In re Viacom Inc. Stockholders Litigation ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE VIACOM INC. ) CONSOLIDATED
STOCKHOLDERS LITIGATION ) C.A. No. 2019-0948-JRS
MEMORANDUM OPINION
Date Submitted: September 15, 2020
Date Decided: December 29, 2020
Gregory V. Varallo, Esquire of Bernstein Litowitz Berger & Grossmann LLP,
Wilmington, Delaware; Jeroen van Kwawegen, Esquire, Edward G. Timlin, Esquire,
Andrew E. Blumberg, Esquire and Daniel E. Meyer, Esquire of Bernstein Litowitz
Berger & Grossmann LLP, New York, New York, Attorneys for Lead Plaintiff
California Public Employees’ Retirement System.
Chad Johnson, Esquire, Noam Mandel, Esquire and Desiree Cummings, Esquire of
Robbins Geller Rudman & Dowd LLP, New York, New York; Christopher H.
Lyons, Esquire of Robbins Geller Rudman & Dowd LLP, Nashville, Tennessee,
Attorneys for Additional Plaintiff Park Employees’ and Retirement Board
Employees’ Annuity and Benefit Fund of Chicago.
Francis A. Bottini, Jr., Esquire and Anne B. Beste, Esquire of Bottini & Bottini, Inc.,
La Jolla, California, Attorneys for Additional Plaintiff Louis M. Wilen.
Matthew E. Fischer, Esquire, Michael A. Pittenger, Esquire, Christopher N. Kelly,
Esquire, J. Matthew Belger, Esquire, Jacqueline A. Rogers, Esquire and Callan R.
Jackson, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware and
Victor L. Hou, Esquire, Rahul Mukhi, Esquire and Mark E. McDonald, Esquire of
Cleary Gottlieb Steen & Hamilton LLP, New York, New York, Attorneys for
Defendants National Amusements, Inc., NAI Entertainment Holdings LLC, and
Shari E. Redstone.
Gregory P. Williams, Esquire, Blake Rohrbacher, Esquire and Kevin M. Regan,
Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware and Robert H.
Baron, Esquire, Gary A. Bornstein, Esquire and Rory A. Leraris, Esquire of Cravath,
Swaine & Moore LLP, New York, New York, Attorneys for Defendants Thomas J.
May, Judith A. McHale, Ronald Nelson and Nicole Seligman.
Jon E. Abramczyk, Esquire, D. McKinley Measley, Esquire, Alexandra M.
Cumings, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware
and Stuart J. Baskin, Esquire and Randall Martin, Esquire of Shearman & Sterling
LLP, New York, New York, Attorneys for Defendant Robert M. Bakish.
SLIGHTS, Vice Chancellor
Delaware’s General Corporation Law is a prime example of codified law that
“elegant[ly] and flexibl[y]” enables those it regulates to fulfill their vital and multi-
faceted purposes.1 As a “counterpoint” to the DGCL’s enabling and contractarian
features, “the ex post judicial review of the actions of corporate officers and
directors, measured by fiduciary principles” exists as a means to ensure that those
charged with the management of the corporation act with a loyal purpose
“when exercising their broad powers over corporate property and processes.” 2
This ex post judicial review is presumptively deferential in recognition of both the
managerial primacy of the board of directors, as provided for in the DGCL, and the
prudence of encouraging managerial “creativity and risk-taking.”3 Indeed, for these
reasons, as a general matter, the conduct of corporate fiduciaries is given less judicial
scrutiny than the conduct of trust fiduciaries. 4 But courts of equity, where judicial
review of fiduciary conduct abides, have long been on qui vive for the self-dealing
fiduciary who steers the corporation into transactions that enrich the fiduciary to the
1
William T. Allen, Jack B. Jacobs and Leo E. Strine, Jr., Function Over Form:
A Reassessment of Standards of Review in Delaware Corporation Law, 56 Bus. L. Rev.
1287, 1289 (Aug. 2001) (hereinafter “Function Over Form”).
2
Id.
3
Leo E. Strine, Jr., The Delaware Way: How We Do Corporate Law and Some of the
Challenges We (and Europe) Face, 30 Del. J. Corp. L. 673, 675 (2005) (hereinafter
“The Delaware Way”).
4
Function Over Form, at 1289.
1
potential detriment of the stockholders.5 In these instances, “the duty of loyalty is
rigorously enforced by requiring the [fiduciaries] to justify as intrinsically fair any
transaction in which they had a financial interest.”6
“Consistent with the nuance that infuses our common law, Delaware is more
suspicious when the fiduciary who is interested [in a transaction] is a controlling
stockholder.” 7 Thus, this court is, and should be, skeptical when a controlling
stockholder seeks a pleading stage dismissal of breach of fiduciary duty claims
brought on behalf of public stockholders who challenge the bona fides of a
transaction where the controller indisputably stands on both sides of the transaction.8
Indeed, when a controlling stockholder engages in self-dealing, she should assume,
if challenged, that the court will perform its “ex post review” function with vigor,
5
Id. at 1290 (noting that duty of loyalty claims, addressing primarily claims involving self-
dealing, are the fiduciary duty claims with “the longest pedigree”).
6
Id.
7
The Delaware Way, at 678 (explaining that, “[w]hen that is so, there is an obvious fear
that even putatively independent directors may owe or feel a more-than-wholesome
allegiance to the interests of the controller, rather than to the corporation and its public
stockholders”).
8
Lewis H. Lazarus, Brett M. McCartney, Standards of Review in Conflict Transactions on
Motions to Dismiss: Lessons Learned in the Past Decade, 36 Del. J. Corp. L. 967, 998–99
(2011) (reviewing the interaction between the plaintiff-friendly standard of review
embodied in Court of Chancery Rule 12(b)(6) and the standards of review applied in
Delaware to adjudicate breach of fiduciary claims in the corporate context, and observing
that dismissals of complaints challenging transactions where the controller “stands on both
sides” of a transaction are extraordinary).
2
and that it will generally allow public stockholders who might challenge the self-
dealing transaction an opportunity to proceed beyond the pleadings to test the
fairness of the transaction. 9 This case, involving one of the more visible, hotly
contested instances of alleged controlling stockholder self-dealing in recent memory,
is no exception. 10
A putative class of Viacom Inc. stockholders allege that the controlling
stockholders of both Viacom and CBS Corporation, defined below as the NAI
9
That the court allows a plaintiff to take discovery in support of his claims does not mean
the court has fixed the standard of review for all time come what may. See Orman v.
Cullman, 794 A.2d 5, 31 (Del. Ch. 2002) (“Reaching this decision with regard to the loyalty
of the Board that approved the merger, however, does not rebut the business judgment
presumption at this stage of the litigation. It merely means that the business judgment
presumption may not be used as the basis to dismiss Orman’s fiduciary duty claims for
failure to state a cognizable claim. Further discovery is necessary to determine whether the
facts—as they truly existed at the time of the challenged transaction, rather than those
accepted as necessarily true as alleged—are sufficient to rebut the business judgment rule
presumption and to trigger an entire fairness review.”).
10
Of course, our Supreme Court has drawn a “road map” for those engaged in transactions
with conflicted controlling stockholders to earn business judgment deference at the
pleading stage for all fiduciaries involved in the transaction. See Kahn v. M&F Worldwide
Corp., 88 A.3d 635 (Del. 2014) (“MFW”) (holding that breach of fiduciary duty claims
arising out of a squeeze-out merger conditioned from the outset upon both the negotiation
and approval of a fully empowered independent special committee of the board and the
uncoerced, fully informed vote of a majority of the minority stockholders in support of the
transaction will be reviewed under the business judgment rule), overruled in part, Flood v.
Synutra Int’l, Inc., 195 A.3d 754 (Del. 2018); Flood, 195 A.3d at 770 (affirming trial court
dismissal of a complaint under Chancery Rule 12(b)(6) where defendants had clearly
complied with the MFW dual protections); In re Martha Stewart Living Omnimedia, Inc.
S’holder Litig., 2017 WL 3568089, at *18 (Del. Ch. Aug. 18, 2017) (describing the dual-
protections laid out in MFW as a “road map” for fiduciaries to earn business judgment
review of their conduct in approving transactions with conflicted controllers).
3
Parties, caused Viacom and CBS to merge and become the combined entity now
known as ViacomCBS, Inc. (the “Merger”). According to Plaintiffs, the NAI
Parties are controlled by Shari Redstone (“Ms. Redstone”). Ms. Redstone is alleged
to have exerted her control over other Viacom fiduciaries in a manner that caused
them to negotiate and approve the Merger out of loyalty to her on terms detrimental
to Viacom and its public stockholders.11
Plaintiffs’ complaint spins a tale of Ms. Redstone’s unrelenting drive to attain
the status of “media magnate” that would rival or surpass the legacy of her father,
Sumner Redstone. According to Plaintiffs, in 2016, Ms. Redstone initiated a
campaign to consolidate the media empire her father had built. Her first step was to
augment her control of the NAI Parties. She then attempted to leverage her control
of the NAI Parties to cause the entities they controlled, Viacom and CBS, to merge
on three separate occasions, in 2016, 2018, and then again (successfully) in 2019.
In 2016 and 2018, when her attempts to effect a Viacom/CBS combination failed,
she took steps to remove the obstacles and tried again.
11
In an interesting twist, a putative class of CBS stockholders have brought a separate
lawsuit in this Court in which they allege that CBS fiduciaries, including the NAI Parties,
breached their fiduciary duties by causing CBS to merge with Viacom on terms unfair to
CBS. See In re CBS Corp. S’holder Class and Deriv. Action, C.A. No. 2020-0111-JRS.
The CBS fiduciaries have moved to dismiss that consolidated action and the Court expects
to issue its opinion addressing those motions shortly.
4
In 2018, Ms. Redstone convinced an allegedly compromised Viacom
transaction committee to push for a merger with CBS (for the second time), but her
insistence that Viacom CEO and alleged NAI loyalist, Robert Bakish, be named to
the board of the pro forma company prompted CBS to reject the deal and stop
talking. Undeterred, Ms. Redstone was back again in 2019, pushing the same
conflicted Viacom transaction committee to push the same transaction that CBS had
rejected the year before, but this time she insisted that CBS agree that Bakish would
not only have a seat on the board but also be named CEO of the pro forma company.
CBS sensed that Ms. Redstone’s fixation on installing her compatriot Bakish as CEO
of the combined company could be exploited, and its special committee insisted that
Viacom make a commensurate “significant concession” on price in exchange for its
governance priorities. The Viacom transaction committee did just that, ultimately
agreeing to accept approximately $1 billion less in the Merger than it had bargained
for just a year before.
Plaintiffs bring breach of fiduciary duty claims against the NAI Parties,
Bakish and the members of Viacom’s transaction committee for their role in
consummating the Merger. Each defendant has moved to dismiss the complaint.
In doing so, they urge the Court to review Plaintiffs’ breach of fiduciary duty claims
under the deferential business judgment rule since Plaintiffs have alleged nothing
more than that the NAI Parties stood on both sides of the merger. According to
5
Plaintiffs, a controller’s mere presence on both sides of a transaction is not enough
to trigger entire fairness review; Plaintiffs must also well plead that the controller
exploited its control position to the tangible detriment of the minority stockholders.
Citing the seminal Weinberger v. UOP, Inc., 12 Plaintiffs maintain that the
Defendants’ position plainly misstates Delaware law, which has, for decades,
recognized that, “[t]he requirement of fairness is unflinching in its demand that
where one stands on both sides of a transaction, he has the burden of establishing its
entire fairness, sufficient to pass the test of careful scrutiny by the courts.”13
According to Plaintiffs, the controller’s presence on both sides of a transaction is
“inherently coercive” with respect to other corporate decision makers, and entire
fairness scrutiny, therefore, is required to gauge whether the transaction replicated
what would have been secured for the corporation and its stockholders at arms-
length. Alternatively, Plaintiffs argue their complaint more than adequately pleads
that the NAI Parties, and Ms. Redstone in particular, secured value from the
Viacom/CBS Merger that was not shared with other Viacom stockholders.
The parties’ fundamental disagreement over the supposedly settled state of
our law regarding whether the controller’s “mere presence” on both sides of a merger
12
457 A.2d 701 (Del. 1983).
13
Id. at 710 (emphasis added).
6
is enough to trigger entire fairness review is interesting to be sure, but ultimately
academic. After carefully reviewing the complaint, I am satisfied it adequately
pleads a reasonably conceivable basis to infer that the controller achieved a non-
ratable benefit from the Merger to the detriment of Viacom’s public stockholders.
Thus, at this stage, and without prejudice to Defendants’ right to argue otherwise on
a more developed record, I am satisfied that NAI’s conduct with respect to the
Merger should be reviewed for entire fairness.
NAI could have agreed to the MFW dual protections to avoid entire fairness
review but explicitly directed the special committees of both Viacom and CBS to
proceed on the assumption that NAI would not agree to allow the minority
stockholders of either company to decide whether to proceed with the Merger.
