Securities Regulation Daily CBS stockholder may inspect books ahead of Viacom merger
Monday, December 2, 2019

CBS stockholder may inspect books ahead of Viacom merger

By Anne Sherry, J.D.

The stockholder sought CBS’s books and records to potentially seek to enjoin the closing of the merger between CBS and Viacom.

An institutional shareholder of CBS won the right to inspect some of the company’s books and records before its merger with Viacom closes. The Delaware Court of Chancery found that the pension fund had demonstrated a credible basis to infer wrongdoing on the part of Shari Redstone as a conflicted controller, establishing a proper purpose for the DGCL Section 220 inspection. However, not all the requested documents were necessary to fulfill that purpose (Bucks County Employees Retirement Fund v. CBS Corporation, November 25, 2019, Slights, J.).

The court expedited its decision in light of the merger’s anticipated closing this week. However, it made clear in a footnote that it does not mean for the process the plaintiff used to become a template for other stockholders in pre-closing challenges. Whether the plaintiff’s strategy is conducive to a proper review of the transaction "very much remains to be seen."

One "proper purpose" of a Section 220 inspection demand is to investigate mismanagement or wrongdoing. The pension fund’s theory of wrongdoing pertained to Shari Redstone’s status as the effective controller of both CBS and Viacom through her control of National Amusements, Inc. According to this theory, Redstone’s years-long pursuit of a merger between the two companies—essentially a bailout of Viacom using CBS’s resources—culminated in an unfair merger process and a merger with no economic justification.

The court agreed that the plaintiff had demonstrated a "credible basis," which is the lowest burden of proof under Delaware law, requiring only the presentation of some evidence of wrongdoing. The fund appealed to the fact that the CBS board went to great lengths last year to try to prevent Redstone from forcing a merger that was not materially different than the one it has since approved, under new leadership that is allegedly beholden to Redstone. The plaintiff also pointed to CBS’s public filings and other documents that suggest Redstone pushed for a merger at a February 22 Nominations and Governance meeting. CBS’s Chief Legal Officer, Lawrence Tu, resigned abruptly immediately after this meeting, perhaps in response to wrongdoing he witnessed, the plaintiff posited.

CBS countered that the evidence demonstrated its process was sound and that there was no evidence that Redstone controlled either the process or the decisionmakers. However, the plaintiff met its burden of showing some evidence. By declining to give unaffiliated stockholders a vote on the merger, CBS passed up the opportunity for business judgment deference under the MFW framework, a decision that can look suspicious in the Section 220 context. While the failure to follow the MFW road map would not be a credible basis to suspect wrongdoing by itself, it can contribute to a credible basis. Additional factors in the court’s eyes were the suggestion that the current merger terms are not materially improved from those the board rejected in 2018, the possibility of a nonratable benefit to Redstone, Redstone’s presence at the Nominations and Governance meeting when she is not a member of that committee, the CEO’s change of heart on the merger coincident with a more generous compensation package, and Tu’s abrupt resignation.

Nevertheless, the court did not give the investor every document it requested. Certain documents pertaining to a 2018 meting where new directors were added were unnecessary to the plaintiff’s purpose, and documents pertaining to the independence of CBS directors were unlikely to provide information that the plaintiff would not already have from conflict questionnaires. Similarly, it was unclear why expert reports would provide useful information when the plaintiff already has substantial information from prior litigation. The court also denied a broad request for electronic communications, which was more appropriate for discovery in a plenary action.

The case is No. 2019-0820-JRS.

Attorneys: Michael Hanrahan (Prickett, Jones & Elliott, P.A.) for Bucks County Employees Retirement Fund. Elena C. Norman (Young Conaway Stargatt & Taylor, LLP) for CBS Corporation.

Companies: Bucks County Employees Retirement Fund; CBS Corporation

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews MergersAcquisitions DelawareNews

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