Pfeffer v. Redstone, C.A. No. 15, 2008 (Del. Jan. 23, 2009)

In this en banc decision, the Supreme Court affirmed the Court of Chancery’s dismissal for failure to state a claim of the plaintiff’s class action complaint challenging two transactions that resulted in Viacom, Inc. (now CBS Corp.) divesting itself of its controlling interest in Blockbuster.

In the first of the two transactions at issue, Blockbuster issued a $5.00 Special Dividend per share. In the second transaction, Viacom offered to its stockholders an Exchange Offer whereby each tendering stockholder would receive 5.15 shares of Blockbuster stock in  exchange for each share of Viacom tendered. In support of the Exchange Offer, Viacom issued a Prospectus outlining its relevant terms. The plaintiff brought several claims challenging these transactions, each of which was dismissed by the Court of Chancery. On appeal, the plaintiff pursued only her claims that Viacom’s board of directors had breached its fiduciary of loyalty, care and disclosure, and that National Amusements, Inc. (NAI), Viacom’s controlling stockholder, had breached its fiduciary duty of loyalty as a majority stockholder of Viacom. In its review de novo of the Court of Chancery’s decision, the Supreme Court addressed each of these issues in turn.

The Court first affirmed the Court of Chancery’s holding that the Viacom directors did not breach their fiduciary duties in structuring the divestiture. In so doing, the Court reiterated that a controlling stockholder’s decision to make a noncoercive tender or exchange offer to acquire shares from minority holders is not subject to entire fairness review, and that a corporation’s decision to make a noncoercive self-tender is also not subject to entire fairness review. Accordingly, because the Viacom stockholders’ participation in the transactions was voluntary, the transactions were not subject to entire fairness review, and the plaintiff had failed to state a claim that Viacom’s board had breached its fiduciary duties in structuring the divestiture.

The Court then turned to plaintiff’s disclosure allegations. Under Delaware law, a breach of the duty of disclosure occurs where a fiduciary makes a materially false statement, omits a material fact, or makes a partial disclosure that is materially misleading. A fact is material if there is a “substantial likelihood” that a reasonable person would consider it important in deciding how to vote. The disclosure of a non-material fact may trigger an obligation to disclose other non-material facts if the initial disclosure creates a materially misleading impression. The plaintiff alleged that the Prospectus (1) had misstated Blockbuster’s operational cash flow because Blockbuster had later restated that information; (2) omitted information regarding an analysis of Blockbuster’s cash flow that had been created several months prior to the Special Dividend and Exchange Offer and that indicated that Blockbuster faced significant cash flow problems; (3) omitted information regarding how the Exchange Offer’s exchange ratio was determined; and (4) failed to disclose the composition of the special committee that had recommended to Viacom’s full board that it pursue the Exchange Offer. In affirming the Court of Chancery’s dismissal of each of these disclosure claims, the Supreme Court found that (1) any misstatement of Blockbuster’s operational cash flow was not material; (2) the Complaint failed to plead adequately that Viacom’s board knew or reasonably should have known of the cash flow analysis, as it was not the type of information “routinely available” to the Viacom directors, and thus the board could not have been obligated to disclose the analysis’s conclusions; (3) pricing methodology is not material where, as here, there is no duty to offer a fair price and there were no partial disclosures suggesting the price was fair and (4) because there was no indication that the committee was independent or that stockholders should place reliance on the committee’s recommendation, the single disclosure of the existence of the committee without disclosing its composition was not incomplete.

Finally, the Court affirmed the dismissal of Plaintiff’s claim that the Viacom directors and NAI breached their duty of loyalty, finding (1) that the Exchange Offer was not an interested transaction because no stockholder received a benefit that was unavailable to the other stockholders, and (2) that because NAI did not construct or direct the Exchange Offer or the Special Dividend and did not receive a benefit from either transaction not shared by other stockholders, NAI did not breach its duties as a controlling stockholder.

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