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Chancery Sustains Claims Against CBS Fiduciaries Concerning CBS-Viacom Merger, While Questioning the Viability of “Holder” Claims Under Delaware Law

In re CBS Corp. S’holder Class & Deriv. Litig., C.A. No. 2020-0111-JRS (Del. Ch. Jan. 27, 2021)

This decision is one of several by the Delaware Court of Chancery arising out of efforts to merge CBS Corporation and Viacom by the companies’ controlling stockholder—National Amusements, Inc., controlled by Shari Redstone. Recently, in In re Viacom Inc. Stockholders Litigation, 2020 WL 7711128 (Del. Ch. Dec. 29, 2020), the Court upheld claims by the Viacom stockholders against Viacom fiduciaries arising out of the CBS-Viacom merger. This decision is the flipside of that same coin, with the Court upholding claims by the CBS stockholders against CBS fiduciaries, including special transaction committee members, arising out of the same merger.

The Court addressed or observed several interesting issues in this motion to dismiss decision spanning nearly 160-pages, including the operation of a books-and-records “incorporation by reference” condition, the direct versus derivative claim distinction, and pleading demand futility and triggering entire fairness review in transactions involving a controller on both sides. One determination worth emphasis concerned the plaintiffs’ disclosure claim. Specifically, the Court doubted that so-called “holder” claims—i.e., “a cause of action by persons wrongfully induced to hold stock instead of selling it”—are cognizable under Delaware law. While some jurisdictions recognize these claims, Delaware law is unclear on the subject. Here, the Court echoed previously identified policy and proof problems that weigh against recognizing the claims, and stated the Vice Chancellor’s view that they are not cognizable. The Court nonetheless predicted the standards Delaware law would impose on pleading “holder” claims, should it recognize them, and found plaintiff’s allegations lacking. Also of note, left unresolved in Viacom and again in CBS was the parties’ disagreement regarding whether a controller’s “mere presence” on both sides of a merger is enough to trigger entire fairness review or whether a plaintiff also must allege a non-ratable benefit to the controller. In each decision, the Court found an adequately pled non-ratable benefit to the controller in the circumstances, rendering the question academic.

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