If implemented, the dual protections provided to minority stockholders under the
MFW framework would have sufficiently neutralized the NAI Parties coercive
influence over the process.14 Absent these protections, a conflicted controller
14
Tornetta v. Musk, 2019 WL 4566943, at *12 (Del. Ch. Sept. 20, 2019) (observing that
“MFW’s ‘dual protections’ are meant to ‘neutralize’ the conflicted controller’s
‘presumptively coercive influence’ so that judicial second-guessing is no longer required”
(quoting In re Rouse Prop., Inc., 2018 WL 1226015, at *1 (Del. Ch. Mar. 9, 2018))). To be
clear, I am not suggesting that the NAI Parties’ refusal to agree to implement the MFW
protections is indicative of fiduciary wrongdoing. It is not. But the lack of MFW dual
protections does render pleading stage business judgment deference unavailable to the NAI
Parties if Plaintiffs have well pled that they were controlling stockholders who were
conflicted with respect to the Merger. And, as discussed below, Plaintiffs have carried that
pleading burden.
7
standing on both sides of a transaction cannot avoid entire fairness review of that
transaction. Here, the complaint well pleads that the Merger was not entirely fair.
It follows, then, that the motion to dismiss the claims against the NAI Parties must
be denied.
Plaintiffs also assert claims against the members of Viacom’s transaction
committee who negotiated the transaction on Viacom’s behalf and recommended its
approval, alleging these fiduciaries not only maintained relationships with
Ms. Redstone that conceivably compromised their independence, but also labored
under a “controlled mindset” that caused them to succumb to the will of the
controller. In other words, Plaintiffs allege that the willingness of the fiduciaries
who served on Viacom’s transaction committee 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. Thus,
notwithstanding the Section 102(b)(7) provision in Viacom’s charter, 15 Plaintiffs
15
See 8 Del. C. § 102(b)(7) (enabling Delaware corporations to adopt a provision in their
certificate of incorporation, “eliminating or limiting the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that such provision shall not eliminate or limit the liability of a director:
(i) For any breach of the director’s duty of loyalty to the corporation or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from
which the director derived an improper personal benefit”).
8
maintain they have stated viable, non-exculpated claims against each member of the
Viacom transaction committee.
For reasons explained below, I agree with Plaintiffs that their complaint states
non-exculpated breach of loyalty claims against the members of the Viacom
transaction committee. The well-pled facts relating to the controller’s past
predations, her direct involvement in Merger negotiations and her relationships with
the members of the Viacom transaction committee are enough to allow pleading-
stage inferences that these fiduciaries did not act independently and in the best
interests of Viacom’s minority stockholders when negotiating and ultimately
consummating the Merger. Thus, notwithstanding the exculpation clause in
Viacom’s charter, the motion to dismiss the claims against these defendants must
also be denied.
The same cannot be said of the motion to dismiss brought by Bakish.
Regardless of the applicable standard of review, our law requires that a plaintiff
plead a factual basis to support a claim of breach of fiduciary duty. In other words,
the complaint must put the fiduciary on notice of what he is alleged to have done
wrong. Given that not a single allegation in the complaint alleges actionable
wrongdoing by Bakish, the claim against him, as set forth in Count III, must be
dismissed.
9
I. BACKGROUND
I have drawn the facts from well-pled allegations in the Verified Class Action
Amended Complaint (the “Complaint”) and documents incorporated by reference or
integral to that pleading.16 For purposes of the motion, as I must, I accept as true the
Complaint’s well-pled factual allegations and draw all reasonable inferences in
Plaintiffs’ favor.17
A. The Parties and Relevant Non-Parties
Non-party, Viacom, was a publicly traded Delaware corporation
headquartered in New York, New York. 18 Viacom provided entertainment-related
services and products through its primary business units, Viacom Media Networks
and Paramount Pictures. 19 In addition to feature films released by Paramount
Pictures, Viacom was well known for its cable channels, including MTV, BET,
VH1, Nickelodeon and Comedy Central.20 Viacom featured a dual-class stock
structure, with voting Class A Common Stock and non-voting Class B Common
16
First Am. Verified Class Action Compl. (“Compl.”) (D.I. 41); Wal-Mart Stores, Inc. v.
AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (noting that on a motion to dismiss, the
Court may consider documents that are “incorporated by reference” or “integral” to the
complaint).
17
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
18
Compl. ¶ 17.
19
Id.20
Id.10
Stock.21 Both classes of stock were publicly traded on the New York Stock
Exchange as “VIA” and “VIA.B,” respectively. 22
Non-party, CBS, was a publicly traded Delaware corporation headquartered
in New York.23 CBS was a mass media conglomerate, with operations in cable,
publishing, local television, film and streaming services. 24 CBS also maintained a
dual class stock structure, again with voting Class A Common Stock and non-voting
Class B Common Stock. 25 Both classes of stock were publicly traded on the New
York Stock Exchange as “CBS.A” and “CBS,” respectively. 26
Lead Plaintiff, California Public Employees’ Retirement System
(“CalPERS”), has held shares of Class A and Class B Common Stock in Viacom at
all relevant times. 27 Additional Plaintiffs, Park Employees’ and Retirement Board
Employees’ Annuity and Benefit Fund of Chicago and Louis M. Wilen (together
21
Id.22
Id.23
Compl. ¶ 18.
24
Id.25
Id.26
Id.27
Compl. ¶ 14.
11
with CalPERS, “Plaintiffs”), have held shares of Class B Common Stock in Viacom
at all relevant times as well. 28
Defendant, National Amusements, Inc. (“National Amusements”), is a
privately held Maryland corporation headquartered in Norwood, Massachusetts, and
Defendant, NAI Entertainment Holdings LLC (together with National Amusements,
“NAI”), is a wholly owned subsidiary of National Amusements. 29 NAI is a national
movie theater operator founded by Ms. Redstone’s grandfather. 30 NAI was the
controlling stockholder of both Viacom and CBS at all relevant times, holding
approximately 80% of the Class A voting shares of each company. 31 Despite holding
nearly 80% of the voting power in each company, NAI held only approximately
10.5% of the economic value of CBS and 9.9% of the economic value of Viacom at
the time of the Merger. 32
Defendant, Shari E. Redstone (together with NAI, the “NAI Parties”), is a
director, president and controlling stockholder of NAI. 33 Ms. Redstone owns
28
Compl. ¶¶ 15–16.
29
Compl. ¶¶ 23, 24.
30
Compl. ¶ 23.
31
Compl. ¶ 24.
32
Id.33
Compl. ¶ 20.
12
approximately 20% of NAI through the Shari E. Redstone Trust.34 She served as a
director of Viacom and as the Non-Executive Vice Chair of both the CBS and
Viacom boards of directors at all relevant times. 35 Ms. Redstone is currently the
Chair of the ViacomCBS board of directors (the “ViacomCBS Board”).36
Non-party, Sumner Redstone, was the Emeritus Chairman of both CBS and
Viacom. 37 He was Ms. Redstone’s father. 38 At the time Plaintiffs’ Complaint was
filed, Sumner Redstone was the CEO, owner and Chairman of the Board of NAI,
and he held approximately 80% of the voting control of NAI through the Sumner M.
Redstone National Amusements Trust (“Trust”).39 Sumner Redstone has since
passed, effectively leaving the control of the Trust and, by extension NAI, to
Ms. Redstone.40
34
Id.35
Id.36
Id.37
Compl. ¶ 21.
38
Compl. ¶ 20.
39
Compl. ¶ 22.
40
Id.13
Defendant, Thomas J. May, served on and chaired the Viacom board of
directors (the “Viacom Board”) from June 16, 2016 until the Merger closed.41 May
was co-chair of the Viacom special transaction committee (the “Viacom
Committee”) for each of the three attempted mergers with CBS (including the
consummated Merger at issue here).42 May has lived on the same street as
Ms. Redstone since 1994, and May, Ms. Redstone and Sumner Redstone served
together on two non-profit boards. 43
Defendant, Judith A. McHale, served on the Viacom Board from June 16,
2016 until the Merger closed.44 McHale was a member of the Viacom Committee
for all three attempted mergers with CBS. 45 She was general counsel for MTV
Networks in the mid-1980s when Viacom acquired the company. 46 McHale
currently serves on the ViacomCBS Board. 47
41
Compl. ¶ 26.
42
Id.43
Id.44
Compl. ¶ 27.
45
Id.46
Id.47
Id.14
Defendant, Ronald L. Nelson, served on the Viacom Board from June 16,
2016 until the Merger closed. 48 Nelson was a member of the Viacom Committee for
all three Viacom/CBS merger attempts.49 He was CFO and a director at Paramount
when Viacom acquired the company, and he subsequently became COO at
DreamWorks, which co-produced a variety of projects with Paramount.50 Nelson
currently serves on the ViacomCBS Board. 51
Defendant, Nicole Seligman (together with May, McHale and Nelson, the
“Viacom Committee Defendants”), served on the Viacom Board from June 16, 2016
until the Merger closed. 52 Seligman was co-chair of the Viacom Committee for all
three Viacom/CBS merger attempts. 53 She was a former executive at Sony, of which
NAI is a “long-term . . . customer,” and she and Ms. Redstone served on a non-profit
board together. 54 Seligman and Ms. Redstone regularly attend trade and social
48
Compl. ¶ 28.
49
Id.50
Id.51
Id.52
Compl. ¶ 29.
53
Id.54
Id.15
events together, and the closeness of their personal relationship has been the subject
of several media reports.55 Seligman currently serves on the ViacomCBS Board.56
Defendant, Robert M. Bakish, is a Viacom veteran, having served for years as
President and CEO of International Media Networks and its predecessor, MTV
Networks International, before serving as President, CEO and board member of
Viacom from December 2016 until the Merger closed.57 Bakish is currently the
President and CEO of ViacomCBS.58
B. Viacom’s Pre-2016 History
At Sumner Redstone’s behest, NAI first acquired a controlling interest in
Viacom in 1987.59 Throughout the years, Viacom made numerous acquisitions,
including its acquisition of CBS in 2005. 60 On December 31, 2005, Sumner
Redstone split Viacom and CBS, establishing the separate and operative legal
entities that existed as of the Merger.61 Sumner Redstone selected Les Moonves as
55
Id.56
Compl. ¶ 29.
57
Compl. ¶ 25.
58
Id.59
Compl. ¶ 19.
60
Compl. ¶¶ 19, 33.
61
Compl. ¶¶ 17, 34.
16
CEO of CBS and Phillipe Dauman as CEO of Viacom. 62 As noted, while NAI
ensured its position as controlling stockholder in both entities by holding
approximately 80% of the voting stock of each company, 63 it owned less than 11%
of the equity in either entity as of the Merger. 64
Recognizing this discrepancy between control and economic risk, Sumner
Redstone took pains to ensure that responsible corporate governance was a
cornerstone of both Viacom and CBS. 65 One particularly salient measure related to
succession; Mr. Redstone 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. 66
As Sumner Redstone’s health deteriorated in early 2016, he abdicated the
roles of Chairman of Viacom and CBS.67 Viacom moved to appoint Phillipe
62
Compl. ¶ 34.
63
Compl. ¶¶ 19, 24.
64
Compl. ¶¶ 24, 40.
65
Compl. ¶¶ 35–36.
66
Compl. ¶¶ 36–39, 42–45.
67
Compl. ¶ 46.
17
Dauman, Sumner Redstone’s designated CEO, to assume the role of Chairman of
Viacom. 68 Ms. Redstone was the only Viacom Board member to oppose the move.69
Soon after Sumner Redstone’s withdrawal from Viacom and CBS,
Ms. Redstone began to whittle away at the governance protections her father had
installed. 70 She removed Dauman from the NAI Board and as trustee of the Trust;
she removed George Abrams, a longtime friend of both Sumner Redstone and
Dauman, as trustee of the Trust; and she replaced both with trustees of her
choosing. 71
Sensing Ms. Redstone may next turn her focus to Viacom, the Viacom Board
sent a letter to NAI on May 30, 2016, in which it emphasized that “attempts to
remove Viacom directors from the board ‘would be completely inconsistent with
Sumner’s lifetime commitment to an independent board and professional
management for Viacom after his incapacity or death.’” 72 Now under
Ms. Redstone’s control, NAI responded two weeks later by issuing a written consent
that purported to amend Viacom’s bylaws to allow stockholders to fill vacancies on
68
Compl. ¶¶ 47–48.
69
Compl. ¶ 48.
70
Compl. ¶¶ 49–56.
71
Compl. ¶¶ 49, 50.
72
Compl. ¶ 51.
18
the Viacom Board directly. 73 NAI then promptly exercised this newly created
authority by removing five of eleven directors on the Viacom Board. Not
coincidentally, the five removed directors included Dauman, Abrams and three
others who had signed the May 30 letter on behalf of Viacom. 74 NAI unilaterally
replaced the removed directors with May, McHale, Nelson and Seligman.75
Apparently recognizing the unsettling circumstances surrounding their appointment,
NAI agreed to indemnify each of the newly appointed directors for any liability
arising from their appointments.76 This move proved prescient as litigation related
to NAI’s ouster of Viacom directors soon erupted on both coasts. 77
C. The First and Second Merger Attempts
Shortly after NAI’s unilateral appointment of May, McHale, Nelson and
Seligman to the Viacom Board, Ms. Redstone and NAI initiated their first attempt
to cause a Viacom/CBS merger. 78 In September 2016, NAI sent a letter to both
73
Compl. ¶ 52.
