Bucks County Employees Retirement Fund v. CBS Corp.,

C.A. No. 2019-0820-JRS (Del. Ch. Nov. 25, 2019)

In Bucks County Employees Retirement Fund v. CBS Corp., the Court of Chancery held that a pension fund that invested in CBS was entitled to obtain records related to CBS’s planned (and now completed) merger with Viacom Inc., finding a credible basis to suspect actionable wrongdoing and that seeking records in order to evaluate a potential action to enjoin the merger was a proper purpose. Noting that the standard for showing a “credible basis” to suspect corporate wrongdoing is “low,” the court held that the plaintiff met its burden because of evidence that CBS officers, directors, and its controller, Shari Redstone, may have breached their duties by pressing CBS to merge with Viacom, and that some disclosure (but less than the plaintiff requested) was appropriate to allow the plaintiff to investigate if it should seek to enjoin the merger before it closed a week later. Background

National Amusements, Inc. (NAI) owned a controlling majority of Class A voting common stock in both CBS and Viacom. NAI is controlled by Shari Redstone, who proposed a merger of CBS and Viacom in 2016. CBS’s board formed a special committee to consider the proposed merger, and did not recommend it. Redstone again proposed that CBS merge with Viacom in 2018. CBS’s board again formed a special committee, which again declined to recommend the merger. CBS took additional steps, which the court termed “extraordinary,” including filing an action in the Court of Chancery seeking to enjoin Redstone and NAI from forcing a merger with Viacom, arguing that such a merger would serve the interests of Viacom and Redstone, not those of CBS and its stockholders. The case settled after what the court described as “intense litigation.” As part of that settlement, Redstone agreed to not propose a merger for a period of two years unless she was invited to do so by two thirds of CBS’s independent directors. Meanwhile, CBS’s longtime CEO, Leslie Moonves, resigned amid allegations of sexual misconduct and was replaced on an interim basis by Joseph Ianniello. Following the settlement of the 2018 lawsuit, Redstone held a meeting with Ianniello, who subsequently reversed his prior opposition to a CBS merger with Viacom. In 2019, Redstone participated in a meeting of CBS’s Nominating and Governance Committee, at which “strategic possibilities for the Company” were discussed. Also in attendance was CBS’s chief legal officer, Lawrence Tu. Shortly after the meeting, Tu resigned for “Good Reason” as defined in his employment agreement, and CBS resumed consideration of a potential merger with Viacom. Redstone met with Ianniello to discuss a possible Viacom merger, and after Ianniello allegedly expressed support, CBS entered into a new employment agreement with him that significantly increased his compensation. The plaintiff, Bucks County Employees Retirement Fund, a holder of CBS Class B non-voting common stock, demanded that it be permitted to examine CBS’s books and records pursuant to 8 Del. C. § 220 (Section 220). CBS complied with that request in part, but the plaintiff was not satisfied with the documents produced and filed a complaint to receive all documents before the merger closed the first week of December 2019. The court held that the plaintiff had established a “credible basis” to infer actionable fiduciary duty breaches to support its books and records request.

The Court’s Analysis

Under Section 220, a stockholder may inspect a corporation’s books and records for any “proper purpose” reasonably related to the stockholder’s “interest as a stockholder.” It is well-settled that a desire to investigate mismanagement or wrongdoing is a proper purpose. To justify a books and records request premised on the investigation of mismanagement or wrongdoing, the stockholder must show “a credible basis from which a court can infer that mismanagement, waste or wrongdoing may have occurred.” Here, the court determined there was a credible basis to infer mismanagement and wrongdoing by Redstone and the CBS Board. The court began by acknowledging the “low threshold” required by a plaintiff to show a “credible basis” to infer mismanagement or wrongdoing. The plaintiff argued that Redstone was “a conflicted controlling stockholder who has, for years, been seeking a bailout of the sinking Viacom ship, which she controls, with resources provided by CBS, which she also controls.” These circumstances, the plaintiff argued, allowed for a merger process that was tainted from the start and that gave rise to “a transaction result with no economic justification.” The court further noted, as an initial matter, that the presence of an exculpatory provision in CBS’s charter did not bar the plaintiff’s demand because the plaintiff indicated it may seek pre-closing equitable relief, which would not be barred by the exculpatory provision. The court next considered several factors in determining that Bucks County had met its burden, including that: (1) CBS had declined to submit the merger to its unaffiliated stockholders for approval, and thus “tacitly agreed to submit the transaction to entire fairness review if challenged”; (2) there was “credible basis” that the terms of the proposed merger were “not materially improved” from those CBS had rejected in 2018; (3) there was evidence that Redstone would receive a non-ratable benefit – effectively, “a bailout of her controlling interest in Viacom” – through the merger; (4) there was evidence to suspect “an improper transaction process,” including because of Redstone’s participation in the CBS board committee meeting that appeared to discuss a potential merger with Viacom at a time when she was barred from suggesting a Viacom merger under the 2018 settlement; (5) there was evidence that Ianniello may have changed his prior opposition to a Viacom merger in return for additional compensation, in breach of his fiduciary duty to CBS; and (6) the abrupt departure of CBS’s chief legal officer in response to what he saw as a violation of the 2018 Settlement Agreement “raises yellow, if not red, flags.” The court in particular noted that CBS’s decision not to seek unaffiliated stockholder approval “will pique suspicion” in the Section 220 context because it opens the possibility that the transaction “was not at arm’s length, less than optimal, and potentially tainted by the undermining influence of a controller.” The absence of unaffiliated stockholder approval was not, without more, “enough to establish a credible basis to suspect wrongdoing,” but the court found that it could “contribute to a credible basis,” and that “[t]his suspicion is all the more justified here since, contrary to its firm stance in 2018, the CBS Board inexplicably did not even ask to condition the 2019 Merger on the approval of the majority of CBS’s unaffiliated stockholders.” Having established a credible basis to support its request, the court turned to whether the documents sought were necessary and essential to fulfill the plaintiff’s purpose. The court noted that the plaintiff was required to “make specific and discrete identification, with rifled precision, of the documents sought.” The court found that some, but not all, of the plaintiff’s requests met this standard. The court deemed unnecessary the plaintiff’s requests for documents related to new directors added in connection with the settlement agreement, the independence of the new directors, expert reports prepared by CBS during litigation, certain board-level communications, and certain electronic communications between Redstone and representatives for CBS and Viacom. The plaintiff was, however, permitted to access books and records regarding the appointment of the CBS board members who approved the merger; materials regarding the CBS board’s consideration of each merger opportunity; documents related to the employment of certain individuals interested in the merger; and a “narrow set” of communications between Redstone and certain individuals, including members of the committee in charge of board member nomination and governance. Conclusion

In Bucks County, the Court of Chancery affirmed the low standard for demonstrating a credible basis to infer wrongdoing to support a books and records request under Delaware law, but reinforced that Delaware courts will closely scrutinize the scope of stockholders’ requests to ensure that they only seek specific and discrete information necessary and essential to the plaintiff’s purpose. In the context of a controlling stockholder transaction, the court’s reasoning highlights that although the decision to forego unaffiliated stockholder approval is not, standing alone, sufficient to establish a credible basis to suspect wrongdoing, the failure to follow “the MFW road map” can support a credible basis, particularly when accompanied by “some evidence” of wrongdoing, such as the controller’s receipt of a non-ratable benefit or a tainted board process. www.hoganlovells.com

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