the sale of a company he controlled.)
- The court also referred to relief available under DGCL Section 225 which the directors could use in the future to contest their removal as directors if they allege their removal was improper. In addition, relief would be available if a merger with Viacom is alleged to be the result of a breach of fiduciary duties by a controller. Thus, the irreparable harm component and the balancing of the equities requirement for injunctive relief were not met at this juncture–though one can be fairly certain that the parties will be back in court again in the near future as this drama unfolds.
SUPPLEMENT: I was quoted in an article about this case. As predicted, amended complaints and new complaints have been filed in this case since the date of the above opinion.