74
Id.75
Compl. ¶¶ 52–54. The fifth replacement director, Kenneth Lerer, is not a party to this
Action.
76
Compl. ¶ 56.
77
Compl. ¶¶ 57–58 (noting that the ousted directors sued in Massachusetts and Delaware,
and NAI counter-sued in California).
78
Compl. ¶ 59.
19
Viacom and CBS, requesting the two companies consider a combination. 79 In its
letter, NAI proactively asserted it would not consider any combination or transaction
that would require it to relinquish control of either company. 80 Viacom entertained
Ms. Redstone’s demand, establishing the first Viacom special transaction committee
co-chaired by Seligman and May with McHale, Nelson and two other directors
comprising the remainder of the committee. 81 This committee retained LionTree
and Morgan Stanley as its financial advisors in November 2016. 82
This first attempt at a Viacom/CBS merger never left the starting gate. The
CBS board of directors (“CBS Board”) refused to discuss a merger if NAI would not
agree to relinquish its control. And NAI refused to agree to that condition.83
Apparently recognizing that CBS had no desire to negotiate, NAI withdrew its
request that the two companies explore a merger on December 12, 2016.84
Ms. Redstone was not pleased. She advised the CBS Board that “the failure to get
the deal done had caused Viacom to suffer” and declared her intent to continue to
79
Id.80
Id.81
Compl. ¶ 61.
82
Compl. ¶ 62. LionTree and Morgan Stanley remained the Viacom Committee’s advisors
throughout all three merger attempts. Id.83
Compl. ¶ 64.
84
Compl. ¶¶ 63–64.
20
pursue the combination, stating “the merger would get done even if I have to use a
different process.”85
In the period between the first and second merger attempts, the Viacom Board
selected Bakish as Viacom’s President, CEO and newest board member. 86 Bakish
was Ms. Redstone’s choice and she expected him to keep her apprised of all major
Viacom decisions. 87 With Ms. Redstone’s support, Bakish was able to make
significant changes at Viacom that substantially improved its financial
performance. 88
Ms. Redstone and NAI did not wait long to initiate the second attempt at a
Viacom/CBS merger, advising both companies in January 2018 that NAI wanted
their respective boards to re-engage in negotiations.89 Both companies obliged, re-
constituting their respective special committees within weeks of NAI’s request.90
For its part, the Viacom Committee’s mandate was “to consider, with the support of
[NAI], the possibility of a merger or other business combination between [Viacom]
85
Compl. ¶ 63 (internal quotations omitted).
86
Compl. ¶ 66.
87
Compl. ¶ 67.
88
Compl. ¶¶ 67–68.
89
Compl. ¶ 69.
90
Compl. ¶ 70.
21
and CBS” and “to propose, review and evaluate, recommend or reject any such
potential transaction . . . in its sole discretion.” 91 The Viacom Committee was again
co-chaired by Seligman and May with McHale and Nelson comprising the balance
of the committee.92 While Seligman and May were co-chairs, Seligman spearheaded
the negotiations and drove all substantive discussions.93 This version of the Viacom
Committee remained intact until the consummation of the Merger. 94
NAI was omnipresent throughout the merger discussions. It was a named
beneficiary of the Viacom Committee’s confidentiality agreement and received all
materials.95 Through Ms. Redstone, NAI made clear that it would not agree to a
majority of the minority condition, and the Viacom Committee, therefore, made no
effort to negotiate for that protection on behalf of Viacom’s public stockholders.96
NAI also made clear that the merger consideration would be all stock, that it was
unwilling to accept a third-party bid for Viacom and that it was unwilling to
91
NAI Parties’ Corrected Opening Br. in Supp. of the NAI Parties’ Mot. to Dismiss Pls.’
Verified Compl. (“NAI OB”) (D.I. 84), Ex. 9 at 2.
92
Compl. ¶ 71.
93
Compl. ¶ 74.
94
Compl. ¶ 71; NAI OB at 24.
95
Compl. ¶ 72.
96
Compl. ¶¶ 75–76.
22
relinquish its control position in either company or in the combined company. 97 The
Viacom Committee capitulated and early in the process rebuffed interest from a
third-party due to “the speculative nature of the overture and the risk of [distraction]
from pursuing the substantial strategic benefits of a transaction between the
Company and CBS that would be supported by NAI.” 98
NAI was also quick to express its expectations for governance of the
combined company, stating that Bakish should “have a substantive position in the
combined company.” 99 Taking its cue, the Viacom Committee proposed that
Moonves serve as Chairman and CEO and Bakish as President, COO and board
member of the combined company. 100 CBS missed the cue and refused to consider
Bakish for any senior management position.101 The financial press was soon
reporting that Ms. Redstone had threatened to replace recalcitrant CBS Board
members. 102
97
Compl. ¶ 73.
98
Compl. ¶ 77.
99
Compl. ¶ 79.
100
Compl. ¶ 80.
101
Compl. ¶ 81.
102
Id.23
In the midst of the parties’ rather stark differences on governance, the special
committees initiated the negotiation of financial terms. At the outset, the offers and
counters were far apart. To bridge the gap, Viacom provided CBS with its long-
range projections for fiscal years 2018 through 2021 (the “2018 LRPs”).103 The
2018 LRPs were prepared by Viacom management in the ordinary course and
management was confident they were “achievable.”104 The CBS special committee
did not share that optimism and that informed its negotiations with respect to the
exchange ratio. 105
On “the assumption of no role for Robert Bakish in the management of the
combined company,” the special committees eventually settled upon an exchange
ratio of 0.6135. 106 This implied a valuation of ⁓$12.8 billion for Viacom, well below
the $13.7 billion valuation implied by the Viacom Committee’s initial offer.107
Recognizing Ms. Redstone’s ultimate control over the process, the Viacom
Committee, following Seligman’s lead, unanimously agreed to advise CBS that it
should address any concerns regarding “board composition matters” with NAI
103
Compl. ¶ 86.
104
Compl. ¶ 89.
105
Compl. ¶ 90.
106
Compl. ¶ 91.
107
Id.24
directly. 108 Unwilling to bypass the Viacom Committee and negotiate directly with
Ms. Redstone, the CBS special committee broke off negotiations and announced its
view that the merger would not be in the best interest of CBS or its minority
stockholders.109
Litigation ensued between CBS and NAI. CBS feared retributive action by
NAI—likely spurred by NAI’s unilateral removal of Viacom directors with whom it
disagreed in June of 2016.110 In a preemptive strike, CBS attempted to dilute NAI’s
voting control by issuing a special dividend of voting Class A shares to all
stockholders.111 CBS then filed suit in this court seeking a temporary restraining
order that would, among other things, prevent NAI from altering the composition of
the CBS Board and prevent NAI from interfering with the special dividend. 112 In its
riposte, NAI executed written consents that essentially required its approval for any
108
Compl. ¶¶ 92–93.
109
Compl. ¶¶ 94–98.
110
Compl. ¶¶ 99–100.
111
Compl. ¶¶ 49–58, 99–106.
112
Compl. ¶¶ 102–06.
25
amendments to CBS’s bylaws. 113 It then counter-sued for a declaration that CBS’s
effort to strip NAI of voting control was invalid. 114
The parties ultimately settled the 2018 litigation when issues surfaced
regarding Moonves’ fitness to remain as CBS’s CEO. 115 After the dust settled, the
special dividend was rescinded, NAI’s consents were withdrawn, Moonves and
several CBS directors had departed CBS and NAI gained greater control over the
CBS Board.116 Importantly, as part of the settlement, Ms. Redstone agreed “not [to]
propose a CBS-Viacom merger for two years.”117
D. The Third and Final Merger Attempt
With the Viacom and CBS boards now primed with NAI allies, NAI and
Ms. Redstone’s third and final attempt to prompt a Viacom/CBS merger came in
early 2019.118 Notwithstanding her commitment in the 2018 settlement stipulation
to take a rest from her campaign to cause a Viacom/CBS merger for two years,
Ms. Redstone was already encouraging CBS interim CEO, Joseph Ianniello, to press
113
Compl. ¶¶ 103–06.
114
Compl. ¶ 105.
115
Compl. ¶ 107.
116
Compl. ¶¶ 107–12.
117
Compl. ¶¶ 112.
118
Compl. ¶¶ 113–14.
26
for a merger by late 2018 and again in early 2019. 119 The CBS Board began
preliminary internal discussions about a possible merger in March 2019. 120 While
the CBS Board initially thought it best to condition any merger on a majority of the
minority vote, that plan was promptly scuttled when counsel for NAI made it clear
that NAI would never agree to that condition.121 With the knowledge that NAI
“had already determined the negotiation framework,” the CBS Board formed its
special committee on April 7, 2019. 122
Four days later, on April 11, Ianniello contacted Bakish to “restart” merger
discussions between CBS and Viacom. 123 In response, Bakish advised Ianniello that
Viacom’s previously engaged financial advisors would “engage in further
discussions to consider potential terms for a transaction and to conduct due
diligence.”124 The Viacom Committee had never disbanded and was promptly
119
Compl. ¶ 113.
120
Compl. ¶ 115.
121
Compl. ¶¶ 115–18.
122
Compl. ¶¶ 117–18.
123
Compl. ¶ 119.
124
Id.27
reignited to “pick[] up where they left off before the CBS rebellion and [the]
Moonves [departure].” 125
Viacom’s position appeared strong entering into negotiations principally
because its financial performance had significantly improved since the prior merger
negotiations with CBS had broken off.126 CBS’s financial position, on the other
hand, had declined. 127 Given the strength of Viacom’s position, the Viacom
Committee initially planned to focus negotiations on the exchange ratio before
turning to governance issues for the combined company. 128 This plan was scuttled,
however, when the Viacom Committee realized that NAI expected to nail down
“governance and board items” in connection with the Merger as predicates to
agreeing to a deal.129
CBS apparently understood the importance of governance issues to Viacom
and, by extension, to NAI. Thus, when the Viacom Committee proffered the 2018
exchange ratio as a floor for the exchange ratio negotiations, CBS retorted that
“the prior ratio was ‘irrelevant to the current negotiations,’ partially because of
125
Compl. ¶ 120.
126
Compl. ¶¶ 126–39.
127
Compl. ¶¶ 140–47, 152–66.
128
Compl. ¶ 167.
129
Id.28
‘differences in the proposed governance terms of the currently proposed transaction
as compared with the proposed governance terms’ in the 2018 transaction.”130
The principal “difference” referenced by CBS was NAI and Ms. Redstone’s
insistence that Bakish, Ms. Redstone’s “loyal Viacom CEO,” serve not only on the
board but also as CEO of the combined company. 131
Bakish met with the CBS special committee in July 2019 to discuss its
concerns with NAI’s (and Viacom’s) governance demands.132 Sensing how
important these demands were to NAI, the CBS special committee informed Bakish
that the parties would have to agree on governance and management matters before
turning to the negotiation of the exchange ratio.133 Bakish relayed these discussions
to the Viacom Committee, reiterating the unavoidable divergence of fulfilling NAI’s
governance demands and maximizing Viacom stockholder value—a trade-off that
ultimately favored NAI and Ms. Redstone.134
On August 12, 2019, the parties settled upon a governance structure to NAI
and Ms. Redstone’s liking: a combined board of six former CBS directors, four
130
Compl. ¶ 181.
131
Compl. ¶¶ 4, 182–85.
132
Compl. ¶ 184.
133
Id.134
Compl. ¶¶ 185, 195–96.
29
former Viacom directors and three NAI designees, with Ms. Redstone as Chair and
Bakish as board member and CEO. 135 In exchange for this governance structure, the
parties agreed to an exchange ratio of 0.59625, valuing Viacom at $11.9 billion.
This was ~$1 billion less than the Viacom stockholders would have received had the
merger been consummated at the 2018 exchange ratio.136 The Merger closed on
December 4, 2019.
E. Procedural History
On November 25, 2019, the first of several lawsuits challenging the Merger
was filed on behalf of Viacom stockholders in this Court. 137 On January 23, 2020,
the Court consolidated the actions and, on February 6, 2020, selected lead plaintiffs
and lead counsel.138 Plaintiffs then filed their operative Complaint on February 28,
2020. 139
The Complaint asserts three direct claims. Count I asserts a claim for breach
of fiduciary duty against the NAI Parties as controlling stockholder of Viacom for
135
Compl. ¶¶ 195–96.
136
Compl. ¶¶ 193, 214.
137
See, e.g., Verified Class Action Compl. (D.I. 1).
138
D.I. 18, 40.
139
D.I. 41.
30
causing Viacom to consummate a demonstrably conflicted and unfair Merger.140
Count II asserts claims against the Viacom Committee Defendants for breach of
fiduciary duty “by preferring Ms. Redstone’s dream to combine Viacom and CBS
and governance demands over the rights of nonaffiliated stockholders and
subsequently approving an exchange ratio that deprived Viacom stockholders of fair
value.”141 Count III asserts a claim for breach of fiduciary duty against Bakish, in
his capacity as officer, for “pursuing self-enrichment as the chief executive of
ViacomCBS over the interests of Viacom stockholders.” 142
Each of the Defendants have separately moved to dismiss the Complaint.143
This decision resolves all pending motions.
