(Reuters) – CBS Corp filed a lawsuit on Monday to reduce the voting power of controlling shareholder National Amusements Inc, the movie theater company owned by Sumner and Shari Redstone, in an act of defiance aimed at thwarting the Redstones’ plan to merge CBS with Viacom Inc.
CBS said in its lawsuit it is seeking to prevent the Redstones from ousting any directors or changing the company’s bylaws before its full board meets on Thursday to consider issuing a dividend that would curb National Amusements’ voting power.
If the dividend is approved, National Amusements’ voting rights in CBS would shrink to about 17 percent from about 80 percent, more in line with National Amusements’ economic stake in CBS of 10.3 percent, according to CBS’s legal complaint, filed with the Court of Chancery in Delaware.
Legal experts said the lawsuit was a rare example of a company attempting to use a “nuclear option” to free itself from its controlling shareholder, setting the stage for a high-stakes legal battle over the future of one of the biggest U.S. entertainment companies.
“(CBS is) at least sending the signal and creating evidence they had the best interests of everyone in mind, and not (Shari Redstone),” said Brian Quinn, a professor at the Boston College Law School, referring to Shari Redstone.
National Amusements denied it had any plan to oust CBS’s board.
“National Amusements had absolutely no intention of replacing the CBS board or forcing a deal that was not supported by both companies,” it said in a statement. “National Amusements’ conduct throughout supports this, and reflects its commitment to a well-governed process.”
Shari Redstone was surprised by the lawsuit, particularly since the two parties had informally agreed on a stock exchange ratio for combining CBS and Viacom, according to two people familiar with the situation.
In its statement, National Amusements said it believes CBS filed its lawsuit because National Amusements had raised specific concerns about incidents of bullying and intimidation by one CBS director, dating back to 2016.
National Amusements brought these concerns up again with CBS last week, according to one of the sources familiar with the situation.
CBS declined to comment on the bullying accusation.
CBS shares rose 3 percent to $54.07 on Monday on hopes of a better deal for the company. Viacom shares dropped 7 percent to $28.05, as investors fretted over the company’s prospects as a standalone company.
CBS’s lawsuit comes after its merger negotiations with smaller peer Viacom, which National Amusements also controls, failed to produce a deal. The talks, that started in February, had hit an impasse over disagreements about price as well as the leadership of the combined company, sources have said.
It was the second attempt in three years by Shari Redstone to merge CBS and Viacom, after her father separated them 12 years ago.
National Amusements believes a deal is needed for the two media companies to gain scale and compete with growing internet powers Netflix Inc and Amazon.com Inc pushing deeper into the media business.
In its lawsuit, CBS cited the battle for control of publisher Hollinger International Inc, which like CBS had a controlling shareholder, Conrad Black, who wanted to sell control of the company over opposition from the board.
A Delaware court ruled in 2004 that the Hollinger board could dilute Black’s voting control in response to what it considered to be the damage he had done to the company.
“Ms. Redstone has acted to undermine the (CBS) management team, including, without board authority, talking to potential CEO replacements, deriding the chief operating officer and threatening to change the board,” the lawsuit said.
CBS sees good reason to worry about Redstone replacing directors. In 2016, National Amusements waged a legal battle and took back control of Viacom after ousting its CEO Philippe Dauman.
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In a sign that CBS is keeping the door open to negotiations with Redstone, CBS said in its lawsuit that if it is granted an injunction against Redstone, it would agree not to issue the dividend once it approves it, pending further orders from the court.
CBS said in its lawsuit that Shari Redstone had taken actions over the past two years that have led the special committee of the board considering the merger to conclude that she presents a “significant threat” to the company and its stockholders.
Its proposed dividend would not dilute the economic interests of any CBS stockholder, but would help the company to operate as an independent, non-controlled company and fully evaluate strategic alternatives, the company said.
CBS’s lawsuit also said Redstone rejected an approach by an unnamed potential acquirer of CBS, citing that as another reason her interests are not aligned with other CBS shareholders.
The undisclosed party is U.S. wireless carrier Verizon Communications Inc, according to two sources familiar with the situation who requested anonymity to disclose confidential details. Verizon declined to comment.
CBS’s lawsuit has been assigned to Delaware Chancellor Andre Bouchard, who will consider the request for a temporary restraining order on Wednesday.
Reporting by Jessica Toonkel in New York and Tom Hals in Wilmington, Delaware; Additional reporting by Arjun Panchadar and Supantha Mukherjee in Bengaluru and Greg Roumeliotis in New York; Editing by Patrick Graham and Bill Rigby