Don’t feel guilty if you’re confused by the twists in the battle for Viacom. The story has become complicated, and vitally important, in the month since lawyers for Sumner Redstone informed CEO Philippe Dauman that he had been jettisoned from the controlling shareholder’s inner circle.
There’s a lot more at stake than Dauman’s career and reputation. Yesterday, Redstone’s camp moved to replace five Viacom board members, which could reshape the company. He also controls CBS. And the court cases from the dispute could affect governance practices across corporate America.
We sorted through the issues shortly after Redstone’s camp declared war on Dauman. But after all that’s taken place, this is a good time to take another look at where things stand:
Q: Who’s running Viacom?
A: Dauman and the board are still in charge. But they’re mostly caretakers until the Delaware Chancery Court determines whether the National Amusements (NAI) board has the right to change Viacom’s bylaws, directors, and management.
Q: National Amusements? Doesn’t Redstone own Viacom?
A: Yes, but indirectly. He owns 80% of the privately held exhibition chain, which gives him the power to pick its board. NAI, in turn, owns 80% of the voting shares in Viacom and CBS. That gives it the power to pick their boards and write their bylaws.
Q: What do you mean by “voting shares”?
A: Viacom and CBS each have two classes of stock. The ones Redstone controls come with one vote apiece. The ones the public trades don’t include voting rights.
Q: Does that mean National Amusements can do whatever it wants with Viacom and CBS?
A: Pretty much. Company bylaws spell out the theater chain’s authority. And a doctrine of corporate law called the business judgment rule gives people in power a lot of leeway.
“You can’t use your voting control to steal,” Charles Elson, Director of the University of Delaware’s John L. Weinberg Center for Corporate Governance, tells me. “But if you have a different judgment about where the company should go, you win.”
In the end, he says, “it’s not about the law. It’s about the structure that created this company” with two classes of stock. “This is the reason why dual class stock should be banned as a financing tool,” Elson says.
Q: What happens if Redstone’s competent?
A: Then it’s ballgame over. He can choose who’s on his family trust, and how to vote his NAI shares.
Q: If it’s that simple, then how can Dauman challenge Redstone?
A: Dauman says Redstone, who’s 93 and ailing, isn’t really making the decisions. He allegedly has become incompetent, and is being manipulated by his daughter Shari, who’s President of NAI and Vice Chair of Viacom and CBS.
Q: Why would that matter?
A: If Sumner is out of the picture, then his seven-member family trust controls his NAI holdings — the source of his power. And if the trust is in charge, then several major decisions made in the last month were invalid, Dauman says.
Q: What decisions?
A: The battles began on May 20 when Redstone’s lawyers told Dauman and Viacom director George Abrams that they’d been kicked off of the family trust and the NAI board. Since then, NAI said it changed Viacom’s bylaws in a way that could derail Dauman’s effort to sell a 49% stake in Paramount. And, yesterday, NAI said it will replace five Viacom directors, including Dauman.
Q: Does Viacom still plan to sell a stake in Paramount?
A: Dauman said he’s closing in on a deal that would add $10 a share to Viacom’s market value. But it’s hard to imagine anyone going through with it if Dauman’s authority is in doubt, and Redstone opposes.
Q: Who will decide if Redstone is competent?
A: It’s not clear yet. Dauman and Abrams filed a court challenge in Massachusetts, where the family trust was created. The judge there said last week that he’ll decide by the end of this month whether to grant the duo’s request for an expedited trial — as well as an independent examination of Redstone.
Meanwhile Redstone’s team has asked a court in California, where he lives, to validate his ability to make his own decisions. That court threw out a challenge to his competence last month, but isn’t scheduled to consider the new case until July.
And now Viacom wants the Delaware Chancery Court to make a judgment about Redstone’s competence to determine whether NAI has the right to change its directors.
Q: Why is Redstone’s competence relevant in the Chancery Court case?
A: Viacom says it’s key to the decision to kick Dauman and Abrams off the family trust which “set in motion a chain of events” that should invalidate the decision to change Viacom’s directors.
Q: What does Redstone’s team say?
A: It hasn’t filed court papers yet. But it is expected to argue that the issue is not relevant. Even without Sumner, three of NAI’s six directors supported the decision to replace Dauman and Abrams. And the issue in Delaware involves a vote by the NAI board, whose competence is not in question.
Q: What makes Dauman believe that Redstone is incompetent and being manipulated?
A: His team wants a court to order an independent examination to prove the point. And it says that there are a lot of reasons to be concerned. Dauman says Redstone seemed out of it when he last saw his boss in March. Since then Redstone has been silent on board conference calls, refused to meet with long time friends on the board, and seemed to be making decisions that are dramatically inconsistent with his past positions.
Q: The guy’s 93 and ailing. He hasn’t appeared in public since May 2015.
A: Still, Dauman has the burden of proof.
Q: What do Redstone’s people say?
