The Delaware Court of Chancery has denied a request to temporarily restrain a controlling shareholder’s efforts to push through a merger despite opposition by the board’s special committee and efforts to issue a share dividend to dilute the controller’s voting power. According to the court, while the company and its independent directors stated a colorable claim for breach of fiduciary duty, they were unable to show that full relief would be unavailable if the injunction is denied. Further, the court stated, precedent supports a controller’s right to preemptively protect a control interest (CBS Corporation v. National Amusements, Inc., May 17, 2018, Bouchard, A.).
Corporate battle. CBS and Viacom were part of one company until they were split into the standalone entities in 2005. According to the complaint, Shari Redstone, who (with her control of National Amusements, Inc.) effectively controls nearly 80 percent of the voting power of CBS, began to pursue a merger of CBS and Viacom. By January 2018, Redstone formally approached the boards of CBS and Viacom, and the boards formed special committees to evaluate the possibility of a combination. On May 13, 2018, the CBS special committee determined that a merger is not in the best interests of its stockholders, other than NAI. The special committee found that, in response, Redstone could immediately replace directors to force through the merger and decided to recommend that the CBS board approve a stock dividend of voting shares to all holders. If approved, the dividend would dilute NAI’s, and thereby Redstone’s, voting power.
The next day, CBS and the independent directors moved for a temporary restraining order, alleging that NAI and Redstone breached their fiduciary duties as a controlling stockholder and requesting that the court temporarily enjoin the defendants from interfering with the composition of the CBS board or with the issuance of a share dividend. The defendants then executed and delivered consents to amend CBS’s bylaws to require 90-percent director approval at two separate meetings held at least 20 days apart in order to declare a dividend, which would allow NAI to block enactment of the dividend proposal.
Colorable claim. To obtain a temporary restraining order, a movant must demonstrate: (1) a colorable claim; (2) a likelihood of imminent, irreparable harm if relief is withheld; and (3) greater hardships if the relief is not granted than the defendants would suffer if restrained.
Rejecting the defendants’ contention that the plaintiffs must make a stronger showing because a TRO would effectively provide final relief by blocking action before the vote on the dividend proposal, the court found that the plaintiffs stated a colorable claim for breach of fiduciary duty by a controlling shareholder. According to the complaint, Redstone allegedly refused during negotiations to agree to typical public company governance or submit any potential transaction to a public shareholder vote and had in the past interfered with board nominations and the CBS management team. "[G]iven CBS’s proclaimed commitment to independent board governance, these allegations are sufficient to state a colorable claim for breach of fiduciary duty," the court stated.
Irreparable harm. The plaintiffs argued that, if the court does not grant relief to prevent interference with the proposal, Redstone would be able to replace directors and "cram down a merger with Viacom. "Despite the 90-percent bylaw effort coming within hours of the hearing on the TRO, the court was not convinced that harm would be irreparable. The court has the power to provide redress if Redstone violates her fiduciary obligations and could set aside the bylaw if it is shown to be invalid or inequitable, the court stated. Further, recourse is available if it is proven that a merger is the result of a fiduciary breach, according to the court.
Balance of equities. The court noted that, in granting a TRO, it may not risk greater harm to the defendants than it seeks to prevent. Precedent recognizes a controlling shareholder’s right to preemptively address threats to its control and potential disenfranchisement, even in the form of a bylaw amendment, and no precedent has sanctioned the type of relief that the plaintiffs request in this matter, the court explained. While NAI and Redstone collectively have the right to protect their majority interest, exercise of that right can be subjected to judicial review, which could afford full relief to the plaintiffs, the court found.
Finding that equity weighed in favor of NAI and Redstone, the court denied the plaintiffs’ motion for a TRO.
The case is No. 2018-0342-AGB.
Attorneys: David E. Ross (Ross Aronstam & Moritz LLP) for CBS Corporation. Myron T. Steele (Potter Anderson & Corroon LLP) for National Amusements, Inc.
Companies: CBS Corporation; National Amusements, Inc.
MainStory: TopStory CorporateGovernance CorpGovNews GCNNews FiduciaryDuties MergersAcquisitions DelawareNews
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