Sunday, July 22, 2007
The newly-public dispute between Sumner Redstone and his daugther Shari Redstone highlights the perils of minority shareholders in privately-held enterprises. The Redstones currently control their investments through the family holding company, National Amusements Inc., a Delaware corporation. It owns controlling interests in Viacom and CBS, Midway Games and the National Amusements theater chain. Sumner Redstone controls 80% of the company and Shari Redstone the remaining 20%.
According to the Wall Street Journal, Shari is asking to be bought out for $1.6 billion, valuing National Amusements at $8 billion. Sumner apparently responded to her request in a public letter to Forbes on Friday:
I am perfectly satisfied to leave the matter as it is. There is no practical difference between me controlling 80% of the stock of National and 100% of the stock of National . . . . If Shari wishes to be bought out I will consider this so long as the price is acceptable.
For Shari, the corporate situs of National Amusements in Delaware is unfortunate for her bargaining position. For partnerships, Delaware follows the strict majority rule and allows no remedy for oppression. National Amusements is a corporation, though, but Delaware also has a strict rule that in a close corporation context as here, there are no specialized fiduciary duties of majority shareholders to minority shareholders (Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993)). Thus, Shari's rights vis-a-vis a buy-out and as a minority shareholder will be determined solely by any shareholder agreement among the parties. It has previously been reported that such an agreement exists and it restricts her from selling her stake except for back to National Amusements at book value, which would be a fraction of its market value. This puts Shari in a tenuous negotiating position; Sumner is absolutely correct that he can just leave her there and run National Amusement and its controlled subsidiaries at his discretion.
If Sumner indeed does follow this route, Shari will likely be left with the only remedy typically available of shareholders in this minority position: be a pest and hope that this will create an incentive for Sumner to buy her out. If she follows this route, expect her to be regularly trooping to Delaware Chancery to challenge the decisions made by National Amusements on any plausible fiduciary grounds available to her, with a focus on any arguably self-dealing transactions between these entities and Sumner as these are subject to heightened scrutiny.
Ultimately and in order to prevent these problems, minority shareholders in any private enterprise and their attorneys should before-the-fact bargain for exit and governance rights in the case of a dispute. Unfortunately for Shari, since these shares were reportedly a gift from her father she likely did not have this option.