National Amusements did not detail the exact bylaws it was adopting, instead choosing to put out a news release describing the changes. Viacom has four business days (starting after the day of the announcement) to file these new amendments. Viacom has not done so yet, presumably because it is trying to decide how to deal with National Amusements' latest action.
The problem for Viacom is that its directors other than Ms. Redstone have decided to oppose a leadership change and support Mr. Dauman. The chief executive's opposition, beyond his seeming incapability of letting go, is based on claims that Mr. Redstone is not competent to act and is being manipulated by his daughter. Somehow, this translates to the actions of National Amusement's board being illegitimate. And the Viacom directors have drawn a line in the sand based on this claim, asserting that their removal would be unlawful.
This amendments are the test of that claim. If Viacom accepts the changes, the entertainment conglomerate will be admitting that National Amusements can act appropriately in regard to Viacom. This would be tantamount to admitting that Mr. Redstone and National Amusements can also remove the board.
No wonder Viacom is taking the full four business days to file the amendments as it thinks through its response.
One tactic would be to try to kick the can down the road. In this situation, Viacom would file the changes with some vague wording that they were illegal but that the time was not yet ripe to challenge the new restrictions.
A second route would be to challenge the changes in court either by refusing to accept them or by declaring them invalid.
A bylaw requiring 100 percent board approval is certainly not the best corporate governance and is unusual, but there is precedent for the validity of this type of bylaw under the law in Delaware, where Viacom is incorporated. (I would also add that all parties involved would be on thin ice if they tried to invoke principles of good corporate governance, as Viacom has been a governance disaster for decades.)
The main precedent supporting a bylaw change like this is in the case Frantz Mfg. Co. v. EAC Industries. In that 1985 case, a board similarly rebelled against its controlling shareholder. The board tried to block a controlling shareholder after the shareholder tried to take control of the company. The controlling shareholder then responded in a manner similar to National Amusements by adopting a bylaw that required all future actions of the board to be unanimous. The Delaware Supreme Court upheld this maneuver, stating that these actions were "permissible" as "an attempt to avoid" the controlling stockholder's "disenfranchisement as a majority shareholder."
This case stands as strong precedent allowing National Amusements to proceed with the bylaw requirement. To be sure, it is not dispositive. In the Frantz case, the controlling shareholder was acting to preserve its control. The court thus found that the shareholder was entitled to that control and that its actions were justified and were otherwise not "inequitable."
Viacom is likely to argue that the controlling shareholder is overreaching and that the changes are thus unduly restrictive. Viacom will also argue that the Franz case does not apply because the Viacom board is simply trying to sell an asset, while the controlling shareholder is restricting the board from exercising its fiduciary duties to get the best price for shareholders.
There is certainly a difference in the facts, but there is also other support in Delaware law for controlling shareholders being able to assert their authority. And as part of the amendments, National Amusements required that any dispute over the bylaws be litigated in a Delaware court.
There is a third option for Viacom: The company can claim that National Amusements' amendments are void because of claims of Mr. Redstone's incompetency. But this claim is hard to establish. The company would be asserting that National Amusements' own actions are void because of the incapacity of its controlling shareholder. Yet National Amusements has its own board and is a functioning company. Moreover, if Mr. Redstone is indeed incompetent, then his interest goes to the trust from which Mr. Dauman and George Abrams were removed. Here, the other trustees have already said that they supported Mr. Redstone's actions, and so the whole affair becomes moot.
Even then, it is hard to see a Delaware judge looking past the actions of the majority stockholder to see the rationale for its decision. There is no precedent for this, particularly when the dispute is a question of business judgment in which reasonable minds could disagree, namely whether a sale of Paramount should proceed.
If Viacom does pursue litigation, this may be National Amusements' and Mr. Redstone's cue to finally unseat the Viacom board. National Amusements can do this easily by removing and replacing the directors pursuant to a simple consent delivered to Viacom. At the same time, National Amusements could invoke the seldom-used summary procedures in the Delaware code for contested elections of directors and procedures to confirm the validity of its appointments. This would allow National Amusements to raise the ante if Viacom does litigate over the amended bylaws.
Viacom has some difficult decisions to make. Perhaps if it and its advisers think hard enough, they can come up with another even more clever way to get at this. They should think fast, though; the company has only another day or two.
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