Business

Maybe Revenge Should Come Before Business

A director grabbed Shari Redstone by the face. If that isn't a firing offense, what is? 

Revenge first, business later.

David Paul Morris

This post originally appeared in  Money Stuff.

A couple of weeks ago the board of CBS Corp. tried to get rid of the company’s controlling shareholder, Shari Redstone’s National Amusements Inc., through a two-pronged strategy of (1) holding a board meeting to approve a special dividend that would dilute away her voting control of the company and (2) suing to get a court to say that was okay. (CBS’s board claimed that Redstone was trying to force through a merger with Viacom Inc., which is also controlled by National Amusements.) Redstone responded by changing CBS’s bylaws—by voting her own stock before that board meeting—to require 90 percent of the directors to approve such a dividend. The directors held the board meeting anyway, and 11 out of 14 voted to dilute Redstone, which is less than 90 percent, so you’d think Redstone’s strategy was effective.

Just to be sure she sued too, though; here is National Amusements’ complaint, which was filed yesterday. It makes a bunch of arguments that the special dividend—in which the board voted to give a bunch of voting stock to all shareholders, which would dilute Redstone’s voting power from 79.6 percent down to 17 percent—was invalid, but you only really need the first one:

First, the dividend is plainly invalid under CBS’s bylaws, as amended on May 16, 2018. At the time of the Special Meeting, the Company’s bylaws required adherence to certain procedural requirements and a supermajority vote of at least 90% of the directors to approve any dividend. Even putting aside the procedural requirements, fewer than 90% of the directors voted in favor of the Special Committee’s recommended dilutive dividend. The dilutive dividend is therefore a corporate nullity.

Redstone voted to prevent the board from diluting her before the board voted to dilute her. On any sort of formalist theory of corporate governance—you know, the shareholders control the corporation, a vote by a controlling shareholder can change the bylaws, the bylaws bind the board, that sort of thing—that is the end of the matter. The motion to dilute Redstone didn’t get enough votes, so it didn’t pass, so why are we even arguing about it?

But in corporate-governance situations like this—a controlling shareholder who owns a majority of the voting power but a minority of the economic interest and who is at odds with the independent directors, the shadow of a merger with the controlling shareholder’s other company, etc.—courts love to get involved and upset the formal rules, so you can’t necessarily rely on who voted for what first. So National Amusements raises other arguments. I found this one compelling:

Contrary to their representations to the Court and to stockholders that the Special Meeting was necessary to “deliberate” on, “debate”and “consider” the Special Committee’s recommendation on a “full record,” Defendants’ haste to hold the Special Meeting on May 17 resulted in a perfunctory and heavily scripted Board meeting that lasted only an hour, with almost no deliberation or debate. Despite the gravity of the issue before the Board, there were no written materials provided to the Board (either in advance of or at the meeting) other than distribution at the meeting of (i) a bare-bones agenda, and (ii) the resolutions declaring the dividend, which the Director Defendants apparently already agreed in private they would approve. Absent from the promised “full record” was: any written analysis or fairness opinion sought from or provided by any financial advisor; any consideration given to the dilutive dividend’s economic impact on or damage to Class A stockholders, including the minority Class A stockholders; any discussion of actual or potential conflicts of interest of the Special Committee members or other Director Defendants, all of whom own significantly more non-voting Class B stock than voting Class A stock; any identification or discussion of less extreme measures to address the supposed “threats” posed by the controlling stockholder; and any threat reassessment in light of NAI’s unequivocal assurances on and after May 14 that it did not have, and never had, any intention of removing directors or taking any other action to force a CBS/Viacom merger.

Right? To decide to take away a shareholder’s entire stake without a fairness opinion seems like a pretty low standard of director performance. It is good, when you are doing wild novel corporate-governance stuff, to keep up appearances that everything is normal. Get an investment bank to give a presentation and a fairness opinion, get a lawyer to describe the issues, look very grave and serious about the whole thing, check all the procedural boxes, you know? If you just casually ask for a show of hands like “should we get rid of our shareholder or what” then it is hard to take you too seriously.

The other weird thing in National Amusements’ complaint is this, about CBS director Charles Gifford:

Ms. Redstone explained that, on two occasions in 2016 and 2017, Mr. Gifford had acted in an intimidating and bullying manner, including on one occasion by grabbing her face and directing her to listen to him.

And:

After hearing that Ms. Redstone was upset by his conduct, Mr. Gifford later told her that he meant no offense, and that was how he treats his daughters when he wants their attention. Ms. Redstone clarified that she was not Mr. Gifford’s daughter but instead the Vice Chair of CBS.

And she didn’t immediately fire him from the board of the company she controls! I have to say that Redstone is being a lot more patient about this whole thing than I would be in her situation. Yes absolutely the board’s moves have probably made it impossible for her to fire them and push forward the merger with Viacom. But I don't think they’ve made it impossible for her to fire them and not push forward that merger. Perhaps she cares a lot about the merger and wants to preserve the possibility of a negotiated solution. (Her complaint suggests otherwise.) But if I were in her situation—rich, in charge, condescended to and undermined—I would probably focus on revenge first and worry about business combinations later.

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    Matt Levine at mlevine51@bloomberg.net

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