IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
R.A. FEUER, suing derivatively on )
behalf of CBS CORPORATION, )
)
Plaintiff, )
)
v. ) C.A. No. 12575-CB
)
SUMNER M. REDSTONE, SHARI )
REDSTONE, DAVID ANDELMAN, )
JOSEPH A. CALIFANO, JR., )
WILLIAM S. COHEN, GARY L. )
COUNTRYMAN, CHARLES K. )
GIFFORD, LEONARD GOLDBERG, )
BRUCE S. GORDON, LINDA M. )
GRIEGO, ARNOLD KOPELSON, )
LESLIE MOONVES, DOUG )
MORRIS, and FREDERIC V. )
SALERNO, )
)
Defendants, )
)
and )
)
CBS CORPORATION, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: January 16, 2018
Date Decided: April 19, 2018
Norman M. Monhait and P. Bradford deLeeuw of ROSENTHAL MONHAIT &
GODDESS, P.A., Wilmington, Delaware; Richard D. Greenfield, Marguerite R.
Goodman, and Ilene Freier Brookler of GREENFIELD & GOODMAN, LLC, New
York, New York; Michael D. Donovan of DONOVAN AXLER, LLC, Berwyn, PA;
Counsel for Plaintiff.
Kurt M. Heyman, Patricia L. Enerio, and Melissa N. Donimirski of HEYMAN
ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware; Paul Vizcarrondo,
Jonathan Moses, Lauren Kofke, and Courtney Heavey of WACHTELL, LIPTON,
ROSEN & KATZ, New York, New York; Counsel for Defendants David Andelman,
Joseph A. Califano, Jr., William S. Cohen, Gary L. Countryman, Charles K. Gifford,
Leonard Goldberg, Bruce S. Gordon, Linda M. Griego, Arnold Kopelson, Leslie
Moonves, Doug Morris, and Nominal Defendant CBS Corporation.
A. Thompson Bayliss, Michael A. Barlow, and David A. Seal of ABRAMS &
BAYLISS LLP, Wilmington, Delaware; Michael C. Tu of ORRICK,
HERRINGTON & SUTCLIFFE LLP, Los Angeles, California; Robert N. Kliger of
HUESTON HENNIGAN LLP, Los Angeles, California; Counsel for Defendant
Sumner M. Redstone.
Anne C. Foster, Lisa A. Schmidt, and Kevin M. Gallagher of RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware; Elizabeth B. Burnett and
Laurence A. Schoen of MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND
POPEO, P.C., Boston, Massachusetts; Wynter L. Deagle of MINTZ, LEVIN,
COHN, FERRIS, GLOVSKY AND POPEO, P.C., San Diego, California; Counsel
for Defendant Shari E. Redstone.
Edward B. Micheletti and Bonnie W. David of SKADDEN, ARPS, SLATE,
MEAGHER & FLOM LLP, Wilmington, Delaware; Jay B. Kasner of SKADDEN,
ARPS, SLATE, MEAGHER & FLOM LLP, New York, New York; Counsel for
Defendant Frederic V. Salerno.
BOUCHARD, C.
This stockholder derivative suit alleges that Sumner Redstone, the controlling
stockholder, former Executive Chairman, and now Chairman Emeritus of CBS
Corporation, became incapacitated around the time he turned 91 years old in May
2014 such that he could no longer provide any services of value for the company.
According to plaintiff, CBS’s directors were aware of Redstone’s debilitated state
and inability to make any substantive contribution to the company’s affairs, yet still
approved over $13 million in cash compensation for him over the next few years.
Plaintiff contends that these payments constitute a waste of corporate assets and were
made in bad faith, and that Redstone has been unjustly enriched.
This court has commented many times on the difficulty of pleading a viable
claim for waste against a corporate director under our law. But the particularized
allegations of the complaint here depict an extreme factual scenario—one
sufficiently severe so as to excuse plaintiff from having to make a demand on the
CBS board of directors to press claims concerning certain (but not all) of the
challenged payments, and to permit plaintiff to take discovery so that an evidentiary
record may be developed before the court adjudicates whether those payments were
made in accordance with the directors’ fiduciary duties.
For this reason, as explained in greater detail below, defendants’ motion to
dismiss the complaint under Court of Chancery Rules 23.1 and 12(b)(6) is granted
in part and denied in part.