II. ANALYSIS
The standard for deciding a motion to dismiss under Court of Chancery
Rule 12(b)(6) is well-settled:
all well-pleaded factual allegations are accepted as true; (ii) even vague
allegations are “well-pleaded” if they give the opposing party notice of
the claim; (iii) the Court must draw all reasonable inferences in favor
of the non-moving party; and (iv) dismissal is inappropriate unless the
140
Compl. ¶¶ 230–35.
141
Compl. ¶¶ 236–39.
142
Compl. ¶¶ 240–44.
143
Defs. May, McHale, Nelson and Seligman’s Mot. to Dismiss (D.I. 45); NAI Defs.’ Mot.
to Dismiss (D.I. 46); Def. Bakish’s Mot. to Dismiss (D.I. 47).
31
plaintiff would not be entitled to recover under any reasonably
conceivable set of circumstances susceptible of proof. 144
Defendants’ motions to dismiss present the gating question that frequently
dictates the pleadings stage disposition of breach of fiduciary duty claims: under
what standard of review will the court adjudicate the claim? As this court has
observed:
If the court reviews the fiduciary conduct under the deferential business
judgment rule, the claim is unlikely to proceed beyond 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, if not trial. Given the high stakes and costs of
corporate fiduciary duty litigation, defendants understandably are prone
to call the “standard of review” question at the earliest opportunity,
usually at the pleadings stage.145
Appreciating the pleading stage implications of the standard of review
designation, Plaintiffs proffer entire fairness as the applicable standard, 146 while
Defendants maintain that business judgment rule deference is mandated by
Plaintiffs’ pled facts. As explained below, I am satisfied Plaintiffs have well-pled
that a conflicted controlling stockholder stood on both sides of the Merger. Having
done so, Plaintiffs have implicated entire fairness review, at least at this stage of the
144
Savor, Inc., 812 A.2d at 896–97 (citation omitted).
145
Tornetta, 2019 WL 4566943, at *1.
146
See Orman, 794 A.2d at 20 n.36 (application of entire fairness “normally will preclude
dismissal of a complaint on a Rule 12(b)(6) motion to dismiss”).
32
proceedings, with respect to their claims against the NAI Parties. They have also
pled facts that allow a reasonable inference that the Viacom Committee Defendants
acted in deference, and out of loyalty, to Ms. Redstone in a manner detrimental to
Viacom’s minority stockholders. Thus, Plaintiffs have pled viable claims against
the NAI Parties and viable, non-exculpated claims against the Viacom Committee
Defendants that are not susceptible to dismissal on a Rule 12(b)(6) motion. As for
the claims against Bakish, however, there are no well-pled allegations that Bakish
did anything wrong with respect to the Merger regardless of the applicable standard
of review. The claim against him, therefore, must be dismissed.
A. The Complaint Well-Pleads Breach of Fiduciary Duty Claims Against
the NAI Parties (Count I)
Because a controlling stockholder “occupies a uniquely advantageous
position for extracting differential benefits from the corporation at the expense of
minority stockholders,” our law has long recognized that it is right to impose upon
the controller the fiduciary duty of loyalty and good faith running to the corporation
and its other stockholders.147 That fiduciary duty, reflecting the standard of conduct
147
In re EZcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *11
(Del. Ch. Jan. 25, 2016) (citing The Delaware Way, at 678).
33
expected of the controller, is to be distinguished from the standard of review by
which the court tests whether the fiduciary has met the standard of conduct.148
While the controller always owes fiduciary duties, the standard of review by
which to test whether the controller has fulfilled those duties is not constant.
The presence of a controller in the midst of a corporate transaction, without more,
does “not automatically subject [the controller’s conduct] to entire fairness
review. . . .” 149 Rather, the court cannot determine the standard of review until it
assesses whether the controller engaged in a “conflicted transaction.”150
As a general matter, under our law, a controller engages in a “conflicted
transaction” when (1) “the controller stands on both sides”; or (2) “the controller
competes with the common stockholders for consideration.”151 The controller will
be deemed to “compete with common stockholders for consideration” when the
controller (1) “receives greater monetary consideration for its shares than the
148
Glidepath Ltd. v. Beumer Corp., 2019 WL 855660, at *18 (Del. Ch. Feb. 21, 2019).
149
IRA Tr. FBO Bobbie Ahmed v. Crane, 2017 WL 7053964, at *6 (Del. Ch. Dec. 11, 2017,
revised Jan. 26, 2018); see also In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419,
at *12 (Del. Ch. Oct. 24, 2014) (“Entire fairness is not triggered solely because a company
has a controlling stockholder.”).
150
Crimson, 2014 WL 5449419, at *12.
151
Id.; see also Larkin v. Shah, 2016 WL 4485447, at *8 (Del. Ch. Aug. 25, 2016)
(“Conflicted transactions include those in which the controller stands on both sides of the
deal (for example, when a parent acquires its subsidiary), as well as those in which the
controller stands on only one side of the deal but ‘competes with the common stockholders
for consideration.’”).
34
minority stockholders”; (2) “takes a different form of consideration than the
minority stockholders”; or (3) “gets a unique benefit by extracting something
uniquely valuable to the controller, even if the controller nominally receives the
same consideration as all other stockholders.”152 Under any of these scenarios, the
controller’s conduct will be tested for entire fairness, “the highest standard of review
in corporate law.” 153 In the merger context, where the controller engages in a
conflicted transaction, entire fairness applies “as a substitute for the dual statutory
protections of disinterested board and stockholder approval, because both
protections are potentially undermined by the influence of the controller.” 154
The parties here agree on three basic facts that drive the ensuing discussion.
First, NAI was the controlling stockholder of both Viacom and CBS, holding slightly
more than 80% of the voting power in each entity. 155 Second, in the Merger, NAI
“stood on both sides.”156 And third, the Viacom Committee did not negotiate for the
152
IRA Tr., 2017 WL 7053964, at *6 (internal quotations omitted).
153
Crimson, 2014 WL 5449419, at *9.
154
Id.155
See Compl. ¶ 24; see also In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980,
991 (Del. Ch. 2014) (describing “two scenarios in which a stockholder could be found a
controller under Delaware law: where the stockholder (1) owns more than 50% of the
voting power of a corporation or (2) owns less than 50% of the voting power of the
corporation but ‘exercises control over the business affairs of the corporation’”) (emphasis
in original).
156
Compl. ¶ 24; Larkin, 2016 WL 4485447, at *8.
35
so-called MFW “dual protections” that, if properly executed, would have triggered
business judgment rule review of breach of fiduciary duty claims arising from the
Merger. 157 From here, the parties part ways.
Plaintiffs maintain that, following the seminal Weinberger v. UOP, Inc., it has
long been settled in Delaware that, “where one stands on both sides of a transaction,
he has the burden of establishing its entire fairness, sufficient to pass the test of
careful scrutiny by the courts.”158 According to Plaintiffs, since NAI indisputably
stood on both sides of the Merger, entire fairness is the applicable standard of review.
Hard stop.
With equal fervency, Defendants counter that our law is settled that “mere
presence” of the controller on both sides of a transaction is not enough to trigger
entire fairness review. Citing the seminal Sinclair Oil Corp. v. Levien, 159 Defendants
maintain that “[t]he basic situation for the application of the [entire fairness] rule is
the one in which the [controller] has received a benefit to the exclusion and at the
expense of the [minority].” 160 According to Defendants, since Plaintiffs have failed
to do more than allege the mere presence of the NAI Parties on both sides of the
157
MFW, 88 A.3d at 644.
158
457 A.2d at 710.
159
280 A.2d 717 (Del. 1971).
160
Id. at 720.
36
Merger, and, in particular have failed to allege that the NAI Parties received any
benefit “to the exclusion and at the expense” of the Viacom minority stockholders,
entire fairness review has no place here.
That highly experienced and highly competent corporate litigators have such
a fundamentally disparate view of supposedly “settled” Delaware corporate law is
either surprising, or not at all surprising, depending upon one’s perspective on the
role of zealous advocates. 161 Surprising or not, the disconnect is, if nothing else,
provocative and worthy of further exploration. Ultimately, as explained below,
because I find Plaintiffs have well pled the Merger was a “conflicted transaction”
beyond NAI’s presence on both sides, I acknowledge that the following discussion
of the “mere presence” debate, unabashedly, straddles the line between obiter dicta
161
Speaking of zealous advocacy, in an interesting twist, NAI acknowledged in the 2018
CBS litigation that its decision not to commit up front to a majority-of-the-minority vote
condition in connection with the proposed 2018 Viacom/CBS merger was not indicative of
wrongdoing but simply meant that “any transaction would therefore be subject to ‘entire
fairness’ review.” Compl. ¶ 5 (quoting paragraph 5 of NAI’s complaint in In re CBS Corp.
Litig., C.A. No. 2018-0342-AGB) (emphasis added). Because it is not necessary, I decline
Plaintiffs’ request that I engage in a judicial estoppel analysis based on this “admission”
by NAI in prior litigation.
37
and judicial dicta. 162 As the dispute may become relevant later in this litigation,
however, it is appropriate to frame the debate and share some observations. 163
The “Mere Presence” Debate
Plaintiffs quote Weinberger correctly; our Supreme Court there clearly stated,
“where one stands on both sides of a transaction, he has the burden of establishing
its entire fairness, sufficient to pass the test of careful scrutiny by the courts.”164
Two years later, in Rosenblatt v. Getty Oil, when determining the standard of review
by which to test a controller’s compliance with fiduciary duties, the court observed:
“Clearly, Getty, as majority shareholder of Skelly, stood on both sides of this
transaction and bore the initial burden of establishing its entire fairness.”165
The court did not ask whether the controller who “stood on both sides” engaged in
self-dealing or received a non-ratable benefit from the transaction; instead, the court
162
See Wild Meadows MHC, LLC v. Weidman, 2020 WL 3889057, at *7 (Del. Super. Ct.
July 10, 2020) (offering a useful distinction between obiter dicta, or “by the way”
comments of the court when rendering a decision, and “judicial dictum,” or “expressions
of opinion [by the court] upon a point in a case argued by counsel and deliberately passed
upon . . . though not essential to the disposition of the cause”).
163
I say the debate may become relevant down the road because if Plaintiffs are unable to
secure evidence in support of their allegations that the NAI Parties secured non-ratable
benefits from the Merger not shared by Viacom stockholders, Plaintiffs likely, and
understandably, will revert to their “mere presence” argument in urging the Court to
continue to review the NAI Parties’ fiduciary conduct for entire fairness.
164
457 A.2d at 710.
165
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 937 (Del. 1985).
38
noted the controller’s presence “on both sides” and then declared that entire fairness
was the standard of review. 166
In his important and oft-cited decision in Citron v. E.I. DuPont de
Nemours & Co., then-Vice Chancellor Jacobs provided a clear explanation of why a
controlling stockholder standing on both sides of the transaction should trigger “the
more stringent entire fairness standard of judicial review.”167 There, DuPont owned
69.54% of Remington’s stock and sought to squeeze-out the minority by merger.
In this context, the court noted, “[i]t is undisputed that DuPont, as the majority
stockholder standing on both sides of the transaction, would normally have the
burden to prove that the merger was entirely fair.” 168 In setting entire fairness as the
standard of review, the court observed that, in transactions where the controller
stands on both sides, the transaction is “proposed by a party that controls, and will
continue to control, the corporation,” and in such instances, the “controlling
stockholder relationship has the inherent potential to influence, however subtly, the
166
The principle was reaffirmed two years later in Bershad v. Curtiss-Wright Corp.,
535 A.2d 840, 845 (Del. 1987), where the court held: “When a majority shareholder stands
on both sides of a transaction, the requirement of fairness is ‘unflinching’ in its demand
that the controlling stockholder establish the entire fairness of the undertaking sufficient to
pass the test of careful scrutiny by the courts.”
167
584 A.2d 490, 502 (Del. Ch. 1990).
168
Id.39
vote of minority stockholders in a manner that is not likely to occur in a transaction
with a noncontrolling party.” 169
Then-Vice Chancellor Strine described the risk of coercion when the
controller stands on both sides more colorfully in In re Pure Resources:
In colloquial terms, the Supreme Court [in Kahn v. Lynch
Communication Systems, Inc.] saw the controlling stockholder as the
800–pound gorilla whose urgent hunger for the rest of the bananas is
likely to frighten less powerful primates like putatively independent
directors who might well have been hand-picked by the gorilla
(and who at the very least owed their seats on the board to his
support).170
169
Id. (further explaining that “[e]ven where no coercion is intended,” the presence of the
controller on both sides may unduly influence the progression of the transaction in a
manner that differs from what would result from arms-length bargaining); see also id.(noting that “no court could be certain whether the transaction terms fully approximate
what truly independent parties would have achieved in an arm’s length negotiation”);
Kahn v. Tremont Corp., 694 A.2d 422, 428–29 (Del. 1997) (“Tremont II”) (“The risk is
thus created that those who pass upon the propriety of the transaction might perceive that
disapproval may result in retaliation by the controlling shareholder.”); Larkin, 2016
WL 4485447, at *9 (“[C]ases where the controller stands on both sides of the transaction
present a particularly compelling reason to apply entire fairness: both corporate decision-
making bodies to which Delaware courts ardently defer—the board of directors and
disinterested voting stockholders—are considered compromised by the controller’s
influence.”).
