Sumner Redstone’s National Amusements Moves to Oust Five Viacom Directors

June 17, 2016 | Wall Street Journal

Among those the holding company seeks to replace is Viacom CEO Philippe Dauman
 

By  Joe Flint, Amol Sharma and Joann S. Lublin

Media mogul Sumner Redstone on Thursday moved to carry out a dramatic overhaul of the board of Viacom Inc., the media giant he spent three decades building, deepening turmoil in his $40 billion empire and setting up a high-stakes legal battle over corporate governance.

National Amusements Inc., the holding company through which Mr. Redstone controls Viacom, said it is seeking to oust five Viacom directors, including his former confidante, Chairman and Chief Executive Philippe Dauman.

The move is a spectacular escalation of the fight for control of the empire built by Mr. Redstone, who is 93 years old and in poor health. It is the culmination of a monthslong drama involving the mogul’s daughter, his longtime associates and even his past romantic companions—a saga that has played out in the courts and in Mr. Redstone’s Beverly Park, Calif., mansion.

The next phase of the fight will present corporate-governance questions that legal experts say are rarely considered in the upper echelons of American business—with a board and its controlling shareholder effectively in a legal war.

Besides Mr. Dauman, National Amusements said it plans to replaceGeorge S. Abrams, Blythe J. McGarvie, Frederic V. Salerno andWilliam Schwartz.

In their place Mr. Redstone’s company said it will elect Kenneth Lerer, managing partner of a venture-capital fund and chairman of BuzzFeed; Thomas May, chairman of Eversource Energy; Judith McHale, a former senior executive at Discovery CommunicationsInc.; Ronald Nelson, chairman of Avis Budget Group Inc.; and Nicole Seligman, a former president of Sony Entertainment.

National Amusements petitioned the Delaware Court of Chancery to affirm the changes, and said the new appointments won’t be effective until the court rules.

Mr. Salerno, Viacom’s lead independent director, immediately filed suit in Delaware to invalidate the dismissals. In a statement, he said Mr. Redstone’s daughter, Viacom Vice Chair Shari Redstone, had orchestrated the overhaul.

“This is a brazen and demonstrably invalid attempt by Ms. Redstone to gain control of Viacom and its management in disregard of Sumner Redstone’s wishes,” Mr. Salerno said.

Ms. Redstone has denied orchestrating the moves by her father. Her spokeswoman said Thursday that she supports the National Amusements action, “which has nothing to do with power or personalities and everything to do with maximizing value for all Viacom shareholders.”

In recent weeks, Mr. Redstone has made a series of changes to the power structure surrounding his holdings, which include Viacom’s cable brands such as MTV and Comedy Central, Paramount Pictures and CBS. Those moves had the effect of increasing the influence of Ms. Redstone.

Throughout the drama, people close to Viacom have questioned whether Mr. Redstone’s health problems have rendered him unable to know what is going on around him.

National Amusements, which has a nearly 80% voting stake in Viacom, didn’t specify why it was removing the board members. Mr. Redstone, through statements issued by his spokesman, has signaled frustration with the company’s performance after a nearly 40% slide in its stock over the past year.

Viacom’s Class B shares closed up 7% to $45.05.

National Amusements said Mr. Dauman remains the CEO, but “it will be the responsibility of the newly constituted Board to evaluate the current management team and take whatever steps it deems appropriate to ensure that Viacom has in place strong, independent and effective leadership.”

Mr. Dauman became chairman in February. If he resigns as CEO, he could claim severance and other payments approaching $95 million, company filings indicate.

Last month, Mr. Redstone removed Messrs. Dauman and Abrams from the board of National Amusements and the seven-member trust that will oversee his controlling stakes in Viacom and CBS when he dies or is incapacitated. The executives have sued in Massachusetts court to challenge their dismissals, arguing that Ms. Redstone is engineering the changes by taking advantage of her father, and that Mr. Redstone doesn’t have the mental competency to carry out the changes. Their suit describes him as suffering from a worsening brain disorder and being unable to write, read, walk or “coherently communicate.”

The mogul’s doctor put out a statement saying Mr. Redstone was alert and in no distress during a recent examination, and that he knows what he’s doing. In recent days, Mr. Redstone has met with top CBS and Paramount Pictures executives, though they came to his car and details of the meetings weren’t available.

The drama and confusion about who is in control at Viacom marks a stunning example of the tumult that can ensue in family-controlled companies when business titans don’t activate succession plans while they are in their prime.

The removal of five Viacom independent directors means “there is no such thing as independence on this board,’’ said Nell Minow, vice chairman of ValueEdge Advisors, which promotes good governance and shareholder rights.

Viacom’s corporate-governance drama “is rare, and probably one of the worst examples of succession planning that I have seen in a long time,’’ said Jeffrey Cohn, managing director of global CEO succession planning for recruiters DHR International. Mr. Redstone, who famously said he would never die, “really set the stage for all of this internal conflict and Shakespearean drama,” Mr. Cohn said.

In his lawsuit, Mr. Salerno, the lead independent director, said Mr. Redstone for decades has had a clear estate plan based on “independent control and professional management.”

Ms. Redstone, now 62, once appeared to be the front-runner to take control of the empire, but later fought fiercely with her father. Mr. Redstone treated Mr. Dauman, who had risen from legal adviser, like a surrogate son.

Mr. Dauman’s detractors say he mismanaged Viacom during a time of great change in media, leading to poor stock performance. People close to Viacom allege Ms. Redstone hasn’t used her position at Viacom to offer up concrete plans to fix the company. Questions intensified over Mr. Redstone’s health after a lawsuit by a former companion and one-time girlfriend, Manuela Herzer, who said he lacked mental capacity when he removed her as his health proxy. He also cut her out of his will. The judge in the case ruled against Ms. Herzer but didn’t rule specifically on Mr. Redstone’s competency.

Lawrence Cunningham, a professor of corporate law at George Washington University, said in a recent interview that controlling shareholders have broad authority under Delaware law to make changes with or without cause. Viacom’s deposed directors could fight their removal by arguing that Mr. Redstone isn’t looking out for the best interests of minority shareholders or is mentally unfit.

David Margules, a partner at Ballard Spahr LLP with experience litigating cases in the Delaware court, said the Viacom directors would have a tough argument. “The proponents of the status quo are going to have to show the board takeover poses a threat to the corporate enterprise.”

WSJ article