I. BACKGROUND
Unless noted otherwise, the facts recited in this opinion are based on the
allegations of the Amended Verified Derivative Complaint (the “Amended
Complaint”)1 and documents incorporated therein.2 Any additional facts are either
not subject to reasonable dispute or subject to judicial notice.
A. The Parties
Nominal defendant CBS Corporation (“CBS” or the “Company”) is a
Delaware corporation headquartered in New York, New York. CBS is a mass media
company with operations in entertainment, cable networks, publishing, and local
broadcasting.
Before 2006, CBS was part of the former Viacom Inc., a media conglomerate.
In January 2006, that entity was split into two publicly traded companies: one
retained the Viacom name and the other is CBS. CBS has two classes of stock,
1
Amended Verified Derivative Complaint (Dkt. 46).
2
See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (citations omitted) (“[A]
plaintiff may not reference certain documents outside the complaint and at the same time
prevent the court from considering those documents’ actual terms” in connection with a
motion to dismiss). Plaintiff made a Section 220 demand on March 29, 2016, but the
parties did not reach any understanding as to how the documents could be used if litigation
ensued. Tr. 81-82 (Sept. 15, 2017) (Dkt. 80). Accordingly, I consider the actual terms of
the documents produced in the Section 220 demand and referenced in the Amended
Complaint, but do not consider those documents for the truth of the matters asserted therein
unless such content is corroborative of a matter that is not subject to reasonable dispute or
subject to judicial notice.
2
voting Class A shares and non-voting Class B shares, both of which trade on the
New York Stock Exchange.
Sumner Redstone is the controlling stockholder of CBS. His controlling
interest can be traced to the Sumner Redstone National Amusements Trust, which is
the controlling stockholder of National Amusements, Inc., which in turn owns 79.5%
of the Class A shares of CBS.
On July 20, 2016, when this action was filed, the CBS Board of Directors (the
“Board”) consisted of thirteen directors, all of whom are individual defendants in
this action: David Andelman, Joseph Califano, Jr., William Cohen, Gary
Countryman, Charles Gifford, Leonard Goldberg, Bruce Gordon, Linda Griego,
Arnold Kopelson, Leslie Moonves, Doug Morris, Shari Redstone (Redstone’s
daughter), and Redstone.3 The Amended Complaint also names as a defendant
Frederick Salerno, who was a CBS director from 2007 until May 2016, during which
period the payments challenged here were approved.4
The Amended Complaint, which was filed on January 19, 2017, defines the
period relevant to this action as the period “from approximately the end of May 2014
through the present” (the “Relevant Period”).5 Four members of the Board were
3
Am. Compl. ¶¶ 20-32.
4
Am. Compl. ¶ 33.
5
Am. Compl. ¶ 2 n.1.
3
members of the Compensation Committee during the Relevant Period: Cohen,
Gifford, Gordon, and Morris.6 Three members of the Board were members of the
Nominating and Governance Committee during the Relevant Period: Califano,
Countryman, and Gifford.7 Under its Corporate Governance Guidelines, CBS
requires a majority of its directors to be independent under New York Stock
Exchange listing standards, including all members of the Compensation and
Nominating and Governance Committees.8
The Board delegated responsibilities for certain compensation-related matters
to the Compensation Committee. According to its charter, the “primary purpose” of
the Compensation Committee “is to discharge the responsibilities of the Board
relating to the compensation of the Company’s executive officers and other senior
executives.”9 Throughout the Relevant Period, the Compensation Committee was
responsible for setting the level of Redstone’s compensation as CBS’s Chairman of
the Board.10 This is reflected in the Compensation Committee’s charter, which
provides that the Compensation Committee shall:
Review and approve corporate goals and objectives relevant to the
compensation of the Chairman of the Board and the Chief Executive
6
Am. Compl. ¶¶ 24, 26, 28, 32.
7
Am. Compl. ¶¶ 23, 25, 26.
8
Transmittal Aff. of Jonathan Moses (“Moses Aff.”) Ex. 5 at 3-6 (Dkt. 56).
9
Moses Aff. Ex. 14 at 1.
10
Am. Compl. ¶¶ 5(b), (d), (e), (g), (n), 51-52, 72-73, 82-83.
