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Chancery Sustains Complaint for Breach of Fiduciary Duty against Viacom Controllers

In re Viacom Inc. Stockholders Litig., C.A. No. 2019-0948-JRS (Del. Ch. Dec. 29, 2020), as corrected (Dec. 30, 2020)

This case exemplifies that the Court of Chancery will review a transaction under the entire fairness standard where a controller receives a non-ratable benefit and the controller fails to condition the transaction on the approval of a special committee and of a majority of the disinterested minority stockholders. Plaintiffs, minority stockholders of Viacom International (“Viacom”), sued Shari Redstone, her corporate entities (together with Ms. Redstone, the “Controllers”), and Viacom directors that were allegedly loyal to Ms. Redstone. Ms. Redstone indirectly controls both Viacom and CBS Corporation (“CBS”). Among other things, the plaintiffs contended that the Controllers breached their fiduciary duties in causing the merger between Viacom and CBS on terms beneficial to the Controllers but detrimental to Viacom’s public stockholders.  

The Court indicated in dicta that a controller’s “mere presence” on both sides of the transaction should trigger entire fairness at the outset, contrary to the defendants’ arguments. In any event, the Court reasoned, here Ms. Redstone also allegedly received non-pro rata benefits by achieving a longstanding dream of solidifying her control over Viacom and CBS. Indeed, the allegations supported that Viacom stockholders received less consideration due to Ms. Redstone’s insistence that the combined company be headed by a particular executive who allegedly was loyal to her. Viacom did not structure the transaction at the outset to require (1) the approval by a fully empowered special committee of the board, and (2) an un-coerced, fully informed vote of a majority of the minority stockholders in support of the merger. In the absence of these dual protections, the Court applied the entire fairness standard of review. The Court also allowed plaintiffs to pursue discovery for their claims against the members of a Viacom transactions committee, against whom the Court found sufficient allegations that the committee did not act independently of the conflicted Controllers.  

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