At the end of last week, the Delaware Chancery Court refused to permit CBS independent directors to obtain a restraining order that would have prevented controlling shareholder Shari Redstone from interfering with the plan that the directors had devised to prevent Redstone from forcing a merger of CBS and Viacom. The directors wanted to amend the CBS By-Laws to permit them to issue more stock and thus dilute Redstone’s vote so as to prevent the merger.
While the facts are complex and while there is no precedent for what the independent directors were attempting to do, the interesting part (at this stage) is that the Court held that, even though it was indeed possible that Redstone was breaching her fiduciary duty, Redstone and her allies had the right to protect their majority controlling interest from attack. The court system would give relief after the fact if it were found there was a breach of fiduciary duty if a merger were to occur.
In Delaware mergers where controlling persons in effect self-deal, there are numerous ways to prevent abuse of power, including getting an independent director vote, setting up independent director committees, getting independent shareholder votes, and obtaining comfort from third party experts. The courts are full of cases filed after the fact alleging that the minority was abused by majority control of a merger or acquisition. But here relief was sought before the fact, and even though there was an independent board committee that dis-recommended the merger, the Chancery weighed the equities and opted to protect the majority in exercising its control; there would be time later to do justice if required.
This is likely to be fast-moving, in that if a merger occurs it will be hard to unwind or calculate injury if the entities actually begin to operate as a single enterprise. Stay tuned.