170
In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 436 (Del. Ch. 2002) (citing Kahn v.
Lynch Commc’n Sys., Inc., 638 A.2d 1110 (Del. 1994)); see also In re Tesla Motors, Inc.,
2020 WL 553902, at *6 (Del. Ch. Feb. 4, 2020) (“And, as an ‘800-pound gorilla’ in the
board room and at the ballot box, the controller has retributive capacities that lead our
courts to question whether independent directors or voting shareholders can freely exercise
their judgment in approving transactions sponsored by the controller.”); id. at *7
(noting that applying entire fairness review to transactions where controllers stand on both
sides “is simply a recognition that because conflicted controller transactions have such
strong potential for self-dealing, absent replication of an arm’s-length transaction process,
an independent judge should thoroughly examine the transaction’s substantive fairness”).
40
One can draw from this observation an appreciation that the dynamic created by the
“mere presence” of the controller on both sides of a transaction is one of inherent
coercion that even putatively independent directors will struggle to resist. 171
The “mere presence” rule Plaintiffs endorse appears to have been stated most
directly by our Supreme Court in Emerald Partners v. Berlin where, in setting the
standard of review, the court held, “[the controller’s] stance on both sides as a
corporate fiduciary, alone, is sufficient to require the demonstration of entire
fairness.”172 Here again, in stating this rule, the court said nothing of the controller
competing with the minority for consideration or otherwise deriving non-ratable
benefits from the challenged transaction.
For their part, Defendants, and in particular the NAI Parties, accurately quote
Sinclair, where, to reiterate, the court held, “[t]he basic situation for the application
of the [entire fairness] rule is the one in which the [controller] has received a benefit
171
See In re USG Corp. S’holder Litig., 2020 WL 5126671, at *13 (Del. Ch. Aug. 31, 2020)
(citations omitted) (observing, “the mere presence of a controller [on one side of a
transaction] does not trigger entire fairness per se. Rather, coercion is assumed, and entire
fairness invoked, when the controller engages in a conflicted transaction, which occurs
when a controller sits on both sides of the transaction, or is on only one side but ‘competes
with the common stockholders for consideration.’”).
172
726 A.2d 1215, 1221 n.8 (Del. 1999) (emphasis added). Accord Orman, 794 A.2d at 21
n.36 (clarifying that Emerald Partners “reiterated that entire fairness review applies when
a controlling shareholder stands on both sides of a challenged transaction”).
41
to the exclusion and at the expense of the [minority].” 173 In keeping with this “basic”
pronouncement, the NAI Parties maintain 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.
For example, in In re Southern Peru, the court appeared to cabin the entire
fairness implications of the controller “standing on both sides of the transaction” to
instances where the controller operates under some other “conflicting self-
interest.” 174 In In re CNX Gas Corporation Shareholders Litigation, the court noted
that entire fairness “will be applied only when the fiduciary duty is accompanied by
self-dealing—the situation when a parent is on both sides of a transaction with its
subsidiary.”175 Indeed, the NAI Parties note that each “controller on both sides”
case cited by Plaintiffs involves either some variant of a parent-subsidiary
transaction where, by definition, the parent is interested in receiving the best
173
Sinclair, 280 A.2d at 720.
174
In re Southern Peru Copper Corp. S’holder Deriv. Litig., 52 A.3d 761, 787 (Del. Ch.
2011), aff’d sub nom. Ams. Mining Corp. v. Theriault, 51 A.3d 1213 (Del. 2012).
175
4 A.3d 397, 411 (Del. Ch. 2010) (emphasis added) (citing Sinclair, 280 A.2d at 720).
42
financial deal for itself regardless of the will of the minority, 176 or some other flavor
of controller self-interest. 177 It is not surprising, say the NAI Parties, that Plaintiffs
can point to no Delaware case where the court reviewed the controller’s conduct for
entire fairness where all the plaintiff had alleged was that the controller stood on
both sides of a transaction.
The NAI Parties are right to seize upon nuance. The rules stated in the judicial
decisions that comprise our common law are driven by the facts of the cases in which
the rules are stated. As Chancellor Chandler has explained, “the opinions of the
Court of Chancery [are] akin to parables; that is, they read like morality stories
describing the behavior of directors and managers, both the good behavior and the
bad.” 178 These “parables” tell stories, for sure, but they also draw “road maps” with
rule statements, prompted by the stories, that serve both to adjudicate the discreet
dispute and provide future guidance for other fiduciaries regarding “what is expected
176
The NAI Parties point out that even Weinberger, Plaintiffs’ favorite case, involved a
parent company cash-out of a subsidiary’s minority stockholders on unfair terms.
Weinberger, 457 A.2d at 703.
177
In re Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *2 (Del. Ch. Mar. 18,
2018) (“Tesla I”) (involving a controller allegedly causing one controlled company to
“bailout” another controlled company that was failing by acquiring the failing company at
an unfair price); In re BGC P’rs, Inc., 2019 WL 4745121 (Del. Ch. Sept. 30, 2019) (same);
Southern Peru, 52 A.3d at 787 (same).
178
William B. Chandler III, Our National Challenge: A Blueprint for Restoring the Public
Trust, 6 U. St. Thomas L.J. 421, 423 (Winter 2009).
43
of them” under our law. 179 The rule statements, of course, must be considered
against the nuance of the facts that prompted them.
On the other hand, Delaware courts can be trusted to say what they mean and
mean what they say. This is true in all areas, but perhaps more so when our courts
are adding to the canon of our corporate law, a law that prospectively guides the
conduct of countless corporate fiduciaries and is “often follow[ed]” by other
jurisdictions.180 With this in mind, 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.” 181 While Emerald Partners, itself, may
be laced with factual nuance, the rule, as stated there, leaves little, if any, room for
nuance. 182 And that rule appears to comport with the “mere presence” argument
Plaintiffs advance here. 183
179
Id.180
Jens Dammann & Henry Hansmann, Globalizing Commercial Litigation, 94 Cornell L.
Rev. 1, 17 (Nov. 2008).
181
Emerald P’rs, 726 A.2d at 1221 n.8 (emphasis added).
182
For instance, I acknowledge that the controller in Emerald Partners was alleged to have
pursued mergers of controlled companies as a means to rescue several real estate firms
owned by the controller and his family. Id. at 1218.
183
I note that Viacom and CBS’s dual-class structures, whereby NAI possessed more than
80% of the voting power but faced only 10% of the economic risk in both companies,
commends Plaintiffs’ “mere presence” argument for careful consideration in this case.
See David T. White, Delaware’s Role in Handling the Rise of Dual-, Multi-, and Zero-
44
As I admitted at the outset of this discussion, the parties’ “mere presence”
debate is interesting and may well prove relevant down the road, but for now, I need
not declare a winner. As explained below, Plaintiffs have pled more than NAI’s
mere presence on both sides of the Merger. They have also well-pled that
Ms. Redstone received a non-ratable benefit from the Merger at the expense of
Viacom’s minority stockholders.
The Non-Ratable Benefit
There can be no credible debate that entire fairness review is triggered when
the controlling stockholder “compete[s] with other stockholders for consideration or
otherwise receive[s] a non-ratable benefit at the expense of minority
shareholders.”184 A non-ratable benefit exists when the controller receives a “unique
Class Voting Structures, 45 Del. J. Corp. L. 141, 153–54 (2020) (positing that in dual-class
structures, “the owners of the majority voting rights in these companies are less concerned
when riskier moves fail as compared to their counterparts at ‘one share-one vote’
corporations”); Lucian A. Bebchuk & Kobi Kastiel, The Perils of Small-Minority
Controllers, 107 Geo. L.J. 1453, 1466 (2019) (observing that “small-minority controllers
are insulated from market disciplinary forces [in dual-class companies] and thus lack
incentives generated by the threat of replacement, which would mitigate the risk that they
will act in ways that are contrary to the interests of other public investors”); id. (“[D]ual-
class structures with small-minority controllers generate significant governance risks
because they feature a unique absence of incentive alignment.”).
184
NAI OB at 32 (citing Crimson, 2014 WL 5449419, at *12); see also In re Primedia, Inc.
S’holders Litig., 67 A.3d 455, 486 (Del. Ch. 2013) (“When a corporation with a controlling
stockholder is sold to a third party, the entire fairness standard applies if the controlling
stockholder receives a benefit not shared with the minority.”); EZcorp, 2016 WL 301245,
at *11 (“A controlling stockholder occupies a uniquely advantageous position for
45
benefit by extracting something uniquely valuable to the controller, even if the
controller nominally receives the same consideration as all other stockholders.”185
While the parties appear to agree that this court has had no cause to apply the non-
ratable framework in the merger context where the controller stands on both sides of
the transaction but receives the same consideration as all other stockholders, I can
discern no reason why the controller should not be obliged to prove that the merger
was entirely fair when the controller ostensibly receives the same merger
consideration as other stockholders but also receives a non-ratable benefit to the
detriment of the minority.
According to the NAI Parties, there are only two scenarios where a controller
can be deemed to have achieved a non-ratable benefit from a transaction when all
stockholders, controlling and minority alike, receive the same consideration: “(a) the
controller eliminates something bad for it and good for the minority, as in the
elimination of the derivative claims in Primedia; or (b) all parties suffer a sub-
optimal price, but the controller still benefits because it receives cash to satisfy an
extracting differential benefits from the corporation at the expense of minority
stockholders.”).
185
IRA Tr., 2017 WL 7053964, at *7 (internal quotations omitted); Crimson, 2014
WL 5449419, at *12–14.
46
idiosyncratic liquidity problem, as in infoGROUP.” 186 To be sure, both scenarios
implicate the non-ratable benefit problem for the controller even when she receives
the same financial consideration from the transaction received by the minority.
In this regard, Primedia and infoGROUP reflect that, as Chancellor Allen so aptly
stated, financial “[g]reed is not the only human emotion that can pull one from the
path of propriety; so might hatred, lust, envy, revenge, . . . shame or pride. Indeed
any human emotion may cause a [fiduciary] to place [her] own interests, preferences
or appetites before the welfare of the corporation.” 187 That same sensibility was on
full display in IRA Trust FBO Bobbie Ahmed v. Crane, a case that offers useful
guidance here and illustrates a third instance where non-ratable benefits from a
transaction flowing to the controller can justify entire fairness review even when the
controller ostensibly receives the same consideration as the minority. 188
In Crane, a controlling stockholder with 55% voting power feared dilution of
its voting control in future transactions. 189 To address this concern, the controller
sought to implement a recapitalization whereby all stockholders holding voting
186
NAI OB at 43 (citing Crimson, 2014 WL 5449419, at *20, which in turn cites, Primedia,
67 A.3d 455 and N.J. Carpenters Pension Fund v. infoGROUP, Inc., 2011 WL 4825888(Del. Ch. Oct. 6, 2011)).
187
In re RJR Nabisco, Inc. S’holder Litig., 1989 WL 7036, at *15 (Del. Ch. Jan. 31, 1989).
188
2017 WL 7053964 (Del. Ch. Dec. 11, 2017, revised Jan. 26, 2018).
189
Id. at *3–4.
47
stock, including the controller, would receive a single non-voting share for each of
their voting shares. 190 Minority stockholders understandably were displeased with
the resulting recapitalization and challenged the transaction. In reviewing the
viability of Plaintiff’s breach of fiduciary duty claim on a motion to dismiss, the
court found the existence of a non-ratable benefit that justified entire fairness review
because the controller initiated the transaction to perpetuate its control of the
company. 191 Specifically, the non-ratable benefit was the controller’s ability
“to ensure it would be able to retain voting control of [the company] well into the
future without abandoning a key aspect of its original business model . . . .” 192 The
benefit was not purely economic; it was the perpetuation of control for control’s
sake. 193
The 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. According
190
Id. at *4.
191
Id. at *9.
192
Id.
193
Id. at *8 (rejecting defendant’s reliance on Sinclair for the proposition that entire
fairness will not apply to a pro rata dividend paid to all stockholders, instead finding
“NRG did receive something from Yield to the exclusion of the minority stockholders—
the means to perpetuate its control position by financing future acquisitions with the low-
vote Class C stock authorized in the Reclassification”).
48
to the Complaint, Ms. Redstone had long desired to combine the media companies
her father had built in order to consolidate her control of both companies and solidify
her status as a media mogul.194 Her desire was fueled in 2016 amid concern that
CBS might agree to be acquired by a large technology company. 195 She tried to push
through a Viacom/CBS merger then but failed.196 She tried again in 2018 but was
rebuffed by the CBS Board in spectacular fashion, culminating in that board’s
desperate attempt to dilute NAI’s voting control over CBS and its initiation of
litigation to prevent the merger. 197 Two years earlier, in 2016, when the
194
Compl. ¶¶ 2–13, 63–64, 69, 98, 197; NAI OB at 49 (“Ms. Redstone achieved her
desperately desired Merger, designed to build an empire and secure her legacy.”).