4
Officer. Together with the Nominating and Governance Committee,
evaluate annually the performances of the Chairman and the Chief
Executive Officer in light of these goals and objectives and report the
results of the evaluations to the non-management directors. The
Committee shall set the compensation levels of the Chairman and the
Chief Executive Officer taking into account the evaluations.11
Plaintiff R.A. Feuer allegedly has been a stockholder of CBS continuously
throughout the Relevant Period.12
B. Overview of Redstone’s Employment and Compensation at CBS
Redstone was Chairman of the board of directors of the former Viacom from
1987 through 2005 and its Chief Executive Officer from 1996 through 2005.13 After
CBS split from the former Viacom, Redstone served as Executive Chairman of CBS
from January 1, 2006 until February 4, 2016.14 Redstone also served during this
period as Executive Chairman of the post-split Viacom. A challenge similar to the
one made here has been made to the cash compensation Redstone received from
Viacom after allegedly becoming incapacitated and unable to provide any services
of value to that company.15
Until his resignation as Executive Chairman in February 2016, Redstone’s
employment at CBS was governed by an agreement dated December 29, 2005,
11
Moses Aff. Ex. 14 at 3 (emphasis added).
12
Am. Compl. ¶ 18.
13
Am. Compl. ¶ 20; Moses Aff. Ex. 3 at 26.
14
Am. Compl. ¶ 20.
15
See Feuer v. Dauman, 2017 WL 4817427, at *1 (Del. Ch. Oct. 25, 2017).
5
which was amended on March 13, 2007 and December 10, 2008 (collectively, the
“Employment Agreement”).16 The Employment Agreement provides that
Redstone’s employment could “be terminated by either party at will.”17
As amended in March 2007, the Employment Agreement provided that
Redstone would receive a base salary of $1 million per year and an annual bonus
based on achievement of performance goals established by the Compensation
Committee.18 The Compensation Committee was required to review Redstone’s
base salary “at least annually” and was permitted to award “merit increases” but was
not permitted to decrease Redstone’s salary, “including as it may be increased from
time to time.”19 In other words, if Redstone’s $1 million base salary as March 2007
subsequently was increased, the Compensation Committee did not have the authority
to decrease it from that higher amount. In 2010, the Compensation Committee raised
Redstone’s base salary to $1.75 million.20
The Employment Agreement also entitled Redstone to receive cash bonuses
in accordance with the Company’s Senior Executive Short-Term Incentive Plan (the
16
Am. Compl. ¶ 16.
17
Am. Compl. ¶ 16.
18
Moses Aff. Ex. 10 ¶ 1; Ex. 9 at Ex. 10.1 ¶¶ 2(a), (c). The base salary is payable “no less
frequently than semi-monthly.” Ex. 9 at Ex. 10.1 ¶ 2(a).
19
Moses Aff. Ex. 10 ¶ 1.
20
Am. Compl. ¶¶ 50, 72; Moses Aff. Ex. 12 at 44.
6
“STIP”).21 The STIP required the Compensation Committee to make a
determination about which senior executives would be eligible for the program and
set performance goals based on financial targets.22
C. Redstone’s Compensation and Performance for 2014
On February 20, 2014, about two months before Redstone would turn 91 years
old,23 the Compensation Committee approved a set of goals for Redstone for 2014
that included being “a sounding-board/counselor to [the] CEO on issues of strategic
importance,” ensuring that “strategic plans are up-to-date” and “being executed on,”
providing “effective communications with [the] Board,” and assisting “the Board in
maintaining best governance practices.”24 Not long after these goals were set,
beginning in the spring of 2014, Redstone suffered from “a precipitous decline in
his physical health” according to a complaint in an elder abuse lawsuit filed on
Redstone’s behalf in 2016 (the “Elder Abuse Complaint”).25 Redstone’s health
problems included a bout with pneumonia and multiple hospitalizations.26
21
Moses Aff. Ex. 9 at Ex. 10.1 ¶ 2(c)(1); Ex. 4 at 44.
22
Moses Aff. Ex. 13 at Art. II §§ 2.1-2.2.
23
Am. Compl. ¶ 36.
24
Moses Aff. Ex. 21 at 2; Am. Compl. ¶ 52.
25
Am. Compl. ¶¶ 13, 95.
