The Game of Thrones at Viacom

http://www.nytimes.com/2016/05/24/business/dealbook/the-game-of-thrones-at-viacom.html

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Who needs “Game of Thrones” when you have the latest battle for control of Viacom and CBS?

On Friday, a lawyer working on behalf of Sumner M. Redstone notified Philippe P. Dauman, the chief executive of Viacom, that Mr. Dauman had been removed as a trustee of the trust that will control Viacom and CBS upon Mr. Redstone’s death or mental incapacity. Another trustee and Viacom director, George Abrams, was also removed as a trustee; both were to be replaced by other people.

The maneuver, which is certainly up to the intrigue of “Game of Thrones,” is expected to give Mr. Redstone’s daughter, Shari Redstone, future control of these companies. By definition, the maneuver also leaves Mr. Dauman, whom Mr. Redstone once referred to as the son he never had, in a precarious place.

Mr. Dauman and Mr. Abrams were also removed as directors of National Amusements, the holding company that owns a controlling interest in Viacom and CBS.

This second maneuver is important.

The trust will eventually control National Amusements (which is currently controlled by Mr. Redstone). National Amusements currently controls Viacom through a high-vote Class A stock, which has 79.8 percent of the votes.

Because of these acts, Mr. Dauman will no longer be able to control Viacom either before or after Mr. Redstone’s inevitable death. (Here, I note for the record that Mr. Redstone had previously remarked that his succession plan was for him not to die.)

Viacom itself responded ferociously. In a statement, Viacom took sides with Mr. Dauman, stating that this maneuver resulted from Shari Redstone’s “long-held goal, which Mr. Redstone has always opposed, of gaining control of National Amusements and Viacom.”

The spokesman continued that the maneuver was “disruptive and damaging to Viacom and all of its shareholders.” Ms. Redstone is a director of Viacom also. And so you have the odd juxtaposition of a company criticizing its own director and controlling shareholder.

Mr. Dauman, of course, also challenged his removal, calling it “illegal and invalid.” On Monday he and Mr. Abrams filed a lawsuit in a Massachusetts court, challenging this decision. The lead independent director of Viacom, Frederic V. Salerno, has also raised questions about Mr. Redstone’s competence. The problem is that Mr. Redstone has all the cards.

Mr. Dauman has been removed only from the trust and National Amusements. He remains chief executive of Viacom. That is the good news for him, but he is now fighting to keep that position and already his actions are questionable.

Mr. Dauman has a duty of loyalty to Viacom and its shareholders, including National Amusements. Putting the machinery of Viacom into combat mode against the company’s majority shareholder appears to be an act of self-interest.

Unless a controlling shareholder is engaging in looting or other extreme and illegal behavior, the law is clear. Boards are at the mercy of their controlling shareholders.

National Amusements can now act to remove and replace all the Viacom directors except Ms. Redstone, and then the newly appointed directors can remove Mr. Dauman as chief executive. And as of now, National Amusements is a functioning company with its own board. That board can take this action so long as Mr. Redstone does not oppose it and try to remove the National Amusements board.

The more Mr. Dauman fights back against this reality through the corporate machinery of Viacom, the more he risks a lawsuit for breach of fiduciary duties.

Mr. Dauman is seeking to challenge his removal at the trust itself, claiming Mr. Redstone’s mental incompetence, but he will have a hard oar to row given his past statements of support for Mr. Redstone. That is what the Massachusetts suit is about, as well as establishing jurisdiction in a friendlier court than the one in Los Angeles that just dismissed a suit challenging Mr. Redstone’s competency.

This struggle for a friendly jurisdiction is why Mr. Redstone immediately countersued in the same Los Angeles court to establish the validity of this change. There now will be a fight over which court hears whether this change to the trust was valid.

Delaware, where Viacom is incorporated, allows director removal for any reason with or without cause. Even if Mr. Dauman can fight removal from the trust, he may have an even harder argument against his removal as director and then chief executive. After all, “without cause” means for any reason and the court would be ruling on the capacity of National Amusements, a real company, to act.

Here’s where there is a twist. There appears to be a mistake in Viacom’s bylaws that allows this removal to happen at any time.

Under Delaware law, while directors can be removed with or without cause at any time, companies can restrict this right. They can do so by adopting an amendment in the company’s charter preventing shareholders from acting by written consent. A shareholder would then have to wait until the annual meeting to remove directors or otherwise call a special meeting.

According to Viacom’s charter, there is no prohibition on shareholders’ action by written consent, which means that the majority of votes (in other words, National Amusements) can act at any time to remove the directors.

Then there is a clause in Viacom’s bylaws that tries to take this right away. Under a section titled “removal of directors,” Viacom’s bylaws state that “any or all directors may be removed” by a “majority of all the aggregate voting power” at a “special meeting of stockholders.”

At first read, this means that National Amusements would have to call a special meeting to remove the directors and then fire Mr. Dauman. National Amusements can do this, but it would take months and give time for Mr. Dauman and perhaps Viacom to fight back.

There is a legal problem with this provision, however. Delaware law requires that any restriction in action by written consent be in the charter of the company. And so, this restriction in the bylaws may be void.

Moreover, the bylaws can be amended at any time by Viacom’s shareholders, acting by written consent. So it appears that National Amusements can amend Viacom’s bylaws at any time to eliminate this requirement.

If I’m reading all this right, the bottom line is that if National Amusements wants, it can act to replace the Viacom board at any time. The directors of Viacom may fight this. But they will be arguing that National Amusements is not of sound mind, and that is not true: It is run by Ms. Redstone and its board.

The key to Mr. Dauman’s preservation therefore is for him and his colleague to get back on the trust before Mr. Redstone dies, or show that Mr. Redstone is mentally incompetent. That way the trust gains control of National Amusements and thus Viacom, and they can act to prevent their own removal.

But that is unlikely to happen soon at least, and instead will take months if not years of litigation in Massachusetts and most likely elsewhere as the Redstones, never shy about litigation, countersue.

It is telling that these changes, which apply equally to CBS, did not elicit even a peep out of that company, its executives or directors. This is all about whether Mr. Dauman or Ms. Redstone will control these two companies.

And so, I am not puzzled by Mr. Dauman’s response. After all, he has staked his whole career on Mr. Redstone. But I am puzzled by Viacom’s reaction. The media company would do well to realize that its interests are not those of its chief executive and that Mr. Dauman’s legal case may not be quite the winner he asserts.