195
Compl. ¶ 60.
196
Compl. ¶¶ 3–4, 59–64.
197
Compl. ¶¶ 100–107. In its opening brief, NAI argues that Plaintiffs may not assert facts
relating to prior transactions in support of their claims here because Viacom released NAI
from “any and all Claims” arising out of the failed 2016 merger in a settlement agreement
the parties reached in related litigation. NAI OB at 53. I do not follow this argument.
Plaintiffs are not bringing claims relating to the transactions that are the subject of the
release. They are stating facts relating to those transactions to support new claims
regarding a new transaction. Releases release claims, not facts relating to claims. NAI also
argues that because Plaintiffs’ allegations here have been lifted wholesale from an old
complaint, the Court should disregard the allegations as immaterial. NAI OB at 55. But,
the allegations regarding the NAI Parties’ past conduct are relevant in that, according to
Plaintiffs, they set the stage for NAI’s actions with respect to the Merger. See Bear Stearns
Mortg. Funding Tr. 2007-AR2 v. EMC Mortg. LLC, 2013 WL 164098, at *1 (Del. Ch.
Jan. 15, 2013) (denying a motion to strike allegations from a complaint that had been lifted
from a prior complaint addressing events that pre-dated the events giving rise to the
complaint at issue, noting the allegations of past events served as proper background for
the dispute sub judice).
49
Viacom/CBS merger failed, Ms. Redstone made her displeasure clear to the CBS
Board, vowing that “the merger would get done even if I have to use a different
process.”198 She was true to her word in 2019.
After reshaping the boards of both companies, and in defiance of a stipulation
not to instigate merger negotiations between them for at least two years,
Ms. Redstone returned in 2019, whispering in the ears of her compatriots that a
merger was still a good idea and that they should pursue it.199 In a gesture that
exposed her true motives, Ms. Redstone insisted that Bakish, then the CEO of
Viacom and her loyal confederate,200 become the CEO of the combined entity,
knowing well, given past events, that the CBS special committee would resist and
seek valuable consideration in return for its capitulation.201 And that is exactly what
198
Compl. ¶ 63 (internal quotations omitted).
199
Compl. ¶¶ 113–14.
200
Compl. ¶ 182. The NAI Parties argue the Complaint fails to well plead Bakish’s
allegiance to Ms. Redstone. I disagree. The Complaint alleges that, notwithstanding that
Ms. Redstone had committed to withdraw from any discussions regarding a Viacom/CBS
merger for two years in the 2018 settlement, Bakish regularly kept her informed of the
status of negotiations throughout 2019. Compl. ¶ 67. More to the point, whether Bakish
was, in fact, implacably loyal to Ms. Redstone, the Complaint well pleads that
Ms. Redstone believed that he was, and acted accordingly. Compl. ¶ 182.
201
Compl. ¶¶ 181–83. On this point, the NAI Parties argue it cannot be disputed that
Bakish performed well as Viacom’s CEO and it is, therefore, not at all surprising or
problematic that the NAI Parties would push for Bakish to become the CEO of the
combined company. To be sure, Plaintiffs have acknowledged that, under Bakish’s
leadership, Viacom performed very well in the months leading up to the Merger.
Compl. ¶¶ 65–68. Even so, the NAI Parties miss the point of Plaintiffs’ breach of fiduciary
claim against them. Plaintiffs allege that by installing a CEO in a combined Viacom/CBS
50
happened; the CBS special committee made clear that the exchange ratio agreed to
in 2018 was off the table given the “differences in the proposed governance terms
of the currently proposed transaction as compared with the [previously] proposed
governance terms.” 202 Those governance terms, as pled, largely involved NAI’s
insistence that Bakish be named CEO of the combined company. The CBS special
committee viewed this governance term as a “significant concession,” and both deal
parties came to appreciate that the concession would cost Viacom in the exchange
ratio.203 Exploiting this leverage, the CBS special committee informed Bakish that
the negotiation of governance issues would come first before CBS would discuss the
exchange ratio. 204
This insistence on Bakish as CEO was Ms. Redstone’s first step in cementing
a loyal management team in the combined company that would yield to her demands.
But the consolidation of her control went further. As bargained for, the board of the
combined company would consist of six former CBS directors, four former Viacom
to whom she had unfiltered access, and over whom she exercised unfettered control,
Ms. Redstone and the NAI Parties obtained a benefit from the Merger not enjoyed before
the Merger and not shared by the other Viacom stockholders—a non-ratable benefit that,
according to Plaintiffs, cost Viacom stockholders ⁓$1 billion.
202
Compl. ¶ 181.
203
Compl. ¶ 183.
204
Compl. ¶ 184.
51
directors and three NAI designees.205 Ultimately, following the horse-trading on
governance to meet NAI’s demands, the two special committees settled on a
valuation for Viacom of $11.9 billion, roughly $1 billion less than the same
committees had agreed to in connection with the scuttled 2018 transaction.206
NAI’s fixation on consolidated control, where Ms. Redstone maintains both
the management and board she wants within the combined entity, is precisely the
strain of controller benefit characterized as non-ratable in Crane. Ms. Redstone was
concerned about her ability to control both companies, at least practically, if they
stayed as separate entities. Similarly, in Crane, the controller used the challenged
recapitalization to “perpetuate its control position” to avoid loss of control at a future
date. 207 The past actions of the CBS Board make it reasonably conceivable that
Ms. Redstone was concerned about loss of control; and consolidating the companies
and installing loyal management and directors would ensure her control position
would expand and continue.208 Therefore, the Complaint’s well-pled allegations
205
Compl. ¶ 195.
206
Compl. ¶¶ 9, 216.
207
IRA Tr., 2017 WL 7053964, at *8.
208
Importantly, this is not the same thing as “merely preserving the controlling
stockholder’s preexisting rights.” NAI OB at 42; Robotti & Co., LLC v. Liddell, 2010
WL 157474, at *10 (Del. Ch. Jan. 14, 2010) (“Although it may seem as though the directors
therefore received a benefit that did not accrue to the shareholders, this is a result of their
pre-Offering (and otherwise unchallenged) contractual rights under the option
agreements.”). Here, NAI’s control rights had been threatened by the CBS Board
52
create a reasonable inference that Ms. Redstone received a unique benefit at the
expense of the minority stockholders, necessitating an entire fairness review of the
Merger. 209
3. Plaintiffs Have Well-Pled the Merger Was Not Entirely Fair
Defendants do not seriously argue that Plaintiffs have failed to well-plead the
Merger was not entirely fair, and for good reason. The Complaint alleges the NAI
Parties relentlessly pursued the Viacom/CBS merger over many years, and through
many roadblocks, including those placed on the road by Viacom and CBS fiduciaries
who viewed the merger as unfavorable to their stockholders, all to allow Ms.
Redstone to consolidate control and achieve what her father thought she could not
achieve. The Viacom Committee proved unable (or unwilling) to overcome the will
of Viacom’s controller. It did not consider alternative transactions; it did not
consider walking away when the CBS committee telegraphed that it viewed agreeing
historically. The consolidation of control in the 2019 Merger was an effort to prevent the
CBS Board from usurping NAI’s control in the future.
209
The NAI Parties’ singular focus on the fact that NAI’s ability to influence Viacom and
CBS, both as separate entities and as a combined entity, was not altered by the Merger
ignores the bigger picture drawn by the Complaint. NAI OB at 44. As pled in the
Complaint, the NAI Parties historically faced obstacles when seeking to exert control over
the boards of CBS and Viacom. The consolidation of the two boards into one, comprised
of a majority of directors that were selected by Ms. Redstone, coupled with the selection
of a CEO for the combined company of Ms. Redstone’s choosing, delivered benefits to the
NAI Parties not shared by other Viacom stockholders. That the benefits to the NAI Parties
came at a cost of ⁓$1 billion to Viacom, if proven, places the Merger in the realm of
conflicted controller transactions that justify entire fairness review.
53
to Ms. Redstone’s governance demands as a valuable “concession”; it did not insist
on protections to neutralize the controller; it did not exploit Viacom’s favorable
trajectory and CBS’s unfavorable trajectory during negotiations; it agreed to an
exchange ratio that was significantly less favorable to Viacom stockholders
(⁓$1 billion less favorable to be precise) than the exchange ratio both parties had
agreed to when Viacom and CBS explored a merger just one year before; and it
relied upon flawed market projections, rather than its own management’s internal
projections, when valuing the transaction. 210 If these facts are true, and they are
assumed to be at this stage, it is reasonably conceivable the Merger was not entirely
fair. Thus, the motion to dismiss as to the NAI Parties must be denied.
B. The Complaint Well-Pleads Non-Exculpated Breach of Fiduciary Duty
Claims Against the Viacom Committee Defendants (Count II)
Having determined that the breach of fiduciary claims against the NAI Parties
are subject to entire fairness review, and that the Complaint well pleads that the
Merger was not entirely fair, I turn next to the claims against the Viacom Committee
Defendants. Given that the Merger, at this stage, will be reviewed for entire fairness,
there is some reflexive appeal to reviewing all claims against all Viacom fiduciaries
arising out of the Merger under the entire fairness standard.211 But that is not how
210
Compl. ¶¶ 201–219.
211
See, e.g., In re Radiology Assoc., Inc. Litig., 1990 WL 67839, at *8 (Del. Ch. May 16,
1990) (noting that all defendants, controlling stockholders and directors alike, had
54
our law works. As our Supreme Court made clear in In re Cornerstone
Therapeutics, Inc. Stockholder Litigation, entire fairness review for one does not
mean entire fairness review for all:
[T]o require independent directors to remain defendants solely because
the plaintiffs stated a non-exculpated claim against the controller and
its affiliates would be inconsistent with Delaware law and would also
increase costs for disinterested directors, corporations, and
stockholders, without providing a corresponding benefit. First, this
Court and the Court of Chancery have emphasized that each director
has a right to be considered individually when the directors face claims
for damages in a suit challenging board action. And under Delaware
corporate law, that individualized consideration does not start with the
assumption that each director was disloyal; rather, independent
directors are presumed to be motivated to do their duty with fidelity. . . .
This Court has [] refused to presume that an independent director is not
entitled to the protection of the business judgment rule solely because
the controlling stockholder may itself be subject to liability for breach
of the duty of loyalty if the transaction was not entirely fair to the
minority stockholders. 212
This is particularly so when breach of fiduciary claims against board members, like
the claims against the Viacom Committee Defendants here, must be reconciled with
the corporation’s Section 102(b)(7) charter provision.213
conceded that the entire fairness standard of review applied to all claims of breach of
fiduciary duty arising out of a cash-out merger initiated by a controlling stockholder).
212
In re Cornerstone Therapeutics, Inc. S’holder Litig., 115 A.3d 1173, 1182–83
(Del. 2015) (internal quotations omitted).
213
See id. at 1185 (“Establishing a rule that all directors must remain as parties in litigation
involving a transaction with a controlling stockholder would thus reduce the benefits that
the General Assembly anticipated in adopting Section 102(b)(7).”).
55
The Complaint alleges the members of the Viacom Committee, May, McHale,
Nelson and Seligman, breached their fiduciary duties by favoring NAI’s interests
over those of Viacom’s minority stockholders.214 Here again, Plaintiffs draw heavily
on Viacom’s history, especially NAI’s dogged attempts to force a Viacom/CBS
merger over the initial resistance of both companies’ fiduciaries, followed by their
eventual submission.215 In opposing the Viacom Committee Defendants’ motion to
dismiss, Plaintiffs urge the Court to consider the “constellation of facts” they have
pled that attacks the independence (and good faith) of the Viacom Committee
Defendants on three levels: (1) their “thick” personal relationships with
Ms. Redstone; (2) their appreciation of, and reaction to, NAI and Ms. Redstone’s
demonstrated willingness to remove board members who did not march to the NAI
rataplan; and (3) their failure to operate independently of NAI as reflected in their
prioritizing Ms. Redstone’s interests in the Merger over those of Viacom’s minority
stockholders.216 After briefly reviewing the standards governing Plaintiffs’ claims
against these putatively exculpated Defendants, I address whether each category of
factual allegations Plaintiffs have proffered to state non-exculpated claims against
the Viacom Committee Defendants, either separately or collectively, do the job.
214
Compl. ¶¶ 236–39.
215
Compl. ¶¶ 1–13, 59–112, 116–17, 123–24, 167.
216
See generally Pls.’ Answering Br. at 52–66 (D.I. 100).
56
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 harbored self-interest
adverse to the stockholders’ interests, acted to advance the self-interest of an
interested party from whom they could not be presumed to act independently, or
acted in bad faith.” 217 Plaintiffs do not allege the members of the Viacom Committee
harbored some personal interest in the Merger. They do, however, allege the Viacom
Committee Defendants lacked independence and acted in bad faith with respect to
the Merger, and either allegation, if well pled, would be adequate to state a non-
exculpated claim. 218
“Independent directors are presumed to be motivated to do their duty with
fidelity.” 219 And each director must be afforded that presumption without regard to
the conduct of his fellow directors, meaning, “[e]ach director has a right to be
considered individually when the directors face claims for damages in a suit
challenging board action.” 220 With that said, if external factors compromise the
independence or prompt bad faith conduct with respect to every director on a special
217
Cornerstone, 115 A.3d at 1179–80.
