Bucks County Employees Retirement Fund v. CBS Corporation
2019 WL 6310243 (Del. Ch. Nov. 25, 2019) (2019)
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Rule of Law:
A stockholder seeking to inspect corporate books and records under 8 Del. C. § 220 for the purpose of investigating mismanagement must demonstrate a credible basis to suspect wrongdoing and prove that each requested document category is necessary and essential to that proper purpose.
Facts:
- National Amusements, Inc. (NAI), controlled by Shari Redstone, held majority voting stock in both CBS Corporation and Viacom, Inc., giving Redstone effective control over both companies.
- In 2016, Redstone proposed a merger of CBS and Viacom; however, a CBS special committee rejected the proposal after determining Viacom’s declining performance made it unattractive, prompting Redstone to express frustration and state the merger 'would get done' despite Viacom 'tanking'.
- In 2018, Redstone again proposed a CBS-Viacom merger. The CBS special committee again refused to recommend it, specifically after Redstone would not agree to a minority stockholder vote on the transaction or provide certain governance protections.
- Fearing Redstone would force the 2018 merger, CBS's independent directors attempted to issue a stock dividend to eliminate NAI’s voting control and filed preemptive litigation accusing Redstone of abusing her control to 'rescue Viacom' regardless of strategic or economic merits.
- The 2018 litigation settled, leading to a significant overhaul of the CBS Board and a two-year agreement restricting Redstone from proposing a CBS-Viacom merger without an invitation from two-thirds of CBS's independent directors. Leslie Moonves resigned as CEO and Joseph Ianniello became interim CEO.
- In fall 2018, after the settlement, Ianniello (who had been a strong opponent of the 2018 merger) met with Redstone and subsequently expressed support for a CBS-Viacom merger. In April 2019, Ianniello's employment agreement was amended to substantially increase his compensation.
- In February 2019, Redstone, who was not a member, attended a CBS Nominating and Governance Committee meeting where 'strategic possibilities' and the re-engagement of financial advisors for a strategic review were discussed. CBS's Executive Vice President and Chief Legal Officer, Lawrence Tu, abruptly resigned 'for Good Reason' immediately following this meeting.
- On August 13, 2019, CBS and Viacom announced the 2019 Merger. Although structured as CBS acquiring Viacom, the combined company would be named ViacomCBS, Viacom’s CEO Robert Bakish would lead it, and CBS’s unaffiliated stockholders would not vote on the transaction.
- In September 2019, Plaintiff, Bucks County Employees Retirement Fund (a CBS stockholder), served CBS with a demand letter under 8 Del. C. § 220 to inspect certain books and records, stating a purpose to investigate mismanagement or wrongdoing related to the 2019 Merger.
Procedural Posture:
- Plaintiff, Bucks County Employees Retirement Fund, a CBS stockholder, served CBS Corporation with a demand letter in September 2019, seeking to inspect certain books and records under 8 Del. C. § 220, stating a purpose to investigate mismanagement or wrongdoing related to the 2019 Merger.
- CBS Corporation agreed to provide some, but not all, of the documents requested in the Demand.
- Plaintiff filed its Verified Complaint in the Delaware Court of Chancery on October 15, 2019, seeking to compel inspection.
- The Court of Chancery granted Plaintiff's Motion to Expedite on October 24, 2019.
- A trial on a paper record was held on November 22, 2019.
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Issue:
Does a stockholder establish a proper purpose and a right to inspect specific corporate books and records under 8 Del. C. § 220 when it presents a credible basis to suspect a controlling stockholder manipulated a merger process for non-ratable benefits, even if alternative benign explanations exist?
Opinions:
Majority - Slights, Vice Chancellor
Yes, the stockholder established a credible basis to infer mismanagement or wrongdoing and is entitled to inspect specific categories of documents necessary and essential to that purpose. The court found that Plaintiff presented sufficient 'some evidence' to satisfy the low 'credible basis' burden for investigating mismanagement. This was supported by several factors: (1) the CBS Board's inexplicable about-face from its aggressive opposition to previous Viacom mergers and its failure to seek unaffiliated stockholder approval for the 2019 Merger, tacitly submitting it to entire fairness review (citing In re MFW S’holder Litig.); (2) the dramatic shift in CEO Joseph Ianniello's position on the merger, from fierce opposition in 2018 to vocal advocacy in 2019, coinciding with meetings with Redstone and a substantial increase in his compensation, suggesting he acted as Redstone's surrogate; (3) Redstone's long-standing desire for the merger, including her prior statements that Viacom was 'tanking,' creating a credible inference of a nonratable benefit (a 'bailout') to her from the transaction; (4) Redstone's attendance and apparent participation in a February 2019 committee meeting where strategic possibilities were discussed, potentially violating the 2018 settlement agreement that restricted her from proposing a merger; and (5) the abrupt 'for Good Reason' resignation of CBS's Chief Legal Officer immediately after that February 2019 meeting, suggesting he witnessed wrongdoing. The court ruled that this totality of facts, coupled with the entire fairness standard likely applicable to the conflicted controller transaction, crossed the 'credible basis' threshold (citing Kosinski v. GGP, Inc. and Seinfeld v. Verizon Commc’ns, Inc.). Regarding the scope of inspection, the court held that documents from the 2016, 2018, and 2019 merger attempts (Board minutes, materials, and financial advisor presentations) were necessary and essential, as the history of these attempts was crucial to understanding the alleged misconduct. Board-level documents concerning Ianniello's compensation were also deemed necessary due to suspicions of his self-interested advocacy. A narrow set of electronic communications between Redstone and the Nominations and Governance Committee members and Lawrence Tu 14 days before and after the February 22, 2019 meeting were also granted, given the suspicions surrounding that meeting. However, the court denied requests for general director independence documents (as redundant with already provided questionnaires), expert reports from prior litigation (not shown to be necessary and essential), and broad, unspecific demands for electronic documents between all parties and their advisors, finding the latter lacked the 'rifled precision' required for a Section 220 demand and were more appropriate for discovery in a plenary action (citing Brehm v. Eisner).
Analysis:
This case significantly reinforces the low evidentiary bar for stockholders to establish a 'credible basis' for investigating mismanagement under Section 220 in Delaware, particularly in controller-led transactions. It demonstrates that a pattern of circumstantial evidence—including changes in board and management positions, the controller's past statements, and irregularities in the transaction process—can cumulatively satisfy this burden, even if each piece of evidence might have an innocent explanation. The ruling provides practical guidance on the 'necessary and essential' requirement, affirming that historical documents from prior, rejected merger attempts and board-level compensation materials are often critical for investigating related-party transactions, while emphasizing that broad electronic discovery without 'rifled precision' remains outside the typical scope of Section 220. This serves as an important tool for stockholders to obtain information to scrutinize potential breaches of fiduciary duty by boards in conflicted transactions, especially when they bypass minority stockholder protections.
