MOTION FOR A TEMPORARY RESTRAINING ORDER OF CONTROLLING STOCKHOLDERS DENIED AS NO EXTRAORDINARY CIRCUMSTANCES FOUND
By Annette Becker and Caitlin Velasco
In CBS Corporation, et al. v. National Amusements, Inc., et al., Civil Action No. 2018-0342-AGB, the Court of Chancery denied a motion for temporary retraining order brought by CBS Corporation (“CBS”) and five independent directors of CBS (the “Plaintiffs”) to restrain controlling shareholders, Shari Redstone, her father Sumner Redstone, National Amusements, Inc. (“NAI”), NAI Entertainment Holdings LLC, and the Sumner M. Redstone National Amusements Trust (the “Defendants”) from taking certain actions that would interfere with the governance of CBS or other proposed actions of the board of directors of CBS. The Court found that there was no precedent for the type of relief requested by Plaintiff and that no extraordinary circumstances existed to warrant the grant of such relief.
Prior to 2005, CBS and Viacom, Inc. (“Viacom”) were one company. In 2005, the company split forming CBS and Viacom, each controlled by the Defendants. In 2016, the Defendants began pursuing a merger of CBS and Viacom. In response, the two companies formed special committees to evaluate and negotiate a potential combination.
On May 13, 2018, the CBS special committee determined that a CBS–Viacom merger was not in the best interest of CBS stockholders, other than the Defendants. The CBS special committee had concerns that in response the Defendants would take action to remove independent directors and force through a merger. Accordingly, the CBS special committee scheduled a special meeting of the board to consider a dividend that would dilute the Defendants’ voting power from 80% to 17%, but would not dilute their economic stake or the economic stake of any other CBS stockholder. Notably, the stock dividend was conditioned on the Delaware courts approving its legality.
On May 14, 2018, the Plaintiffs filed a complaint alleging the Defendants breached their fiduciary duties as the controlling stockholders of CBS and moved for a temporary restraining order (“TRO”) to restrain the Defendants from: (i) interfering with the composition of CBS’s Board or modifying the CBS governance documents; (ii) taking any other actions to interfere with any decisions to be taken by the CBS board at a May 17, 2018 special board meeting; and (iii) interfering with the issuance of any shares payable in a stock dividend.
The Court scheduled a hearing on the motion for a TRO to begin May 16, 2018. One hour before the hearing, Defendants informed the Court that NAI had executed and delivered consents to amend the CBS bylaws to require approval by 90% of the directors then in office at two separate meetings held at least twenty business days apart in order to declare a dividend. Given the current board structure of CBS, this bylaw amendment would effectively allow the Defendants to block the proposed dividend.
The Court focused on balancing the equities between the controlling stockholder’s right to protect its control position and the right of independent directors to manage the business affairs of the corporation and respond to a threat posed by a controller, including possible dilution of the controller. The Court found that the Plaintiffs failed to identify a case in which the Court had entertained, much less approved, the type of relief the Plaintiffs request. Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401 (Del. 1985) and Adlerstein v. Wertheimer, 2002 WL 205684 (Del. Ch. Jan. 25, 2002), expressly endorsed a controller’s right to preemptively protect its control interest. These cases provide the clearest precedent and weigh heavily in Defendants’ favor. The Court noted that if the Defendants do exercise their right to protect their controlling interest, such action is subject to judicial review and correction, if appropriate.
Accordingly, the Court found that the balance of the equities weighed in Defendants’ favor. Though the Plaintiffs had shown a colorable claim for breach of fiduciary duty, they failed to show threatened, imminent, and irreparable injury absent the restraints. The Court denied Plaintiffs’ motion.
CBS Corporation, et al., v. National Amusements, Inc., et al., letter opinion 180517