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Business Litigation Alert: "Family Feud - When In-Fighting Threatens to Destroy a Company"

The recent battle between CBS and its controlling shareholder, National Amusements Inc. (NAI), is unusual, to say the least!

Typically, the controlling shareholder of a company – even a public company – is generally able to wield significant power, including exercising control over the board of directors.  NAI, however, has recently seen the CBS board, led by its President Les Moonves, file a lawsuit in Delaware Chancery Court against it.  What is the cause of this dispute? 

NAI, which is a private company that is owned by the Sumner Redstone family, has recently indicated that it wants to merge CBS with Viacom Inc., another company that NAI owns.  The CBS board and Moonves don’t think the merger is a good idea for CBS’s shareholders, other than NAI!

The CBS board is not stopping with just a lawsuit.  Last week it voted to reduce NAI’s voting power (but not economic interest) from 80% to approximately 17% so that NAI could not take steps to replace the board members.  The board said this reduction was expressly permitted by the Company’s charter.  However, the day before the vote, NAI changed CBS’s bylaws to require that any board action required a supermajority – 90 percent of the 14 CBS board members – for approval.  Because the vote to reduce NAI’s voting power was 11-3, not a supermajority, it is unclear whether it has any consequence.

Earlier this week, NAI filed a counter-suit against CBS.  Ultimately, the Delaware Chancery Court will resolve these issues.

Avoiding a Costly Dispute

Regardless of the outcome, this level of conflict between a company’s owners, its board members, and its officers is damaging, distracting, and costly.  In-fighting like this can occur at a company of any size, even the Fortune 100.  As a result, it is important to have robust and thorough organizational documents, not just “off-the-shelf” forms found on the internet, in order to anticipate, and hopefully avoid, this kind of legal battle. 

Business owners should take the following steps to ensure they are protecting their interests:

  1. Plan for the worst.  While you might think this would never happen within your organization, failure to plan for these kinds of conflicts can be detrimental to your organization.  You must plan for the worst when developing all company operating agreements and documents.
  2. Consider anything and everything.  There are countless situations that can create in-fighting within a company.  Consider as many as possible and try to plan for everything.  The more forethought given, the better you can try to avoid legal issues.
  3. Review everything.  These kinds of cases remind us that it is a good idea to periodically review your company’s formation and operating agreements.  Are they robust enough?  Do they need to be expanded or updated?  It is important to periodically conduct a thorough review and analysis to make sure the company’s documents are suitable.

While most company conflicts are not as public as the fight between CBS and NAI, they can be just as painful, even if they occur outside of the public eye.  Make sure your organizational documents are appropriate and tailored to meet conflicts that you might face down the road.

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