(Bloomberg) -- CBS Corp. and top shareholder Shari Redstone are headed for a faceoff Thursday afternoon when the board meets to decide whether to dilute her voting rights, just hours after a court ruled that she has the right to intervene to protect them.
The ruling by a Delaware judge is a victory for Redstone, a CBS director and president of the family’s movie-theater operator National Amusements Inc., in her push to merge the media company with Viacom Inc. -- also controlled by NAI -- over the wishes of CBS Chief Executive Officer Leslie Moonves.
The ruling sent shares of CBS shares down as much as 7.2 percent to $49.95, the biggest intraday decline in almost three years. Wall Street has generally opposed a CBS merger with Viacom. Shares in Viacom were little changed on Thursday at $28.25.
Delaware Chancery Court Judge Andre Bouchard said that, as the controlling shareholder, Redstone has the right to take steps to protect that control. In a surprising move Wednesday, the Redstone family ordered CBS directors to change the company’s bylaws so that the dilution proposal would require 90 percent of the directors’ approval to pass, rather than a simple majority.
“No precedent has been identified, however, in which the court has ever entertained, much less sanctioned, the type of request for relief that plaintiffs make here,” Bouchard said. But he added that CBS, which alleges that Redstone hadn’t acted in the interests of the company, had shown evidence that backs up a “claim for breach of fiduciary duty against Ms. Redstone and NAI.
The ruling is “a vindication of National Amusements’ right to protect its interests,” NAI said in a statement. “As we intend to demonstrate as the case proceeds, the actions of CBS and its special committee amount to a grievous breach of fiduciary duties and show no regard for the significant risk posed to CBS and its investors.”
Click here to read the ruling
Moonves wanted the judge to bar the Redstones from interfering with the Thursday board meeting to consider a plan that would wipe out her family’s grip on the broadcaster, cutting its voting stake to 17 percent from 79 percent. That would enable the board to resist the merger.
CBS said in a statement that it will go ahead with the board meeting, and added that it will file more legal claims as needed “to protect the interests of all shareholders,” according to a statement on the decision.
“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.”
The case is part of an unusual corporate fracas over two media properties that are not only controlled by the same company -- NAI -- but also were part of a single conglomerate until 2005. After more than a year of opposing NAI’s demands to pair up the businesses, Moonves and some CBS directors dared to take on the Redstone family.
Redstone, who took over as NAI’s overseer after health issues sidelined her billionaire father, opposed the split of the two companies. She’s urged the two companies’ boards to consider the merits of welding them back together. Management of the merged entity emerged as a key issue, with Redstone keen to ensure that Viacom CEO Bob Bakish had a role in the company and Moonves preferring to keep his own people in charge. NAI contends the companies’ board committees had reached a provisional agreement on economic terms of the proposed merger.
“I was never a great proponent of the split of the two companies,” Redstone said at a 2016 conference, according to Vanity Fair magazine. “The path each company took could have been different under different leadership and this is why a combination should be explored now.” Redstone also sits on Viacom’s board.
A special committee of CBS’s board has rejected NAI’s merger proposals and directors filed the suit as a defensive measure to stop her from deploying tactics her billionaire father Sumner Redstone used in 2016 to reassert control over Viacom when the board questioned the then 93-year-old’s mental capabilities. He had Viacom CEO Philippe Dauman booted from the board along with four other directors to pave way for new management. The moves cleared the way for Shari Redstone to take a more prominent role on Viacom’s board.
CBS contends Shari Redstone threatened to similarly oust directors who backed the dividend plan and pushed to have her father’s lawyer, Robert Klieger, take his CBS seat. Klieger has been “instructing management and other directors on Ms. Redstone’s/NAI’s wishes -- including the desire to replace certain directors,” according to CBS’s court filings.
Shari Redstone has renewed a push to recombine Viacom with CBS to give her companies greater heft in a consolidating market. The dispute comes as rivals including 21st Century Fox Inc. and Time Warner Inc. have agreed to sell assets to larger players.
Viacom’s value has plummeted in recent years due to shrinking viewership of its cable networks. All TV companies are struggling from the migration of viewers to online services Netflix and YouTube. Viacom has suffered more than most given its reliance on young viewers, and its stumbles developing hit shows.
The case is CBS Corp. v. National Amusements Inc., No. 2018-0342, Delaware Chancery Court (Wilmington).
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