This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

A recent Court of Chancery decision gave a CBS Corp. shareholder access to the broadcaster’s internal documents regarding an imminent merger with former corporate sibling Viacom Inc. after finding a “credible basis” for the investor’s suspicion that Shari Redstone abused her control of both companies in Bucks County Employees Retirement Plan Fund v. CBS Corp., No. 2019-0820-JRS, memorandum opinion (Del. Ch. Nov. 25, 2019).

Vice Chancellor Joseph Slights III’s Nov. 25 ruling in the books-and-records action orders the CBS directors to turn over materials they considered in reaching an about-face decision to reunite with Viacom after the board vehemently rejected similar mergers with the parent of Paramount movie studios in 2016 and 2018. This decision was based on Section 220 of the Delaware General Corporation Law (DGCL). Compare recent DGCL Section 220 rulings juxtaposed on these pages, among the many addressed on these pages over the last 15 years.

Pennsylvania-based Bucks County Employees Retirement Plan Fund says there is good reason to believe the CBS directors breached their fiduciary duty by caving in to pressure from the daughter of founder Sumner Redstone, whose National Amusements Inc. holding company controls both companies.

After intense court and boardroom battles over Redstone’s efforts to reunite CBS with what she worried was a “tanking” Viacom, CBS executives and directors signed a two-year truce in 2018, but most soon stepped down and were replaced by Redstone’s choices, the pension fund claims.

Vice Chancellor Slights found the complaint met the “low burden” to establish credible suspicion of actionable breaches of fiduciary duties because it provided some support for allegations that:

  • The CBS board declined to submit the merger to the unaffiliated stockholders, raising the specter of merger review under the exacting entire fairness standard;
  • The 2019 stock-for-stock merger did not appear to be a better deal for CBS shareholders than the ones the board had rejected in 2016 and 2018 as “presenting a significant threat”;
  • The 2019 deal could provide Redstone with benefits similar to those that “the CBS board found so offensive in 2018 that it sought to dilute Redstone’s stock and enjoin the 2018 merger”;
  • There is reason to suspect an improper transaction process because, although not a member, Redstone attended a Feb. 22 CBS director governance committee meeting to discuss “strategic planning”;
  • The CBS CEO who replaced Les Moonves, after he was ousted amid misconduct charges, had been a “fierce ally’ in opposing a Viacom merger, but he experienced a “change of heart” after meeting with Redstone and receiving a “substantially boosted compensation package”; and
  • Lawrence Tu abruptly resigned as Chief Legal Officer “for good reason” following the Feb. 22 meeting, probably because he saw a violation of the 2018 settlement agreement with Redstone.

“The totality of these proven facts,” coupled with the fact that the 2019 merger is a conflicted controller transaction that will likely be subject to entire fairness review if challenged, adequately supports the plaintiff’s purpose for inspection, the vice chancellor said.

He granted access to documents used in the nomination of directors to the governance committee but found no separate need for information about directors added in connection with the 2018 settlement agreement or documents that would shed light on all directors’ independence.

The pension fund also won access to financial advisor presentations from all three mergers in order to investigate “a continuing story of misconduct” and “whether the 2019 merger is the product of wrongdoing.”

The vice chancellor ordered CBS to produce board-level documents concerning Moonves-replacement Joseph Ianniello’s compensation arrangements but found no need to access the CEO’s electronic communications with Redstone to show he self-interestedly backed the deal.

He found the pension fund is entitled to see only a “narrow” set of electronic communications between Redstone and the nominations and governance committee concerning the February 22 meeting and the Tu resignation in order to investigate wrongdoing in those contexts.

He rejected plaintiff’s broad demand for all electronic communications between Redstone, CBS, Viacom and their directors and advisors because it “bears little resemblance to the ‘rifled precision’ required in a Section 220 demand,” and is more appropriate for plenary suit discovery. See Brehm v. Eisner, 746 A.2d 206 (Del. 2000).

Vice Chancellor Slights entered judgement for the pension fund in the action he had expedited because of the planned closing of the deal in the following week, but in a footnote, he cautioned that “I do not mean to endorse the plaintiff’s approach here as a ‘playbook’ that should be followed by other stockholders who may seek to challenge transactions preclosing.”