ViacomCBS investors in a sweeping class-action lawsuit allege that controlling shareholder Shari Redstone used her “persistent influence” to push through a controversial merger and sideline those who stood in her way.
CBS had fiercely resisted a merger with Viacom — until last year.
But Redstone enlisted the support of pliant board members and executives to orchestrate the deal, according to a 117-page lawsuit filed in Delaware Chancery Court, which was made public this week. The case details behind-the-scenes maneuverings that led to a softening of CBS’ position, paving the way for the December union between the two companies.
The companies were together worth more than $30 billion before the merger was announced last summer. ViacomCBS’ stock, however, has been on a precipitous decline this year, worsened by weak earnings and the coronavirus outbreak, which has pummeled traditional entertainment companies.
On Thursday, the value of the combined ViacomCBS was $9.7 billion. Its shares, which closed at $15.52 Thursday, are down 60% since the merger.
The shareholder lawsuit, brought on behalf of two Pennsylvania institutional investors, alleges Redstone, CBS board members and Joseph Ianniello, who was acting chief executive of CBS Corp. for more than a year, turned a blind eye to problems posed by the merger, breaching their fiduciary duty to shareholders. The investors also assailed a $125-million payout to Ianniello.
The suit contends the deal — to reunite the companies after 13 years apart — was forced through to protect the fortunes of the Redstone family and its investment vehicle National Amusements Inc., not rank-and-file CBS shareholders. The Redstone family controls 80% of the voting stock of the combined ViacomCBS, and Redstone now presides over ViacomCBS as its chairwoman.
Redstone, through a spokeswoman, declined to comment for this article. A ViacomCBS spokesman said, “We believe the complaint is without merit and intend to file a motion to dismiss.”
Though the merger was part of Redstone’s long-term vision, board members had valid reasons to combine the two companies. Viacom was struggling to dig out from years of mismanagement and underinvestment in its core assets: cable channels MTV, Nickelodeon, BET and Comedy Central, and the Paramount Pictures movie studio.
Other media companies, including Walt Disney Co. and AT&T, were rapidly scaling up, making it harder for smaller companies such as Viacom and CBS to compete.
The suit was filed on behalf of the Bucks County Employees Retirement Fund and the International Union of Operating Engineers of Eastern Pennsylvania and Delaware. Both held CBS nonvoting stock and now are ViacomCBS shareholders.
Bucks County initially sued in October and petitioned the judge for access to internal CBS documents. The judge agreed in late November, finding there was a “credible basis” for investors’ concern.
The current lawsuit is a consolidation of three previous shareholder claims, including the earlier Bucks County case.
The consolidated lawsuit was filed under seal Feb. 20. A copy of it wasn’t publicly available until Tuesday, when a heavily redacted version was filed. The plaintiffs are seeking damages for CBS shareholders and asking a judge to strip the Redstone family of its ViacomCBS stock.
Citing regulatory filings and the internal documents, including emails and minutes of CBS board-level meetings, the shareholders’ lawyers pieced together the deal’s chronology.
Redstone’s first attempt to merge the two companies came in 2016 after a management shakeup at Viacom, but she soon retreated.
According to the lawsuit, Redstone accelerated her campaign to reunite the two companies a year later, after becoming alarmed by Viacom’s struggles.
“Viacom is tanking,” Redstone wrote in an October 2017 email to her ally on CBS’ board, Robert Klieger, the suit states. Klieger also is personal attorney of the family patriarch, Sumner M. Redstone, who is in poor health at his Beverly Park home.
By early 2018, there were deep divisions in the CBS boardroom over the merger campaign. By May 2018, the Redstone family was engaged in battle with then-CEO Leslie Moonves and CBS’ board. Moonves and CBS were trying to strip the Redstones of their voting control and put an end to Viacom merger attempts.
Then, in September 2018, Moonves was forced out amid a widening sexual harassment scandal. Ianniello, Moonves’ longtime deputy, was named CBS’ acting CEO, and within days, he arranged a lunch with Shari Redstone at the Pierre hotel in New York. The suit said the purpose of the meeting was to signal that “he was willing to play ball.”
As part of the September 2018 settlement to end dueling lawsuits, Redstone agreed not to push for a merger for two years.
But the “relentless controlling shareholder” wouldn’t give up, according to the suit.
She participated in meetings in which the merger was discussed and relied on a board member she was friendly with, Candace K. Beinecke, to do her bidding, the suit alleges. Beinecke joined CBS’ board during the September 2018 house cleaning.
Redstone continued to “insert herself into the process.” She attended part of the Feb. 22, 2019, meeting of CBS’ nominating and governance committee, even though she wasn’t on that committee. Another person in attendance was CBS’ then-chief legal officer, Lawrence Tu.
Later that day, Tu abruptly resigned. The reason for his departure was not disclosed, but his contract allowed him to step down for “good reason,” if something happened that would “materially impair [his] ability to function” as CBS’ chief legal officer, citing Tu’s contract. CBS paid Tu more than $9 million in severance, the suit stated.
The shareholders also alleged that Redstone sidelined board members, including Gary Countryman, Martha Minow and Linda Griego, who in 2018 opposed a Viacom merger.
The suit also suggested that CBS’ advertised search for a permanent CEO to replace Moonves was hollow. Instead, Ianniello’s role increased, he was tasked with negotiating the merger deal terms with Viacom. Ianniello’s contract was revised in April 2019, increasing his compensation.
The merger was announced in August 2019. The stock of the two companies dropped 20% over the next few months.
CBS was the bigger of the two companies, but Redstone’s desire to put the emphasis on Viacom carried the day. Since the Dec. 4 merger, several high-level CBS executives have left. Ianniello left CBS in late January. ViacomCBS regulatory filings said his compensation in 2019 was $125.4 million.
The head of Viacom, Bob Bakish, has built his own team with Viacom and CBS executives.
“CBS massively overpaid for Viacom, causing the company substantial harm,” the suit said. “It is now saddled with struggling and depleting assets, while Shari Redstone’s friends run a company they know little about.”
Three days after the merger closed, Bakish announced a sale of CBS’ headquarters in Midtown Manhattan, a hulking building known as Black Rock, which has been the company’s headquarters since 1964.
“Shari Redstone continues to eliminate any remaining vestige of CBS,” the suit said.