Corporate Governance

Limiting the Duty of Loyalty: Pfeffer v. Redstone (Disclosing the Identity of the Special Committee)

By J. Robert Brown

We are discussing Pfeffer v. Redstone, a recent Delaware Supreme Court decision examining the law suit challenging Viacom's spin off of Blockbuster.

The case involved a number of disclosures alleged to be false.  One of them in particular caught our attention.  Plaintiff alleged that Viacom committed a disclosure violation by revealing the existence of a special committee of the board without revealing the identity of the directors.  According to the prospecus:

• On June 17, 2004 a committee of Viacom’s board of directors delegated with authority to approve the final form of the divestiture of Blockbuster from Viacom approved the divestiture by means of the split-off contemplated by this Prospectus-Offer to Exchange. The committee also approved Viacom’s entry into the various separation agreements described on the section entitled “Agreements Between Viacom and Blockbuster and Other Related Party transactions.”

The quote did not suggest that the committee was independent but it did provide that a rump group of the board would make the final determinations with respect to the divestiture.  The Court had little patience with the argument that Viacom should have revealed the membership of the committee.  The entire analysis of the issue consisted of these two paragraphs:

• Here, the Vice Chancellor determined, a single reference to the Viacom special committee did not require further elaboration because the Prospectus did not suggest that the committee had decided anything more significant than what the full Board could have decided. The omission was not materially misleading because “[t]here is no indication that the committee was independent of management or NAI, nor does the language in the Prospectus induce stockholders to rely on the special committee’s decision to validate the transaction.” The Prospectus fully disclosed that NAI was the controlling stockholder of Viacom and that Redstone was the controlling stockholder of NAI as well as Viacom’s chairman and CEO.

In other words, it was enough that the prospectus disclosed that Redstone essentially controlled Viacom.  But the existence of control by NAI and Redstone still does not mean that the identity of the particular directors making these decisions was unimportant to investors.  In fact, some of the directors on the Viacom board also served on the Blockbuster board.  As the prospectus noted in another section:

• Two members of Viacom’s board of directors (one of whom is also a Viacom executive officer) and two additional Viacom executive officers, also serve as members of Blockbuster’s eight member board of directors that approved certain of the transactions contemplated in connection with this exchange offer based upon the recommendation of the Blockbuster special committee. Viacom’s board of directors, Blockbuster’s board of directors and the Blockbuster special committee were aware of these interests and considered them, among other matters, in approving this exchange offer and the transactions contemplated in connection with this exchange offer.

In other words, the committee set up by Viacom could have consisted of directors who also were directors of Blockbuster.  Essentially, they were potentially on both sides of the transaction.  Would shareholders want to know this?  Probably.  In any event, it's facile to suggest that by disclosing Redstone's control of Viacom, the membership of the Viacom committee determining the final terms became irrelevant.

Full post as published by The Race to the Bottom on February 24, 2009 (boomark / email).