CBS on Monday sued National Amusements and its President Shari Redstone to block it from forcing a merger between CBS and Viacom.
The feud between CBS and National Amusements has descended into a playground brawl. CBS is right to defend shareholder value but in doing so it could hurt investors in both companies.
National Amusements, which controls CBS and Viacom , VIAB -1.38% has been trying to merge the two companies. CBS has fiercely resisted the deal, arguing that merging with Viacom would drag down the company’s value. On Monday, CBS filed a lawsuit against National Amusements and its president, Shari Redstone, to block it from forcing the merger.
“This is corporate civil war,” says Joe Grundfest, a professor of law and business at Stanford University.
CBS directors see themselves as freedom fighters battling against Ms. Redstone, who the company says poses “a significant threat of irreparable and irreversible harm to the Company and its stockholders.” In the eyes of Ms. Redstone and National Amusements, the CBS directors are insurrectionist rebels abusing their power.
CBS shareholders appear to be pleased. The stock was up 2.8% Monday afternoon. Meanwhile, Viacom’s stock fell as much as 7%, reflecting the diminished prospects for a deal.
If the CBS board really does believe a merger with Viacom would erode shareholder value, they are right to fight it. As the filing notes, CBS’s stock price has tumbled from nearly $70 per share last summer to under $50 per share over the course of the talks—a loss of about $7 billion in market capitalization for Class B stockholders.
Ultimately National Amusements, which controls 80% of the voting power though only 10% of the shares of CBS, could vote out the board and merge the companies. To block that, the CBS board is planning to hold a meeting on Thursday to issue a dividend of voting Class A shares to all stockholders, which would reduce National Amusements’ voting power from 80% to 17%. Ms. Redstone would then be unable to remove board members—and thus powerless to push through the merger with Viacom.
The move is apparently possible thanks to a provision inserted into the company’s charter in 2005 by Ms. Redstone’s father, Sumner Redstone. Why would a controlling shareholder create a loophole by which his own shares could be diluted? One answer may be to wound Ms. Redstone, to whom he resisted handing over the company.
Investors have good reason to celebrate CBS’s rebellion. An independent CBS would cast off the Redstone discount. But it is a high-stakes gamble: The suit will cause the fight to drag on, and if CBS loses, the companies will merge anyway, likely on less favorable terms.