CBS Shareholders File Class Action Lawsuit Against National Amusements

By Dade Hayes, Dawn C. Chmielewski

Les Moonves Shari Redstone

UPDATED to include comment from National AmusementsCBS stockholders have filed a class-action lawsuit (read it HERE) against the media company’s controlling shareholder, National Amusements, contending the Shari Redstone-run outfit has breached its fiduciary duty.

The suit was filed in Delaware Chancery Court by the Westmoreland County Employees Retirement System. (Westmoreland County is in Pennsylvania, just east of Pittsburgh.) It contends that the execs in charge of NAI, which controls about 80% of CBS and Viacom, “breached and continue to breach contractual, implied obligations and fiduciary duties that they owe to CBS’s Class B stockholders.” The NAI control is achieved via a dual-class stock ownership structure, a setup commonly used by many startup companies and even at some mature ones, such as Facebook.

The retirement fund is seeking certification for class action status on behalf of all of CBS’s Class B shareholders. Lawyers for the pension fund argue that CBS’s board had the authority to issue a special dividend, as was the case earlier this month, when the majority of the board voted to dilute Shari Redstone’s voting control over the company.

In its suit, the fund accuses NAI chief Shari Redstone, the family’s National Amusements holding company, and two board members of harming Class B shareholders by interfering with this special dividend. “The Share Distribution Provision permits share distributions that are dilutive to the excessive voting power of the Class A,” the complaint says. “Sumner Redstone is no longer in control of CBS. His daughter has seized control, interfered with the management of the company and pressured the company to pursue her self-interested plan to combine CBS with Viacom.”
National Amusements issued a statement saying it was merely exercising its legal right to change the CBS bylaws.
“Furthermore, as detailed in NAI’s complaint, the efforts of the CBS Directors to unilaterally dilute the voting rights of its controlling shareholder are extraordinary, unjustified and unlawful,” the company said in a statement. “We are confident the court will uphold NAI’s action.”
The pension fund’s lawyers argue that Redstone and her allies broke their promise to act in good faith by using National Amusement’s controlling stake in CBS to effectively nullify the board’s vote through a last-minute bylaw change.
“This denies the Class B stockholders the protection that the Share Distribution Provision was intended to afford them against an overreaching controlling shareholder,” the lawyers argue.
The pension fund argues that the bylaw change, requiring approval of 90% of the board to issue such a dividend, is invalid for reasons similar to those cited by CBS’s attorneys. The lawyers are asking the Delaware Chancery to authorize the issuance of new, Class A voting stock to all CBS shareholder and find Redstone, NAI and board members David Andelman and Robert Klieger in breach of their fiduciary duties.
One recent report by a Western Pennsylvania newspaper said the pension fund serves 1,300 retired government workers and ended 2017 with $459 million.

The action by shareholders is the latest attempt to challenge the bylaws that give NAI, control of the company. CBS, in a special board meeting May 17, voted to overturn the bylaws and reduce NAI’s control to around 20%, after first taking NAI to court, seeking a temporary restraining order to prevent interference with the board vote. NAI then sued over that move.

Courtroom battles have not interfered with Shari Redstone’s efforts to lead CBS and Viacom through a challenging environment for traditional media companies. She was seen earlier this week casually chatting with attendees at the Code Conference, a prominent technology and entertainment conference in Rancho Palos Verdes.

All of the legal warfare has deep roots, but it has flared up in recent weeks after two attempts by Redstone to bring the companies back together amid overall industry consolidation. One effort at a reunion in 2016 was abandoned. The next, which began in January, led to the current meltdown. Both sets of talks ran aground over issues over managerial control and compensation, with CBS chief Les Moonves resisting efforts to install current Viacom CEO Bob Bakish as the No. 2 in a combined entity. A larger point of contention is that CBS has insisted that Redstone was trying to force a merger regardless of the downside. NAI emphatically denies that charge.

CBS declined to comment on the suit. NAI did not immediately respond to Deadline’s request for comment.

National Amusements was founded as a Boston-area theater circuit in 1936 by the father of longtime former CBS and Viacom chairman Sumner Redstone, who took the helm of the company in 1954. Redstone would eventually expand the regional exhibitor into a global media power. During his six-decade run, the company bought Viacom in a bare-knuckled battle that involved Barry Diller, and then acquired CBS in 1999. CBS and Viacom operated together until deciding to split in 2006. Initially, the thinking behind the divorce was that then-high-flying Viacom, with Paramount Pictures, MTV and Nickelodeon, had too much upside to be weighed down by broadcast-and-localTV-heavy CBS. Stock-wise and operationally, it turned out to be the opposite scenario. Under Moonves, CBS went on a tear that continues to this day, topping the ratings charts and unlocking more shareholder value than Viacom, making Moonves and many shareholders wary of a combination with Viacom and newly critical of the NAI bylaws.

Shari Redstone, who earlier this decade had become estranged from her father, reconciled after the grueling process of ousting former Viacom CEO Philippe Dauman. With the health of Sumner Redstone, 95, now fading, Shari Redstone has steered the family-owned company since 2016.

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