218
Id.219
Id. at 1182–83.
220
Id. at 1182.
57
committee equally, and that influence is well pled, it follows that the court need not
break down director-by-director how the external factor(s) influenced each director.
With the possibility of exculpation and the presumptions of independence and
good faith in mind, I consider the adequacy of Plaintiffs’ allegations against each of
the Viacom Committee Defendants to determine if Plaintiffs have stated legally
viable claims. For reasons that follow, I am satisfied that they have.
1. The Personal Relationships
When considering whether a Complaint states a reasonably conceivable basis
to question the independence of a fiduciary based on that fiduciary’s personal
relationship with another fiduciary who has acted improperly for self-interest, the
court “consider[s] all the particularized facts pled by the plaintiffs about the
relationships between the director and the interested party in their totality and not in
isolation from each other, and draw[s] all reasonable inferences from the totality of
those facts in favor of the plaintiffs.”221 In other words, the court must consider
“the full context of all the [pleaded] facts regarding a director’s relationship to the
221
Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1019 (Del. 2015); see also Sandys
v. Pincus, 152 A.3d 124, 128 (Del. 2016) (“Our law requires that all the pled facts regarding
a director’s relationship to the interested party be considered in full context in making the,
admittedly imprecise, pleading stage determination of independence.”).
58
interested party, and decide whether the relationship is of a bias-producing
nature.” 222
As to May, McHale and Nelson, the Complaint’s allegations regarding their
respective personal relationships with Ms. Redstone (or NAI) are “thin.”223
Plaintiffs make much of the fact that May and Ms. Redstone have been neighbors,
living “a mere five-minute walk away” from each other, for the last 26 years.224
May, Ms. Redstone and Sumner Redstone also spent time on not-for-profit boards
together. 225 McHale served as general counsel for MTV Networks in the mid-1980s,
leaving the network two years prior to its acquisition by Viacom in 1987.226 Nelson
served as the Executive Vice President, CFO and director of Paramount
222
McElrath v. Kalanick, 224 A.3d 982, 995 (Del. 2020) (alteration in original) (internal
quotations omitted).
223
It seems in Delaware’s corporate law jurisprudence that certain words and phrases catch
on as descriptive of particular points. In the director independence realm, our courts have
taken to describing the “thickness” (or not) of the relationship between the target director
and the interested director. See Sanchez, 124 A.3d at 1023–24 (discussing the “thickness
of the relationship” between the clearly interested controller and members of the board of
directors); Amalgamated Bank v. Yahoo!, 132 A.3d 752, at 784–85 (Del. Ch. 2016) (same);
In re PLX Tech., Inc. S’holders Litig., 2018 WL 5018535, at *43 (Del. Ch. Oct. 16, 2018)
(same); Lavin v. West Corp., 2017 WL 6728702, at *13 n.99 (Del. Ch. Dec. 29, 2017)
(same).
224
Compl. ¶¶ 26, 54–55.
225
Compl. ¶ 26.
226
Compl. ¶¶ 27, 54.
59
Communications, which Viacom acquired in 1994.227 Nelson then served as the co-
COO of DreamWorks SKG from 1994 to 2003, during which DreamWorks SKG
and Paramount Pictures co-produced films. 228 When NAI cleaned house at Viacom
following Sumner Redstone’s departure, each of May, McHale and Nelson (and
Seligman, as discussed below) were hand selected by Ms. Redstone to join the
Viacom Board.
Standing alone, I agree with the Viacom Committee Defendants that none of
these allegations reveal the kind of “thick” personal or professional relationship that
would overcome the presumption that these fiduciaries have acted independently of
the NAI Parties.229 Thus, more is required and, as to May, McHale and Nelson, the
analysis must continue.
As for Seligman’s lack of independence based on her personal relationship
with Ms. Redstone, Plaintiffs’ allegations have more substance. Seligman was
President of Sony Entertainment, Inc. and Sony Corporation of America—both long-
227
Compl. ¶¶ 28, 54.
228
Id.229
Defs. May, McHale, Nelson and Seligman’s Opening Br. at 18–28 (“SCDOB”)
(D.I. 80); Defs. May, McHale, Nelson and Seligman’s Reply Br. (D.I. 103) at 5–15;
see Beam v. Stewart, 845 A.2d 1040, 1050 (Del. 2004) (“Allegations of mere personal
friendship or a mere outside business relationship, standing alone, are insufficient to raise
a reasonable doubt about a director’s independence.”).
60
time customers of NAI. 230 Seligman and Ms. Redstone shared time on a not-for-
profit board together and have been known to accompany one another to annual trade
and professional events. 231 A Wall Street Journal reporter, Joe Flint, described
Seligman and Ms. Redstone as “BFFs,” and a New York Post reporter, Alexandra
Steigrad, chronicled how Seligman had come to be considered Ms. Redstone’s
“closest advisor.” 232 Evidencing their friendship, Ms. Redstone emailed Seligman
to express her frustration with the CBS Board’s resistance to NAI: “I need another
you [for the CBS Board], but obviously it can’t be you. . . . Miss you tons. . . . we
can grab coffee next Friday . . . .” 233 As one would expect of close friends,
Ms. Redstone was comfortable having Seligman spearhead the negotiations leading
to the Merger, and Seligman personally provided Ms. Redstone with frequent
updates throughout. 234 These allegations regarding the “thickness” of the personal
relationship between Seligman and Ms. Redstone, standing alone, present a
230
Compl. ¶ 29.
231
Compl. ¶¶ 29, 55.
232
Compl. ¶ 55 (citing, respectively, @JBFlint, Twitter (July 10, 2019),
https://twitter.com/JBFlint/status/1148982061857824768, and Alexandra Steigrad,
The CBS-Viacom Merger Could Be a Few Months Away: Insiders, N.Y. Post (Nov. 18,
2018), https://nypost.com/2018/11/18/the-cbs-viacom-merger-could-bea-few-months-
away-insiders/).
233
Compl. ¶ 55 (alteration in original).
234
Compl. ¶¶ 29, 55, 74.
61
reasonably conceivable case that Ms. Seligman was not independent of the
NAI Parties with respect to the Merger.
As noted, Plaintiffs’ allegations regarding the Viacom Committee
Defendants’ personal relationships with Ms. Redstone are just one element of the
“totality” of facts pled to support the reasonable inference that these directors lacked
independence from the NAI Parties.235 As discussed below, there is more.
2. Ms. Redstone and NAI’s Demonstrated History of Ouster
Plaintiffs proffer a detailed account of NAI’s three attempts to execute a
Viacom/CBS combination in support of their claim that the Viacom Committee
Defendants acted disloyally when negotiating and ultimately approving the Merger.
As noted, Plaintiffs begin their account in 2016 by emphasizing that Ms. Redstone
hand-picked May, McHale, Nelson and Seligman to serve on the Viacom Board
following the contested ouster of Viacom Board members by NAI after the Viacom
Board warned NAI not to attempt to undermine their independence.236 In apparent
recognition that May, McHale, Nelson and Seligman might face liability arising
from the circumstances surrounding their appointment to the Viacom Board, NAI
took the unusual step of agreeing to indemnify these directors for any such
235
Sanchez, 124 A.3d at 1019.
236
Compl. ¶¶ 52–54. Plaintiffs allege it is no coincidence that each of these directors would
comprise the Viacom special committee each time NAI pushed for a Viacom/CBS merger.
Compl. ¶¶ 61, 71.
62
liability. 237 According to Plaintiffs, this unusual gesture set the stage for further
dominance.238
The Complaint alleges that NAI’s retributive conduct was not reserved for the
Viacom Board; NAI came after the CBS Board as well when that board attempted
to prevent the 2018 merger attempt. 239 According to Plaintiffs, NAI’s tendency and
history of ouster “conceivably was not lost on members of the [Viacom Committee]
when they considered” NAI’s third proposal for a Viacom/CBS merger. 240
237
Compl. ¶¶ 56–58.
238
The Viacom Committee Defendants contend the mere fact a director was appointed to
the board by an interested stockholder does not alone compromise that director’s
independence. SCDOB at 15. I agree. See McElrath, 224 A.3d at 995 (“Importantly,
being nominated or elected by a director who controls the outcome is insufficient by itself
to reasonably doubt a director’s independence because ‘[t]hat is the usual way a person
becomes a corporate director.’” (quoting Aronson v. Lewis, 473 A.2d 805, 816
(Del. 1984))); Calesa Assocs., L.P. v. Am. Capital, Ltd., 2016 WL 770251, at *11 (Del. Ch.
Feb. 29, 2016) (“The Defendants correctly argue that ‘[t]he fact that an allegedly
controlling stockholder appointed its associates to the board of directors . . . without more,
does not establish actual domination.’” (alteration in original) (quoting Primedia, 67 A.3d
at 258)). But, to reiterate, there is more.
239
Compl. ¶¶ 49–58, 99–106; see also Compl. ¶¶ 63–64 (alleging Ms. Redstone “reacted
strongly to this rejection advising the CBS independent directors that ‘the failure to get the
deal done had caused Viacom to suffer’ and made clear that her battle to merge CBS and
Viacom was not over, stating ‘the merger would get done ‘even if [she had] to use a
different process’” (alteration in original)).
240
Tesla I, 2018 WL 1560293, at *15; see also EZcorp, 2016 WL 301245, at *41 (Del. Ch.
Jan. 25, 2016) (“[W]hen controllers actually make retributive threats, that fact has legal
significance.”); Tornetta, 2019 WL 4566943, at *1 (“[I]n a transaction such as the one
considered . . . the controlling shareholder will continue to dominate the company
regardless of the outcome of the transaction. The risk is thus created that those who pass
63
In arguing that these allegations do not plead a reasonably conceivable basis
to question their independence, the Viacom Committee Defendants maintain that
Plaintiffs must couple their allegations relating to fear of removal with allegations
that the Viacom directorships were “material” to each of these defendants.241 That
might be true if that is all Plaintiffs alleged. But threats of removal, even in
circumstances where the directorship is not demonstrably material, cannot be
ignored in the independence analysis. Indeed, “giving pleading-stage effect to a
controller’s actual threats and retributive behavior has important integrity-
preserving consequences.”242 Thus, at the pleading stage, this Court can reasonably
infer that “[a controlling stockholder’s] willingness to take retributive action
upon the propriety of the transaction might perceive that disapproval may result in
retaliation by the controlling shareholder.” (quoting Tremont II, 694 A.2d at 428)).
241
Beam, 833 A.2d at 978 (“What is required in addition are allegations demonstrating that
remaining on [the] board is material to the outside directors such that they would be
incapable of considering demand without this extraneous consideration having an
inappropriate effect on their decisionmaking process.”). But cf. Frederick Hsu Living Tr.
v. ODN Hldg. Corp., 2017 WL 1437308, at *32 (Del. Ch. Apr. 14, 2017) (“Although in
theory a special committee of independent directors ‘is best positioned to extract a price at
the highest possible level because it does not suffer from the collective action problem of
disaggregated stockholders,’ the men and women who populate the committees are rarely
individuals ‘whose own financial futures depend importantly on getting the best price and,
history shows, [they] are sometimes timid, inept, or . . . , well, let’s just say worse.’”
(alteration in original) (quoting In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604,
619 (Del. Ch. 2005) (Strine, V.C.))).
242
EZcorp, 2016 WL 301245, at *42.
64
affect[s] all of the directors.”243 Plaintiffs have clearly alleged that NAI has a
willingness to take such action, and this willingness, coupled with other facts, can
reasonably be inferred to have affected the Viacom Committee Defendants’
independence at the pleading stage.
3. The “Controlled Mindset”
As the final element of their pleading-stage lack of independence showing,
Plaintiffs invoke the so-called “controlled mindset” reasoning first applied as such
by this court in In re Southern Peru Copper Stockholder Derivative Litigation.244
The gravamen of Plaintiffs’ argument is that NAI dominated the Viacom Committee
and its process, as evidenced by:
• The composition of the Viacom Committee, all of whom were
NAI’s hand-picked directors selected after disloyal board members
were removed; 245
• The Viacom Committee’s obedient acceptance of NAI’s direction
that it would not consider a transaction other than a merger with
CBS, and its reflexive rebuff of third-party interest in Viacom; 246
• The Viacom Committee’s submissive assumption that NAI’s past
resistance to conditioning the merger with CBS on the approval of a
243
Id.244
Southern Peru, 52 A.3d at 798 (“From inception, the Special Committee fell victim to
a controlled mindset and allowed [the controlling stockholder] to dictate the terms and
structure of the Merger.”).
245
Compl. ¶¶ 52–54.
246
Compl. ¶¶ 73, 77, 116–17, 123–24.
