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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Chancery Finds Proper Purpose in Books and Records Demand to Investigate Potential Wrongdoing in CBS-Viacom Merger, Orders Narrowed Inspection that Includes Electronic Documents
A stockholder seeking books and records in Delaware states a proper purpose for inspection by demonstrating a credible basis to suspect that fiduciaries engaged in wrongdoing. So long as the documents sought are necessary and essential to that purpose, the Court of Chancery will order inspection. The Court generally will not, however, require a broad production of electronic documents akin to plenary discovery.
Plaintiff, a CBS stockholder, sought books and records concerning CBS’s pending acquisition of Viacom. Shari Redstone controlled both CBS and Viacom via her control of their parent, National Amusements, Inc. (“NAI”). The December 2019 merger had come on the heels of her unsuccessful efforts in 2016 and 2018 to merge CBS and Viacom. The 2018 merger effort was contentious: CBS sought to defend itself from the merger by issuing a stock dividend to eliminate NAI’s control of CBS, and also by filing preemptive litigation seeking a temporary restraining order to prohibit NAI from changing the CBS board and rescinding the stock dividend. At that time, CBS argued that the proposed merger with Viacom threatened CBS with irreparable harm. The parties settled that 2018 litigation via an agreement that included a restructuring of CBS’s board and Redstone agreeing for two years not to propose another merger with Viacom without the invitation of two-thirds of CBS’s independent directors.
In February 2019, Redstone attended a CBS Nominating and Governance Committee meeting, although she is not a member of that committee. After she departed, the committee determined to recommend the CBS board form another special committee to consider specific strategic transactions. CBS’s chief legal officer then abruptly resigned. In April, CBS formed a special committee, and in August CBS and Viacom announced they would merge.
In this post-trial decision, the Court concluded plaintiff had shown a credible basis to infer potential wrongdoing. The Court explained that in 2018 CBS had fought NAI, but in 2019 CBS had readily accepted a merger on similar terms. The Court concluded several facts provided a credible basis to suspect wrongdoing, particularly in the context of a conflicted controlling stockholder transaction. First, CBS agreed to a merger without asking that it be conditioned on the approval of a majority of CBS’s unaffiliated stockholders. The Court explained that this failure to follow the MFW framework to obtain deferential review of controlling stockholder transactions did not automatically establish a credible basis to suspect wrongdoing, but did contribute to a finding of a credible basis. Second, the terms of the 2019 merger did not seem materially better for CBS stockholders than the terms of the 2018 proposal CBS had strongly resisted. Third, Redstone’s pattern of conduct indicated she viewed a CBS-Viacom merger as a bailout of her controlling interest in Viacom. Fourth, the known facts suggested that Redstone may have proposed a new merger without invitation at the February 2019 Nominating and Governance Committee meeting. Fifth, the new CEO appeared to have a change of heart on the merits of merging with Viacom shortly after securing a more attractive compensation package, a merger bonus, and a pledge of post-merger employment by the combined entity. And sixth, the abrupt resignation of CBS’s chief legal officer after the February 2019 Nominating and Governance Committee meeting supported a reasonable inference that Ms. Redstone had proposed a transaction without first receiving the invitation required by the 2018 settlement.
The Court did narrow the documents the plaintiff was allowed to inspect. The Court ordered inspection of documents related to the prior CBS/Viacom merger attempts as part of a continuing story of misconduct. For CEO compensation, the Court denied the broad request of electronic documents; board-level documentation would be sufficient to investigate the issue. The Court also narrowed inspection of electronic documents related to Redstone’s communications with committee members to two weeks before and after the February 2019 Nominating and Governance Committee meeting, explaining that the plaintiff’s broader request for all electronic communications between various individuals and parties was more akin to discovery in a plenary action rather than the rifled precision required by Section 220 of the Delaware General Corporation Law.