On December 29, 2020, in a 76-page memorandum opinion, the Court of Chancery denied a motion to dismiss breach of fiduciary duty claims against National Amusements, Inc. (NAI), Viacom Inc.’s controlling stockholder; Shari Redstone, the director, president, and controlling stockholder of NAI; and four individual NAI directors. All were sued for their roles in the Viacom/CBS Corp. merger in a decision that is important for mergers in which a controlling party stands on both sides of a transaction and receives nonratable benefits that are measured in terms of control, rather than based on merger consideration.
As to the claims against NAI and Ms. Redstone, the Court applied an “entire fairness” standard and held that Plaintiffs had pled adequately that the transaction was not entirely fair, but “without prejudice” to the Defendants’ right to argue entire fairness does not apply “on a more developed record.” As to the directors, the Court sustained the allegations that they acted under a “controlled mindset” sufficient to state a breach of loyalty claim that would not be barred by the company’s Section 102(b)(7) exculpatory provision. The Court did dismiss the breach of fiduciary duty claim against Robert Bakish, Viacom’s CEO (who became CEO of the combined company), holding the Plaintiffs did not sufficiently allege wrongdoing on Bakish’s part.
The decision by Vice Chancellor Slights stems from the December 2019 CBS/Viacom merger. According to the Complaint, Sumner Redstone (the late owner, CEO, and chairman of NAI) “made clear his desire that the boards of Viacom and CBS select his successor because, in his view, his daughter, Shari Redstone, was not suitable for the job.” But in 2016, Mr. Redstone’s health deteriorated and Ms. Redstone allegedly “began to whittle away at the governance protections her father had installed” by replacing long-time executives from NAI. Plaintiffs, a class of Viacom stockholders, allege that the controlling stockholders of both Viacom and CBS caused the merger on terms “detrimental to Viacom and its public stockholders.” Plaintiffs allege that Ms. Redstone exerted control over Viacom fiduciaries in a manner that caused them to negotiate and approve the merger out of loyalty to her rather than in Viacom’s interests.
The Court’s Decision
NAI Parties (NAI and Ms. Redstone)
- Standard of Review: Entire Fairness or Business Judgment Rule?
The Parties heavily disputed which standard of review the Court should apply — the Plaintiffs argued that entire fairness should apply since a controller stood on both sides of the transaction, while the NAI Parties posited that the “mere presence” of a controller alone is not sufficient to trigger entire fairness review and therefore the business judgment rule should apply. First, the Court noted that there were no “MFW dual protections” that would have triggered business judgment review. Coined after Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), “MFW dual protections” permit business judgment review of a merger when the merger is approved by both (1) an independent special committee and (2) a majority of minority stockholders. Ultimately, the Court held that the Merger “was a ‘conflicted transaction’ beyond NAI’s [mere] presence on both sides.”
The Court noted the NAI Parties’ contention that “in each instance where a Delaware court has observed that a controller’s presence on both sides of a transaction will trigger entire fairness review, there is always something more that causes the court to conclude that the controller is conflicted.” But, the Court also stated “Delaware courts can be trusted to say what they mean and mean what they say . . . it is difficult to escape the clarity with which the Supreme Court stated the ‘presence on both sides’ rule in Emerald Partners: ‘the controller’s stance on both sides as a corporate fiduciary, alone, is sufficient to require the demonstration of entire fairness.”
- Nonratable Benefit
The Court also held that Plaintiffs pled Ms. Redstone received a “non-ratable benefit from the Merger at the expense of Viacom’s minority stockholders,” and this required review pursuant to the entire fairness standard. “A non-ratable benefit exists when the controller receives a unique benefit by extracting something uniquely valuable to the controller, even if the controller nominally receives the same consideration as all other stockholders.” Typically, however, there is “no cause to apply the nonratable framework in the merger context where the controller stands on both sides of the transaction but received the same consideration as all other stockholders.”
However, the Court held that “[t]he Plaintiffs’ well-pled allegations create a reasonable inference that Ms. Redstone, through NAI, used the Merger as a means to consolidate her control of Viacom and CBS at the expense of the Viacom minority stockholders” — a nonratable benefit. The Court therefore held “Ms. Redstone received a unique benefit at the expense of the minority stockholders” given “Ms. Redstone[’s] long desire to combine the media companies her father had built in order to consolidate her control of both companies and solidify her status as media mogul.” This mandated application of the entire fairness standard, and denial of the NAI Parties’ motion to dismiss since “Defendants do not seriously argue that Plaintiffs have failed to well-plead the Merger was not entirely fair, and for good reason.”
The Court evaluated claims against each of the four directors comprising the Viacom Committee separately. It bears noting that Viacom’s charter included a Section 102(b)(7) provision, exculpating individual directors for breach of fiduciary duty claims, with the exception of, inter alia, claims for breach of the duty of loyalty. “To state a ‘non-exculpated claim for breach of fiduciary duty against an independent director protected by an exculpatory charter provision,’ Plaintiffs must allege ‘facts supporting a rational inference that the director . . . acted to advance the self-interested party from whom they could not be presumed to act independently . . . .’”
Plaintiffs contended that they allege a non-exculpated claim against each of the Viacom Committee Defendants because they allege the “willingness of the fiduciaries . . . to allow Ms. Redstone to dominate their decision-making rendered them servile tools in Ms. Redstone’s relentless pursuit of a Viacom/CBS combination to advance her interests.” The Court held that the personal relationship of Defendant Seligman “standing alone present[ed] a reasonably conceivable case that Ms. Seligman was not independent of the NAI Parties with respect to the Merger.” Specifically, Seligman was President of Sony (a longtime customer of NAI), served on a nonprofit board with Ms. Redstone, was known to attend trade and professional events with Ms. Redstone, a Wall Street Journal reporter described Seligman and Ms. Redstone as “BFFS,” the New York Post called Seligman Ms. Redstone’s “closest advisor,” and Ms. Redstone allegedly emailed Seligman and stated “I need another you [for the CBS Board], but obviously it can’t be you . . . Miss you tons . . . we can grab coffee next Friday.”
As to the other individual Defendants, the Court held that “[a]s pled, the Viacom Committee’s negotiations reflect[ed] a desire to placate the controller, not to land the best transaction possible for all Viacom stockholders” and therefore it was “reasonably conceivable that the Viacom Committee Defendants allowed NAI’s influence over them to impede their role in disabling NAI’s self-interest and ensuring that the best interests of all Viacom stockholders were loyally represented in the negotiation and consummation of the Merger.” Ultimately, the Court held “Plaintiffs have well pled that the Viacom Committee operated under a controlled mindset” and denied the motion to dismiss breach of fiduciary duty claims against the Viacom Committee Defendants.
The Court’s decision to apply entire fairness is significant because, as the Court itself noted, cases in which the business judgment rule apply rarely make it past the “proverbial starting line. If, on the other hand, the court reviews the conduct under the entire fairness standard, the claim is likely to proceed at least through discovery.” Although the Court’s discussion of “mere presence” is dicta, it provides important insight that future decisions from the Court of Chancery will find that the mere presence of a controller on both sides of a merger alone is sufficient to trigger entire fairness review in the absence of MFW dual protections (i.e., that the merger is approved by an independent special committee and a majority of the minority stockholders). It also reminds that while a controller who receives the same consideration as others may not trigger the “nonratable” benefit analysis, the receipt of control-related intangible benefits may suffice.