65
majority of Viacom’s minority stockholders would remain NAI’s
position with respect to the Merger, thereby explaining its decision
not to ask NAI to agree to this protection for minority
stockholders; 247
• The Viacom Committee’s decision not to seek a collar on the deal
price or other minority protections (such as the ability to effect a
change in recommendation tied to a stock price drop), even though
NAI insisted that the Merger be structured as stock-for-stock and
even though due diligence revealed that Viacom was significantly
outperforming CBS;248
• NAI’s dominance of the Viacom Committee’s negotiation strategy,
including that the Viacom Committee allowed NAI to insist on
nailing down NAI’s governance demands, principally Bakish’s
placement as CEO, before the Viacom Committee could negotiate
the economics of the deal in earnest;249
• The Viacom Committee’s refusal to pivot and focus on economics
when the CBS special committee made clear that it would deem its
agreement to NAI’s governance demands as a valuable and
“significant concession,” meaning Viacom would have to pay for
NAI to achieve its governance goals; 250 and
• The Viacom Committee’s refusal to exploit the negotiating leverage
Viacom’s management had given it by electing to ignore the
favorable, reliably prepared Viacom management projections and,
instead, rely only upon consensus analyst estimates when
negotiating with the CBS special committee and when valuing the
transaction (even after the Viacom Committee’s financial advisors
demonstrated that using consensus estimates for both companies
247
Compl. ¶¶ 123, 182, 202–04.
248
Compl. ¶¶ 209, 211.
249
Compl. ¶¶ 119–21, 167, 181–85.
250
Compl. ¶ 183.
66
would artificially overstate CBS’s value to the detriment of
Viacom). 251
When analyzing director independence in the presence of a controlling
stockholder, “the focus . . . is on domination of the board with regard to the
transaction at issue.” 252 This inquiry is not one size fits all; rather, “it is a highly fact
specific inquiry” with “no magic formula to find control.”253 When engaging in this
inquiry at the pleading stage, the court “does not take an unduly restrictive view of
the avenues through which a controller obtains corporate influence.”254
“[W]hether [the Viacom Committee Defendants] were controlled is an issue
of fact which must, at this stage, be determined from an examination of the well-
pled facts in the Complaint.”255 As the Court considers the totality of this
251
Compl. ¶¶ 166, 168–78.
252
Crimson, 2014 WL 5449419, at *16.
253
Calesa, 2016 WL 770251, at *11; see also Usha Rodrigues, The Fetishization of
Independence, 33 J. Corp. L. 447, 465 (2008) (“The Fetishization of Independence”)
(“Delaware courts examine a director’s behavior as an indicator of independence, creating
a contextual approach--rather than looking only to rigid proxies like the lack of a familial
or financial relationship--in gauging the lack of improper influence or conflicts of
interest.”).
254
In re Zhongpin Inc. S’holders Litig., 2014 WL 6735457, at *8 (Del. Ch. Nov. 26,
2014), rev’d sub nom. on other grounds, Cornerstone, 115 A.3d 1173.
255
Calesa, 2016 WL 770251, at *11; see also The Fetishization of Independence, at 478
(“[T]he independence of directors is evaluated not just in terms of their lack of ties with
the acquirer, but also in terms of their behavior. Delaware courts conduct a fact-intensive
ex post inquiry into the special committee's actions.”).
67
Complaint’s allegations of domination and control, it must remain mindful that
“[a] controlling stockholder occupies a uniquely advantageous position for
extracting differential benefits from the corporation at the expense of minority
stockholders,”256 creating a risk “that those [directors] who pass upon the propriety
of the transaction might perceive that disapproval may result in retaliation by the
controlling shareholder.” 257 In this regard, “[e]ven an independent, disinterested
director can be dominated in his decision-making by a controlling stockholder,”258
resulting in directors who are “more independent in appearance than in
substance.”259 When the court determines that the pled facts allow a reasonable
inference that a board’s (or special committee’s) independence has been “sterilized”
by the domination of a controller, “[t]his determination, in turn, is sufficient to rebut
the business judgment rule with respect to actions of the Board.’” 260
256
EZcorp, 2016 WL 301245, at *11.
257
Id. at *11–12 (citing Tremont II, 694 A.2d at 428); id. at *20 (noting when a controller
is interested in consummating a transaction “there is a risk of coercion” (citing, in turn,
Citron, 584 A.2d at 502)). Cf. Tesla I, 2018 WL 1560293, at *16 (discussing how the
controller brought the transaction proposal “to the Board not once, not twice, but three
times” and led the Board’s discussions regarding the transaction, making it appropriate to
consider “whether [the controller] brought with him into the boardroom the kind of
influence that would support a reasonable inference that he dominated the Board’s
decision-making with regard to the Acquisition”).
258
Tesla I, 2018 WL 1560293, at *17.
259
EZcorp, 2016 WL 301245, at *21 (quoting Cox, 879A.2d at 619).
260
Calesa, 2016 WL 770251, at *11.
68
After carefully reviewing the Complaint, I am satisfied Plaintiffs have pled
sufficient facts to meet the “low ‘reasonable conceivability’ standard of
Rule 12(b)(6)” with respect to the controlled mindset of the Viacom Committee.261
Specifically, it is 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. 262 In reaching this
conclusion, I have “focus[ed] on how the [Viacom Committee] actually negotiated
the deal . . . rather than just how the committee was set up.”263 As pled, the Viacom
Committee’s negotiations reflect a desire to placate the controller, not to land the
261
Id.262
See EZcorp, 2016 WL 301245, at *21 (emphasizing the crucial role of an effective
special committee in disabling the controller’s influence); Tornetta, 2019 WL 4566943,
at *12 (“MFW provides a roadmap that allows fiduciaries to engage in conflicted controller
transactions worthy of pleadings stage business judgment deference. In the conflicted
controller context, in particular, MFW’s ‘dual protections’ are meant to ‘neutralize’ the
conflicted controller’s ‘presumptively coercive influence’ so that judicial second-guessing
is no longer required.” (quoting Rouse, 2018 WL 1226015, at *1))).
263
Southern Peru, 52 A.3d at 789; see also Tremont II, 694 A.2d at 429 (stating a special
committee must “function in a manner which indicates that the controlling shareholder did
not dictate the terms of the transaction and that the committee exercised real bargaining
power at ‘an arms-length’”).
69
best transaction possible for all Viacom stockholders.264 Thus, Plaintiffs have well
pled that the Viacom Committee operated under a controlled mindset. 265
* * * * *
264
In other words, the Viacom Committee Defendants “allowed themselves to be hemmed
in by the controlling stockholder’s demands,” placing them “in a world where there was
only one strategic option to consider, the one proposed by the controller, . . . [thus creating]
a dynamic where at best [the committee] had two options, either figure out a way to do the
deal the controller wanted or say no.” Southern Peru, 52 A.3d at 763, 801; see also
Frederick Hsu Living Tr., 2020 WL 2111476, at *35 (noting that a special committee that
was dominated by a controlling stockholder “seemed less intent on negotiating with [the
controller] and more interested in achieving the result that [the controller] wanted”).
Importantly, in the context of the controlled mindset analysis, the question of why the
Viacom Committee Defendants were not independent or acted disloyally ultimately is of
no consequence; it is enough that the facts as pled support a reasonable inference that each
member was unable or unwilling to resist NAI’s influence. In re Oracle Corp. Deriv.
Litig., 2018 WL 1381331, at *11 (Del. Ch. Mar. 19, 2018) (“‘[t]he reason for the disloyalty
(the faithlessness) is irrelevant[;] the underlying motive (be it venal, familial, collegial, or
nihilistic) for conscious action not in the corporation's best interest does not make it
faithful, as opposed to faithless.’” (alterations in original) (quoting Guttman v. Huang, 823
A.2d 492, 506 n.34 (Del. Ch. 2003))).
265
The Viacom Committee Defendants counter that Southern Peru offers no authority for
denying their motion to dismiss since the members of the special committee in that case
were dismissed at the summary judgment stage for lack of evidence supporting a non-
exculpated claim. Arg. and Ruling on Cross-Mots. for Summ. J., C.A. No. 961–VCS,
at 123–29 (Del. Ch. Dec. 21, 2010) (TRANSCRIPT). At first glance, the Viacom
Committee Defendants appear to make a valid point. On closer inspection of the briefs
and oral argument, however, it is clear that the plaintiffs in Southern Peru simply did not
raise the controlled mindset argument at the summary judgment stage, nor did they even
challenge the special committee directors’ independence. It is, therefore, impossible to
predict how the court might have ruled on the special committee’s motion for summary
judgment had the controlled mindset argument been on the table. The court’s comments
about the special committee’s conduct post-trial suggest the controlled mindset argument
may have had traction at summary judgment had it been made.
70
The Complaint well-pleads that each member of the Viacom Committee knew
Ms. Redstone personally outside of Viacom. The fact that Ms. Redstone chose to
appoint the members of the Viacom Committee to the Viacom Board following the
contentious removal of directors she viewed as disloyal suggests her personal
relationship with these hand-picked directors was “thicker” than may first appear.
As for Seligman, there is no need to suggest; the pled facts reveal a close personal
relationship of a nature that allows an inference that Seligman’s loyalties would run
to Ms. Redstone over Viacom. The Complaint’s allegations regarding the Viacom
Committee Defendants’ personal relationships with Ms. Redstone, the
circumstances of their appointments to the Viacom Board and the Viacom
Committee, their knowledge of NAI’s past retributive behavior, and their actions as
special committee members that reasonably infer a controlled mindset, taken
together, sufficiently plead reasonably conceivable breaches of the duty of loyalty
on the part of each Viacom Committee Defendant.266
C. The Complaint Fails to State a Breach of Fiduciary Duty Claim Against
Bakish (Count III)
266
Cornerstone, 115 A.3d at 1186–87 (noting that “when a complaint pleads facts creating
an inference that seemingly independent directors approved a conflicted transaction for
improper reasons, and thus, those directors may have breached their duty of loyalty, the
pro-plaintiff inferences that must be drawn on a motion to dismiss counsels for resolution
of that question of fact only after discovery”).
71
Regardless of the standard of review, to plead a viable claim of breach of
fiduciary duty, Plaintiffs must allege “sufficiently detailed acts of wrongdoing” to
place the defendant on notice of what he purportedly did wrong. 267 Plaintiffs appear
to offer only three criticisms of Bakish, each of which falls far short of pleading
actionable wrongdoing.
First, Plaintiffs allege that Bakish kept Ms. Redstone informed of all major
Viacom decisions.268 Importantly, Plaintiffs do not allege that Bakish was involved
in substantive negotiations or otherwise was a part of the Viacom Committee’s
process leading to the Merger. While Ms. Redstone’s effort to curry favor with
Bakish in order to enlist his assistance in connection with a merger she was
contractually barred from pursuing is troubling, the Complaint does not allege that
Bakish was bound by the 2018 settlement agreement or that he had any basis under
the circumstances to resist Ms. Redstone’s requests for information.
Second, it is alleged that Ianniello contacted Bakish with regard to restarting
the negotiation process leading to the Merger, and that Bakish responded to Ianniello
267
Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009); see also VLIW Tech., LLC v.
Hewlett-Packard Co., 840 A.2d 606, 611 (Del. 2003) (noting that, under Chancery
Rule 8(a), a complaint must “give the defendant fair notice of a claim”); In re Coca-Cola
Enters., Inc., 2007 WL 3122370, at *4 n.28 (Del. Ch. Oct. 17, 2007) (“Plaintiffs need not
offer prolix tales of abuse belabored by needless details, but plaintiffs must
allege facts sufficient to show that the legal elements of a claim have been satisfied.”).
268
Compl. ¶ 67.
72
by suggesting that the financial and legal advisors to each special committee should
engage regarding potential terms of a transaction.269 In this regard, Bakish did
exactly what he was supposed to do: when approached by CBS’s CEO, Bakish
informed him that the respective special committees and their advisors should
engage. There is no actionable wrongdoing there.
Finally, Plaintiffs allege Bakish met with four members of the CBS special
committee after NAI and Viacom insisted that Bakish lead the combined company
as CEO. 270 As alleged, during this meeting, the CBS special committee advised
Bakish that the two special committees would have to agree on governance before
CBS would be willing to discuss the exchange ratio.271 There is no allegation that,
from here, Bakish attempted to influence the Viacom Committee’s negotiation
strategy or otherwise attempted to steer Viacom into pushing for his role as CEO of
the combined company at the expense of economic consideration for Viacom’s
stockholders. All that is alleged is that Bakish was asked to meet with the CBS
special committee and agreed to take that meeting. He then relayed the substance of
the meeting to the Viacom Committee and that committee took it from there.
269
Compl. ¶ 119.
270
Compl. ¶ 184.
271
Id.73
None of these allegations implicate any fiduciary breaches or other actionable
wrongdoing by Bakish. Indeed, from the Complaint’s narrative, it would appear that
Bakish refrained from inserting himself into the process and deliberately chose not
to flaunt his power as chief executive. Again, there is no claim of actionable
wrongdoing pled here.
III. CONCLUSION
For the foregoing reasons, the Motion to Dismiss is DENIED as to Counts I
and II of the Complaint, asserting claims for breach of fiduciary duty against the
NAI Parties and the Viacom Committee Defendants, respectively. The Motion is
GRANTED as to Count III, which purports to assert a claim for breach of fiduciary
duty against Bakish.
IT IS SO ORDERED.
74