CBS-Redstone Fight Isn't Over -- in Court or the Boardroom

(Bloomberg) -- The legal fight may have just begun.

Shari Redstone, a CBS director and president of the company’s controlling shareholder, National Amusements Inc., won a round midday Thursday when a Delaware judge denied a CBS bid to block her from interfering with a board meeting set for 5 p.m. Eastern time. The media company led by Chief Executive Officer Leslie Moonves fears Redstone will oust its board members in a controversial push to merge with Viacom Inc. -- also controlled by NAI.

But the ruling by Delaware Chancery Court Judge Andre Bouchard doesn’t end the corporate battle of the titans. Litigation over the board’s attempt to wrest control from the Redstones is likely to continue long after Thursday’s meeting, when the board decides whether to issue shares that would dilute the family’s voting rights.

“If the board acts today to approve the dilution dividend, Shari Redstone’s lawyers will immediately seek an injunction that the action is no good,” said Larry Hamermesh, a Widener University professor who specializes in corporate law.

And if the Redstone family acts to oust opposing CBS directors, or moves ahead with a Viacom merger over the directors’ objection, the media company’s lawyers will press their legal challenge, he said.

CBS has already claimed in its pending lawsuit that Shari Redstone breached her fiduciary duty to the company by taking steps raising doubt about its public promise of independent board governance. The company is also preparing to challenge the validity of a change to the bylaws, backed by the Redstones, requiring a 90 percent "supermajority" to approve certain board actions over dividends, according to people with knowledge of the situations.

The company said in a statement after Bouchard’s ruling that it will go forward with the board meeting, and added that it will file more legal claims as needed “to protect the interests of all shareholders.”

“The ruling clearly recognizes that we may bring further legal action to challenge any actions by NAI that we consider to be unlawful,” CBS said. “We will bring such action if needed.”

NAI said in a statement that it was “pleased” by the court’s decision to deny CBS’s bid “to deprive a shareholder of its fundamental voting rights.” The company says its change to the bylaws -- requiring a 90 percent vote to approve the dilution plan -- is already in effect and the judge knows he’ll have to review it.

Todd Juenger, an analyst at Sanford C. Bernstein & Co., said in an investor note that NAI has any number of challenges in front of it, even after prevailing in today’s skirmish.

NAI has stated in a public filing that it doesn’t plan to replace CBS directors, he noted.

"It would be impossible, we think, for NAI to now go and do exactly what they told the court they wouldn’t do," he said, "especially given the intense level of scrutiny that NAI will now be under."

Special Committees

In addition, Delaware law specifies that special board committees, including the CBS committee weighing a merger, must be independent, he said.

"We cannot think of a more textbook case of coercion than a situation in which a controlling shareholder replaces a board that just rejected a transaction and asks the new board to approve the same transaction," Juenger said.

In his ruling, Bouchard hinted that CBS may ultimately find itself on the legal high ground on a key point. After reviewing the claims of Shari Redstone’s attacks on the board’s independence, he said the “allegations are sufficient to state a colorable claim for breach of fiduciary duty against Ms. Redstone and NAI as CBS’s controlling stockholder.”

Bouchard’s finding was striking, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

“He’s sending a pretty clear signal that there are problems with this transaction,” Elson said, referring to moves related to the Viacom merger. “If I were Moonves, I’d go for broke and have the dilution proposal approved. That will tee everything up for the judge to decide at one time.”

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