A: They say the old man is still in charge. They had a geriatric psychiatrist examine him — and testify to his competence — on two key days: May 20, when Redstone’s lawyers informed Dauman and Abrams that their client had kicked the duo off the trust and National Amusements board, and then May 24 when replacements were named.
Q: Anything else?
A: Redstone visited the Paramount lot on Friday. He sat in his van, but studio CEO Brad Grey came down to visit him. In an open letter to Redstone this week, Lead Independent Director Fredric Salerno pointedly said that his people “staged a drive for you, with Shari” to Paramount.
Redstone made a similar visit on Tuesday to CBS, where CEO Les Moonves saw him for about 10 minutes, the Wall Street Journal reported. CBS would not confirm that the meeting took place.
Q: A majority of the family trust voted to ratify the move to oust Dauman and Abrams. Doesn’t that mean he loses no matter what a judge says about Redstone’s competence?
A: The 12-page trust document hasn’t been made public, although lawyers have quoted a few passages from it. So we don’t know what it says about procedures to vote a trustee out.
Q: How can Dauman stay on if a majority wants him off?
A: Deadline disclosed early last year that the trust calls for a majority of members to be independent of the Redstone family. What’s more, if an independent member leaves, then other independent members get to choose a replacement. Dauman might be able to challenge the vote to replace him and Abrams as independent members on the grounds that it included votes from the Redstone family.
Q: Let’s say he’s right and stays on the trust. He’d still be in the minority.
A: True. But he may see an angle to turn the tables: Trustees must make decisions that benefit all five of Redstone’s grandchildren and succeeding generations. Dauman conceivably could challenge decisions that he believes fail that test – or, more to the point, that he believes just help Shari and her part of the family.
Q: That would be hard to prove.
A: Here’s where it’s noteworthy that Dauman has the support of the two daughters of Brent Redstone, Sumner’s long-estranged son. They’re beneficiaries of the trust and fear that they’ll be left in the cold if Shari controls the body. She and her son, Tyler Korff, are trustees, leaving Brent’s wing unrepresented.
Keryn Redstone said that Shari and her three children “have succeeded in reversing decades of my grandfather’s careful estate planning and are poised to seize control of Viacom and CBS.”
Q: How about the NAI directors? They also voted to oust Dauman from their board — and want to block a Paramount deal.
A: Here, too, Dauman could argue that an effort to derail the deal is designed to mess with him – not to serve the trust’s beneficiaries. Wall Street liked the idea of selling the Paramount stake.
Q: There are a lot of court cases. What are the odds that Dauman will survive?
A: Not good considering that he’d probably have to win every case. At the end of the day, his power came from Redstone. Dauman probably won’t last long if that’s gone and a majority of the trust and NAI board support Shari.
Q: Could he win some love on Wall Street?
A: Probably not, even though investors are notoriously fickle. Viacom shares have lost 31% of their value over the last year, and nearly half over the last two years. More telling: they’ve appreciated nearly 20% since May 20 — when the Redstone-Dauman fight began — a period when the overall market was up just 1.3%. That suggests investors are eager to see a change.
Q: What would happen if Dauman is forced out?
A: We don’t know. Many analysts believe Viacom would be better off if NAI merges it with CBS, putting CEO Les Moonves in charge. But Moonves may not want to take on channels including MTV, Nickelodeon, Comedy Central, and BET that mostly target young people — an audience that’s cooling to cable and warming to digital media.
Yesterday’s announcement by NAI that it would leave Dauman’s long-time colleague COO Tom Dooley on the board led to speculation about another possibility: He could take charge, if Dauman’s out, and provide stability at Viacom while a reconstituted board figures out what to do.
Q: So what’s Dauman’s end-game?
A: Who knows? His camp says he’s fighting for strong corporate governance that represents all shareholders, not just the Redstones, and a turn-around strategy that could bear fruit.
Q: Is that plausible?
A: Perhaps, but few believe it. Dauman owes his job to his close relationship with Redstone. “Is he truly independent? I don’t think so,” Mark Rogers, CEO of corporate director recruitment firm BoardProspects.com says. And governance watchdogs hate its practices — including the board’s agreement to pay Dauman $54.1 million in 2015. Some of that was due to perks from a contract renewal. Still, it made him the country’s third highest paid CEO with a 22.1% raise in a year when Viacom’s stock value declined 42.5%.
Q: So is it all about money?
A: That’s the more popular view, buttressed by this morning’s disclosure that Viacom agreed to pay Dauman’s legal and PR bills for his fight to remain on the Redstone trust and NAI board.
It also would be consistent with history. He worked out a great deal for himself in 1999 when Redstone had to jettison him, and Dooley, following Viacom’s acquisition of CBS. The broadcaster’s boss at the time, Mel Karmazin, was signed to run Viacom and didn’t want to worry that he might be undermined Redstone’s then-close friend. Dauman and Dooley left with severance of about $150 million apiece, plus stock options, before Redstone brought them back in 2006.