By Anne Sherry, J.D.
In the midst of a fight between Shari and Sumner Redstone and CBS over a potential merger with Viacom, the Delaware Court of Chancery denied the Redstones access to certain likely-privileged documents. Although Shari Redstone, as a CBS board member, would typically enjoy “unfettered” access to legal advice rendered to the company or other directors, her interests conflict with those of the corporation. CBS followed good governance procedures by forming special committees to look into the merger, putting the Redstones and their company, National Amusements, on notice that they would be segregated from that side of the deliberations (In re CBS Corporation Litigation, July 13, 2018, Bouchard, A.).
The Viacom dispute. The special committee determined that a merger with Viacom was not in the best interests of CBS stockholders other than National Amusements, which controls only 10 percent of the economic stake in CBS but nearly 80 percent of the voting power. To counter the Redstones, the special committee recommended issuing a stock dividend that would reduce National Amusements’ voting power to 20 percent, without diluting any stockholder’s ownership interests. Prior to a vote on this recommendation, National Amusements delivered written consents to amend CBS’s bylaws to require approval of 90 percent of directors at two separate meetings in order to declare a dividend. The board voted 11-3 to approve the stock dividend.
The discovery dispute. An expedited trial to determine the validity of the stock dividend and 90-percent bylaw is scheduled to begin in October. Because the case is expedited, National Amusement and the Redstones asked the court to compel production of certain privileged communications at the outset of discovery. The court wrote that although there is a benefit to doing so in certain circumstances, it would be problematic to do so for the eleven-year period predating the formation of the first special committee. The legal principles involved in the request implicate questions of when moments of adversity arose between CBS and the directors affiliated with National Amusements, and the record was too undeveloped to make informed judgments as to those adverse relationships and the directors’ awareness of their existence. With respect to the years predating the formation of the first special committee, the party wishing to challenge privilege should do so after the assertion of privilege has been made.
With respect to the later period, however, the record was sufficient to address the requests. The court determined that the National Amusements-affiliated directors were not entitled to communications between members of the special committees (or committee counsel) and CBS counsel. In asking the board to consider merging with Viacom, the National Amusements parties placed themselves across the negotiating table from CBS, creating sufficient adversity that the National Amusements directors could not have a reasonable expectation that they were a client of the board’s or special committee’s counsel with respect to the matters delegated to the special committees. After following good governance procedures by forming the special committees, the board was entitled to deliberate and receive legal advice in confidence. This is equally true of communications with CBS counsel as it is of communications with counsel separately retained by the committees.
The court also denied the motion to compel communications between CBS counsel and any officer or director of CBS to the extent of any communications undertaken in aid of the process of the special committees. With respect to any matter other than those falling within the purview of the special committees, the court granted the motion to compel—for such matters, there was no basis to support the conclusion that the National Amusements-affiliated directors were or reasonably should have been aware that CBS counsel was not representing them jointly with other CBS directors. The court declined to require that privileged information provided as a result of this ruling not be shared with the National Amusements parties. For practical reasons, as Shari Redstone is both a National Amusements-affiliated director and a party herself, “it is simply not realistic or practical to believe that any information to which she may become privy as a result of this ruling could be segregated from her thought process as an adversary of CBS in this case.”
The case is No. 2018-0342-AGB.