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Although exclusive talks between Paramount Global and Skydance Media are expected to end without a deal, questions linger about controlling shareholder Shari Redstone’s duty to minority investors, some of whom have vocally opposed the merger on grounds that their interests have taken a backseat in negotiations.
A Paramount investor, in a complaint filed on April 30 in Delaware Chancery Court, moved to force the company to turn over records related to talks with David Ellison’s Skydance. The Employees’ Retirement System of Rhode Island alleged that Redstone has “conflicting interests” undermining the company’s motives to find a better deal than the one offered by Skydance.The legal move could be a precursor to a lawsuit challenging any potential deal in which common shareholders perceive as enriching Redstone at their expense. It follows several law firms, in the wake of Paramount’s deal talks with Skydance, announcing investigations into whether the agreement would harm minority investors.Paramount declined to comment.Redstone’s control over Paramount’s fate lies in the company’s unorthodox ownership structure. National Amusements, the family’s holding company, owns her stake in Paramount with 77 percent of preferential voting shares but roughly five percent of common stock. This gives National Amusements the power to oversee Paramount’s operations while only maintaining a ten percent equity stake.The sale of National Amusements to Skydance would’ve turned on the completion of a merger between Paramount and the Ellison-led firm. And since she would’ve been paid for the sale of all of the holding company, it set up different incentives for her and most shareholders.
This lawsuit targeted Redstone’s alleged conflict of interest. The pension fund asked for a court order to access board materials about the way in which Ellison’s offer was evaluated, as well as other offers for the company. Paramount denied access to the files and instead offered to produce only the “resolutions regarding the formation and mandate” of the special committee formed to assess the deal, according to the complaint. It’s concerned that the “Paramount Board has failed to prevent Shari Redstone from diverting corporate opportunities or interfering with Paramount’s ability to seek the best deal for Paramount and its other stockholders,” the lawsuit stated.Concerns from minority shareholders are multi-pronged: The structure of the deal could’ve diluted existing investors while forcing them to finance the investment in Skydance; the transaction could’ve undervalued Paramount; and the board was alleged to have failed to seriously consider a reported $26 billion all-cash offer from Apollo Global and Sony Pictures.
To ease concerns of a conflict of interest and assess options, an eight-person committee of independent board members was formed. In a stunning turn, four Paramount directors — Dawn Ostroff, Nicole Seligman, Frederick Terrell and Rob Klieger — disclosed their intent to step down on April 11. This preceded Paramount chief executive Bob Bakish’s formal ouster on April 29.The fund’s lawyers argued that controlling shareholders are “prohibited from exercising corporate power so as to advantage themselves while disadvantaging the corporation.”
Among the central questions the company’s board will have answer in court if it’s sued: Is the sale beneficial for all shareholders or just Redstone, who could be looking at a massive payout depending on the deal. Minority shareholders, if the deal with Skydance went through meanwhile, could’ve been diluted.Law in Delaware, where Paramount is incorporated, largely defers to controlling shareholders’ ability to assess deals. In In Re Synthes Inc. Shareholder Litigation, which dealt with breach of fiduciary duty claims against a controlling shareholder for refusing to consider an offer that would’ve cashed out investors’ stakes in the company, the court found that the law doesn’t “impose on controlling stockholders a duty to engage in self-sacrifice for the benefit of minority shareholders.” The duty to prioritize the best interest of the corporation and its shareholders, it explained, “does not mean that the controller has to subrogate his own interests so that the minority stockholders can get the deal that they want.”But Paramount, if it’s sued, could run into a recent order out of the Delaware Supreme Court that could determine the standard of review in a lawsuit challenging a potential deal. In In re Match Group, Inc. Derivative Litigation, the court found that the test of entire fairness — the most stringent standard of review designed in part to protect minority shareholders — applies in most cases in which a controlling shareholder stands on both sides of a transaction. For the other standard of review to apply, the transaction must be approved by an independent committee of the board and a majority vote of minority stockholders, it found.
Still, an argument could been made that Redstone was looking out for the long term interests of minority shareholders. She and other investors could’ve viewed Skydance as the best partner to shepherd the studio past a tumultuous period in media and entertainment. The David Ellison-led company is coming off of successfully reviving the Top Gun franchise with Paramount and has branched into animated features and video games. Connections to the Ellison family’s tech know-how (via billionaire Oracle mogul Larry Ellison, David’s father) could’ve helped its streaming platform.Also playing a part in the calculus was Redbird, Skydance’s largest shareholder, which is led by chief executive Gerry Cardinale. It’s been active in the media and entertainment space, partnering with Dwayne Johnson and Davy Garcia to buy the remnants of XFL in 2021 and Epic Games to buy a minority stake in SpringHill. Cardinale, who also helped strike a deal to acquire casting software firm Talent Systems in 2022, could’ve helped leverage Paramount’s intellectual property.
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