State of Rhode Island Office of the General Treasurer, on behalf of the Employees’ Retirement System of Rhode Island v. Paramount Global, C.A. No. 2024-0457-SEM (Del. Ch. Jan. 29, 2025) (Laster, V.C.)

In this letter opinion, Vice Chancellor Laster (the “Court”) conducted a de novo review from a stockholder’s exception to the magistrate’s report and held that a stockholder investigating the possibility of disloyal steering by a controller sufficiently alleges a proper purpose under Section 220. Based on the specific allegations made, the stockholder was therefore entitled to the books and records sought.

This case involved whether a Paramount Global stockholder, proved by a preponderance of the evidence that there was a credible basis to suspect Shari Redstone, the controller of Paramount Global (“Paramount”), steered bidders away from purchasing Paramount and instead channeled bidders toward purchasing her controlling-stockholder company, National Amusements, Inc. (“NAI”), thereby breaching her duty of loyalty to Paramount and minority stockholders. Paramount owns Paramount Pictures (the “Studio”), CBS Television Network, streaming services, and other cable networks and is structured with two classes of publicly traded common stock: Class A having voting rights and Class B without voting rights. Ms. Redstone’s company, NAI, controls Paramount Global through its supermajority ownership of Class A shares.

The stockholder alleged the following. In late 2023, Ms. Redstone was soliciting bids to sell NAI, with multiple media outlets and newspapers chronicling the events surrounding the sale process. It was reported that Ms. Redstone was seeking a swift deal with private equity firms due to NAI’s looming $37.5 million interest payment due in early 2024; however, NAI’s debt and preferred stock made it a less attractive option for most private equity firms. Skydance Media expressed an interest in purchasing Paramount but preferred specific company assets such as the Studio. Multiple other suitors expressed interest and made offers to acquire the Studio, and in some instances the entire
Company, and which generally presented favorable premiums. Simultaneously, Ms. Redstone was in exclusive discussions with Skydance’s acquisition of NAI and its controlling stake in Paramount.

Plaintiff served its demand for books and records pursuant to 8 Del. C. § 220 on April 5, 2024 (the “Demand”), stating that Ms. Redstone and NAI had usurped Paramount’s corporate opportunities by channeling potential buyers towards the purchase of NAI rather than a transaction with Paramount. This led to both directors and officers departing the Company. Paramount responded to the Demand on April 19, 2024, and mostly rejected it as lacking a proper purpose and exceeding a proper scope. Plaintiff filed suit eleven days later and a trial was held on a paper record on July 24, 2024, and the magistrate ruled in Paramount’s favor. However, several key events occurred between the Demand and trial.

After the Demand, Apollo Global Management and Sony submitted a joint offer letter for Paramount. Skydance then enhanced its offer for Paramount with a 26% premium for non-voting Class B shares, which would mean $300 million less for NAI and Ms. Redstone. Minutes before the meeting when independent directors of Paramount were set to formally consider the Paramount deal with Skydance, Ms. Redstone abruptly changed her mind. The Los Angeles Times, relying on anonymous sources, reported that the lower consideration for Ms. Redstone and Skydance’s refusal to indemnify her against stockholder lawsuits caused her to torpedo the Skydance-Paramount deal. One month after Ms. Redstone backed out of the Skydance-Paramount deal, she signed off on Skydance acquiring her company, NAI, for $2.4 billion after NAI consented to a go-shop for Paramount. The second part of the deal was a Skydance-Paramount merger, with the post-merger company committing to indemnify Ms. Redstone.

The Demand stated that Ms. Redstone and NAI breached their duty of loyalty by steering bidders away from Paramount-level transactions and towards NAI-level transactions. However, Paramount argued that the Demand failed to identify a “conceptually viable” form of wrongdoing. The Court adamantly disagreed and reiterated that an investigating stockholder is not required in all cases to establish that the wrongdoing being investigated in actionable. Vice Chancellor Laster elaborated that Delaware Courts have emphasized that demands under Section 220 are investigative tools used to evaluate whether litigation is necessary. Further, a demand is not required to articulate a specific legal theory; it only must explain why a stockholder has a credible basis to suspect wrongdoing, which the Plaintiff did by describing situations giving rise to potential breaches of the fiduciary duty of loyalty.

Paramount then contended that Plaintiff failed to carry its evidentiary burden of proving by a preponderance of the evidence a credible basis to infer wrongdoing because of utilizing post-Demand evidence, news articles with anonymous sources, and hearsay. The Court reaffirmed that the credible basis standard is the lowest possible burden of proof, and a plaintiff may meet it by making a “credible showing, through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing…[a]nd the plaintiff may rely on hearsay, as long as it is sufficiently reliable.” Due to significant material events that occurred after the Demand was made, Plaintiff relied on those facts at trial and in its pre-trial brief. Paramount challenged the post-Demand evidence and argued Plaintiff was limited to the evidence known to it at the time of the Demand. Vice Chancellor Laster disagreed and held that: (1) as the material events unfolded, Plaintiff quickly raised them during litigation; (2) evidence of post-Demand developments was about Paramount’s own conduct, thus alleviating any risk of surprise or prejudice; and (3) Paramount openly relied on such post-Demand events in their own pre-trial brief negating any challenge they could raise.

Plaintiff relied on news reports to support a credible basis to infer corporate wrongdoing. Paramount argued this was both unreliable hearsay and that news articles relying on confidential sources are inherently unreliable. The Court viewed whether to credit hearsay evidence as reliable as a question of fact, not a question of law. In the Court’s analysis, most of the forty-seven articles submitted by the parties were from “reputable publications like the Wall Street Journal, the New York Times, the Financial Times, and Bloomberg” with none reflecting any indication of unreliability or bias. The Court explained the use of confidential sources in article publications is a “foundational aspect of the freedom of the press and the protections afforded under the First Amendment.” Further, the credentials of many of the authors and the strong policies of the editorial boards all supported the reliability of the articles. Ultimately, the use of anonymous sources did not undermine credibility of the news articles. The Court held that a credible basis existed to suspect Ms. Redstone responded to the market interest in the Company by diverting bidders to a NAI-transaction to the detriment of Plaintiff. The Court also stated that the record supported the inference that Ms. Redstone could extract more value from a sale of NAI than from a Paramount sale, and that Ms. Redstone could have steered the sales process to achieve this. Plaintiff was entitled to obtain books and records necessary to fulfill its proper purpose of investigating corporate wrongdoing in connection with the sale of NAI.

On March 24, 2025, the Court of Chancery subsequently certified two issues for interlocutory appeal (link). Those issues were “(1) the court’s finding that the Stockholder properly relied in this case on articles that post-dated the Demand or the filing of the enforcement action, and (2) the court’s finding that the Stockholder properly relied in this case on articles citing confidential sources." 

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