Lessons From the CBS-NAI Dispute: The Applicability of Rule 14c-2 and the 20-day Waiting Period to Stockholder Actions by Written Consent

This is the first in a series of posts discussing certain issues and lessons for practitioners arising out of the recently settled dispute between CBS and its controlling stockholder.

Introduction

• National Amusements, Inc. (“NAI”) owns approximately 80% of the voting shares of CBS Corporation and Viacom Inc., and in early 2018, NAI proposed that CBS and Viacom consider a merger. Each of the boards of CBS and Viacom formed a special committee of independent directors unaffiliated with NAI to consider and potentially negotiate such a merger.
• On Sunday, May 13, 2018, the CBS special committee met and took steps:
  • to call a special meeting of the full CBS board on May 17 to consider and vote on a dividend of a fraction of a Class A (voting) share to be paid to holders of both CBS’s Class A (voting) common stock and Class B (nonvoting) common stock for the express purpose of diluting – very substantially – NAI’s voting interest in CBS; and
  • to commence litigation against NAI in the Chancery Court of Delaware seeking approval of the proposed dilutive dividend and moving for a temporary restraining order to block NAI from taking certain steps as the controlling stockholder of CBS, including any actions prior to the special board meeting that would interfere with the proposed dilutive dividend.
• On May 16, prior to the special board meeting (and prior to a scheduled court hearing on the directors’ motion for a TRO), NAI exercised its right as the holder of a majority of CBS’s voting shares to act by written consent to adopt amendments to the CBS bylaws (the “Bylaw Amendments”). These Bylaw Amendments imposed a 90% supermajority voting requirement on any Board declaration of dividends or any board adoption of bylaw amendments, and also imposed certain procedural requirements for any such actions.  Since three of the fourteen CBS directors were individuals with ties to NAI, the Bylaw Amendments, if valid and in effect, would effectively preclude the declaration and payment of the proposed dilutive dividend.
• The CBS board met the next day as scheduled (and following the court’s decision not to grant the TRO) and purported to approve the dilutive stock dividend by a majority vote of less than 90% of the directors, which would dilute the voting power of NAI to about 20% (and also dilute the voting rights of other Class A stockholders), the payment of such dividend conditioned on Delaware court approval.
• On September 9 (after several months of motion practice and discovery), CBS and NAI entered into a settlement agreement providing for the rescission of the dividend, a reconstitution of the CBS board and dismissal of the litigation.

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This blog post was republished as, “Lessons From the CBS-NAI Dispute: The Applicability of Rule 14c-2 and the 20-day Waiting Period to Stockholder Actions by Written Consent,” by the Harvard Law School Forum on Corporate Governance and Financial Regulation on October 15, 2018.