Saturday, November 30, 2019

Still more to talk about at CBS

I’m assuming most readers know the backstory here, but CBS and Viacom are both controlled by NAI, which in turn is controlled by Shari Redstone.  NAI owns nearly 80% of the voting stock of each company; the rest of the voting shares are publicly traded but held by a small number of institutions.  The bulk of each company’s capitalization, however, comes from no-vote shares, which are also publicly traded.

Redstone has long sought a merger of the two companies, which has been perceived as a boon to Viacom and a drag on CBS.  That’s why, when she proposed a merger in 2018, the CBS Board revolted and tried to issue new stock that would dilute NAI’s voting control.  That case resulted in a settlement whereby Redstone promised not to propose a merger for two years unless the CBS independent directors raised the issue first.  By sheerest coincidence, as luck would have it, mere months after the settlement was reached and the CBS board restructured, CBS and Viacom announced that they had reached an agreement and would merge by the end of 2019.

Of course, the immediate question among academics was whether, if the merger did proceed, Redstone would shoot for MFW-cleansing, which would require conditioning the deal on the approval of the disinterested shares.  And if Redstone did try to cleanse, would she give the no-vote shares the chance to vote?  Or would she try to cleanse with only the voting shares that are not held by NAI?  If the latter, would Delaware courts really permit a deal to be cleansed by the vote of unaffiliated shares representing such a small fraction of the total capitalization, especially when the no-vote shares have no say at all?

Sadly for those of us in the nosebleed seats, those questions are not going to be answered, because Redstone refused to condition the deal on any kind of unaffiliated shareholder vote (one of the points of objection among the 2018 CBS Board) – which is important for where we are now.

Where we are now is that a holder of CBS’s no-vote shares is (inevitably) seeking books and records in order to determine if there was wrongdoing in connection with the proposed deal.  (Spoiler: The shareholder thinks there was wrongdoing).  CBS and Viacom refused to provide all of the documents sought, leading to a lawsuit, and ultimately VC Slights’s recent opinion in Bucks County Employees Ret. Fund v. CBS.  Slights concluded that there was a “credible basis to suspect wrongdoing,” and granted the plaintiff access to a broad array of documents, if not everything identified in the initial requests.

There’s a lot that’s of interest here, including details that I didn’t see reported previously (they may have been, if so I missed it) suggesting Redstone influenced the transaction, by, among other things, pressuring what Slights describes as the “purportedly” unaffiliated CBS committee and offering increased compensation to CBS’s Chair and CEO in exchange for his support.  So, interested readers should really review the entire opinion.  That said, I’m going to highlight what I believe to be the most critical aspects:

(1) There is strong evidence that Redstone sought the merger as a mechanism of using CBS to bail out/shore up the failing Viacom. For example, after Redstone sought – and was refused – a merger in 2016, she complained that “the failure to get the deal done ha[s] caused Viacom to suffer,” admitted that she favored a deal because Viacom’s stock was “tanking,” and vowed to accomplish a merger by a “different process.”  Slights seemed quite persuaded by this evidence, and, of course, it will bolster claims of CBS stockholders that the deal was unfair to them.

(2) Following VC McCormick’s opinion in Kosinski v. GGP, Slights determined that the mere fact that CBS made no attempt to adhere to MFW cleansing was itself evidence of wrongdoing for Section 220 purposes.  That interests me for a few reasons.  First, it extends MFW into a novel space: previously, its purpose was to trigger business judgment review for controlling shareholder transactions, but now it will also be used to “cleanse” for the purpose of avoiding a 220 demand.  Moreover, as I’ve previously noted, the definition of a controlling shareholder transaction is itself malleable, and that malleability can be used to evade the strictures of Corwin.  Going forward, though the CBS/Viacom merger is very clearly a controlling shareholder transaction, I can imagine that in future cases, uncertainty as to whether a controlling shareholder is present in the first instance will wind up weighing in plaintiffs’ favor as they attempt to gain access to corporate records.

(3) In 2018, when CBS first tried to use nuclear tactics to avoid the merger, I said: “the main purpose of these legal skirmishes may be less to actually limit NAI’s power than to create an extraordinarily persuasive record that any attempt Shari Redstone may make to combine CBS and Viacom will be accomplished over the objection of the independent directors, and in violation of her duties as a controller.” That prediction has proved accurate; Slights explicitly read CBS’s 2018 resistance to the deal as evidence that the new deal proposed in 2019 was unfair to the CBS minority shareholders.  As he put it, “a straight line can be drawn between Redstone’s previous attempts to merge Viacom with CBS, which CBS maintained just one year ago ‘presents a significant threat of irreparable and irreversible harm to [CBS] and its stockholders[,]’ and the current attempt to combine these companies. This logical nexus is further evidence of wrongdoing…”

In short, the 2018 CBS Board – and Les Moonves – lost the battle, but may very well have won the war.

https://lawprofessors.typepad.com/business_law/2019/11/still-more-to-talk-about-at-cbs.html

Ann Lipton | Permalink

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