A Delaware judge ruled May 17 to deny CBS Corp.'s request for a temporary restraining order against its controlling shareholder National Amusements Inc. ahead of a board meeting to consider a special dividend that would significantly reduce National Amusements' voting power.
The dividend declaration under consideration by the CBS directors would dilute National Amusements' voting interest in the programmer from roughly 79% to 17%. Without a restraining order, National Amusements President Shari Redstone is expected to block the dividend.
Delaware Court of Chancery Chancellor Andre Bouchard said in his ruling that CBS' dividend proposal is "an extraordinary measure, presumably reflective of the depth of concern the independent members of the Special Committee have about Ms. Redstone's intentions."
Redstone for months has been pushing for a merger between CBS and Viacom Inc., which is similarly controlled by National Amusements. Viacom, according to recent reports, is seeking a bid from CBS that would value the company at about $14.7 billion, about $3 billion higher than the valuation proposed by CBS. On May 13, the CBS board's special committee determined a CBS/Viacom merger "is not in the best interests of CBS stockholders, other than NAI." In response to this decision, CBS directors and executive management worried Redstone might "immediately replace members of the Board and use the new directors to force through the merger," prompting the company to seek its temporary restraining order and consider a dividend declaration, the court order said.
Bouchard acknowledged that CBS and its independent directors appeared to have legitimate concerns about whether Redstone's actions could be construed a breach of fiduciary duty, something he said the court could consider at a later date. He noted, for instance, CBS' claims that Redstone "has acted to undermine the management team, including, without board authority, talking to potential CEO replacements, deriding the Chief Operating Officer [Joe Ianniello] and threatening to change the Board." He also noted CBS' allegation that Redstone told the CEO of a potential acquirer of CBS that "he should not make such an offer, thereby depriving CBS stockholders of a potentially value-enhancing opportunity." Verizon Communications Inc. is widely believed to have been the potential acquirer in question.
Given the unprecedented nature of CBS' dividend proposal, Bouchard said the dispute between National Amusements and CBS would be best solved through more standard legal remedies. The chancellor noted the court has "extensive power to provide redress" if Redstone takes actions that are inconsistent with the fiduciary obligations owed by a controlling stockholder.
"To be sure, litigation over these types of issues takes time, is expensive, and can be distracting and messy. But that does not mean that full relief would not be available," he said.
After Bouchard ruled to deny the temporary restraining order, CBS said it would continue fighting to protect the interests of all CBS shareholders.
"The ruling clearly recognizes that we may bring further legal action to challenge any actions by NAI that we consider to be unlawful, and we will bring such action if needed," the company said.
National Amusements Inc. did not immediately respond to a request for comment from S&P Global Market Intelligence.
CBS said its board still plans to hold a meeting at 5 p.m. ET on May 17 to consider declaring a dividend of shares of class A common stock to all of the company's class A and class B stockholders.
On May 16, National Amusements delivered written consents to amend CBS' bylaws to require that certain board actions, including dividends and bylaw changes, be approved by a supermajority of the CBS board of directors. Under the amendment, dividends would require approval by 90% of the directors then in office at two separate meetings held at least 20 business days apart. Of CBS' 14 board members, three, or roughly 21%, are NAI designees.
CBS has pledged to challenge the 90% bylaw amendment.