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Update: Analysts say CBS suit against National Amusements faces 'uphill battle'


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Update: Analysts say CBS suit against National Amusements faces 'uphill battle'

CBS Corp.'s move to sue its controlling shareholder National Amusements Inc. in a fight to control the future of the company is a risky one and a court approval might be difficult, experts said.

After National Amusements pushed for a CBS/Viacom Inc. merger for months, CBS filed a lawsuit against the Redstone-led holding company, which controls nearly 80% of the voting stock in the two media conglomerates. The lawsuit seeks to block National Amusements from interfering with a planned dividend declaration that, if effected, would dilute National Amusements' voting interest in CBS from roughly 79% to 17%. A hearing at the Delaware Court of Chancery is set to begin at 2 p.m. ET on May 16, according to a court spokesman.

Just before the hearing was scheduled to start, National Amusements said that it had delivered written consents to amend CBS' bylaws, effective immediately, to require that certain board actions, including dividends and bylaw changes, be approved by a supermajority of the CBS board of directors. "NAI believes the irresponsible action taken by CBS and its special committee put in motion a chain of events that poses significant risk to CBS. Due to the magnitude of this threat, NAI was compelled to take this measured step to protect its position while also mitigating further disruption to CBS," the holding company said.

CBS responded, "The latest step by NAI provides further evidence of why we concluded that we had no choice but to file our action in the Delaware courts, in order to protect the interests of all CBS shareholders. We believe the NAI action is unlawful, and we are confident in our position and look forward to presenting our case in court."

Analysts and legal experts agree CBS' lawsuit and its planned dividend both represent bold and unusual moves against a controlling shareholder. But winning court approval might be difficult.

"I'm sure they [CBS] have looked at Delaware law and their charter and talked to outside counsel. But having said that, I've covered a lot of controlled entities … and I've never seen anyone succeed at doing this," Neil Begley, a Moody's Senior Vice President, said in an interview.

Marcel Kahan — a law professor at New York University whose main areas of teaching and research include shareholder voting, corporate governance and M&A — said while this is an "unusual situation" with limited precedent, "It's going to be an uphill battle for the CBS board on the legal front."

According to the CBS lawsuit, National Amusements President Shari Redstone is trying to "force through a merger of CBS and Viacom on terms that are contrary to the best interests of the public stockholders." Moreover, the suit alleges "there are very real dangers" Redstone will seek to replace CBS board members "who do not do her bidding" or change the company's organizational documents.

In a statement, National Amusements said it was "outraged" by CBS' actions, adding it had "absolutely no intention of replacing the CBS board or forcing a deal that was not supported by both companies."

Published reports have indicated Viacom is seeking a $14.7 billion bid, about $3 billion higher than the valuation proposed by CBS. Redstone and Viacom have also reportedly pushed for Viacom President and CEO Bob Bakish to be named second in command at the merged entity, in position to succeed CBS Chairman and CEO Les Moonves when he retires. CBS would prefer longtime COO Joe Ianniello as No. 2 at the expanded company.

The suit states that National Amusements — previously controlled by Shari Redstone's father, Sumner — has repeatedly promised stockholders it would not exercise its control in such a manner. "CBS' stockholders invested in CBS on the strength of those representations, and … it would be a fiduciary breach for [National Amusements] as a controller to abandon those promises for inequitable gain," the broadcaster said in its suit.

Begley said a major flaw in CBS' legal argument is whether public stockholders have indeed been misled. "They all bought the stock knowing it was a controlled entity," the Moody's executive said.

BTIG Research analyst Rich Greenfield agreed. "The CBS lawsuit makes it sound as if shareholders and CBS management are surprised with their controlling shareholder's rights; yet everyone who has gone to work at CBS and/or invested in CBS has been well aware of the controlled nature of the company," the analyst said in a May 16 research note.

While experts agree winning court approval would be challenging for CBS, they disagree on the likely motivations behind the move and its potential repercussions, particularly for Moonves.

"If they lose in this effort to try to reduce the influence of National Amusements, in all likelihood [Moonves] is going to lose his job. But maybe that doesn't bother him so much," Begley said, adding that CBS has "clearly declared war."

Justin Nielson, an analyst for Kagan, a media research group within S&P Global Market Intelligence, said he sees the lawsuit as "a negotiating tactic by Moonves and the CBS board members who support him on killing the Viacom merger talk."

Kahan, meanwhile, said CBS may not be trying to quash the merger talks entirely, but rather just gain some leverage. He said he was inclined to view the lawsuit as "part of a broader maneuver to get to price terms."

Depending on the court's May 16 ruling, CBS has a special meeting of the board set for May 17 to discuss the potential dividend.