26
Am. Compl. ¶¶ 36, 41.
7
On May 22, 2014, Redstone briefly attended CBS’s annual stockholders’
meeting, where he “called the meeting to order and welcomed the directors to the
meeting” after being carried onstage in a chair.27 Redstone was not physically
present for the July 29, 2014 Board meeting; rather, he called in telephonically.28
Redstone’s verbal participation was limited to saying “Hello Everyone,” since, as a
contemporaneous email sent to CBS’s President and CEO Moonves from a fellow
CBS executive explained, “[you] can’t understand him!”29
By early September 2014, two members of the Board, Moonves and
Kopelson, were aware that Redstone had been hospitalized at the end of August with
pneumonia.30 According to the Elder Abuse Complaint, by this point in time,
“Redstone could not eat or drink, it became difficult for Redstone to initiate
communication or articulate more than the most basic verbal responses,” and he
“required around-the-clock nursing care, and any semblance of independence was
lost.”31 Redstone did not physically attend the October 1, 2014 Board meeting, and
only said “Hello Everyone” at the beginning of the session.32 His participation in
27
Am. Compl. ¶ 38.
28
Am. Compl. ¶ 40.
29
Am. Compl. ¶¶ 39-40.
30
Am. Compl. ¶¶ 41-42.
31
Am. Compl. ¶ 95 (internal quotations omitted).
32
Am. Compl. ¶ 44.
8
the Company’s November 5, 2014 quarterly earnings call amounted to Redstone
saying “[t]his is Sumner. Welcome to the CBS Corp. event.”33 Redstone telephoned
into a Board meeting on December 11, 2014, again only saying “Hello Everyone.”34
On January 28, 2015, the Compensation Committee and the Nominating and
Governance Committee held a joint meeting. According to minutes of the joint
meeting, they discussed “the performance of the Executive Chairman . . . with
respect to [his] previously established goals for 2014.”35 The minutes indicate that
the joint committee reviewed “Mr. Redstone’s role as Executive Chairman of the
CBS Board of Directors, noting that during this period, the Company had produced
exceptional results.”36
Later on January 28, the Compensation Committee met and discussed the fact
that CBS had achieved the 2014 goals for payment of bonus compensation under the
STIP.37 According to minutes of the meeting, the Compensation Committee
discussed the “bonus[] to be paid . . . with respect to . . . the Executive Chairman”
and “the future participation by Mr. Redstone in the Company’s bonus program.”38
33
Am. Compl. ¶ 47. A participant in a Viacom earnings call a few days later described
Redstone’s speech as “faint, slurred, barely audible.” Am. Compl. ¶ 48.
34
Am. Compl. ¶ 49.
35
Moses Aff. Ex. 22 at 2; Am. Compl. ¶ 5(a).
36
Moses Aff. Ex. 22 at 2.
37
Am. Compl. ¶¶ 5(b), 51; Moses Aff. Ex. 23 at 1-2.
38
Moses Aff. Ex. 23 at 3.
9
The minutes note that the Compensation Committee was advised by an independent
compensation consultant, Moonves, and CBS’s Chief Human Resources Officer
during this meeting.39 At this January 28, 2015 meeting, the Compensation
Committee approved a $9 million bonus for Redstone for 2014.40
The following day the Board met.41 The meeting minutes state that Gifford,
as chair of the Compensation Committee, apprised the Board of the prior day’s
deliberations and the conclusions of the joint committee.42 All in, CBS paid
Redstone $10.75 million of cash compensation for fiscal year 2014, of which $1.75
million was his base salary and $9 million was a performance bonus.43
D. Redstone’s Compensation and Performance for 2015
In 2015, Redstone did not participate in any conference calls with Wall Street
analysts. He also did not physically attend any Board meetings in 2015,
participating instead by phone.44 The agenda for the January 29, 2015 Board meeting
indicates that Redstone greeted the Board; at the other three Board meetings that
year Redstone did not speak at all.45
39
Moses Aff. Ex. 23 at 1.
40
Am. Compl. ¶¶ 5(b), 55; Moses Aff. Ex. 23 at 3, 11-12; Ex. 24.
41
Am. Compl. ¶ 5(c).
42
Am. Compl. ¶ 5(c).
43
Am. Compl. ¶ 50.
44
Am. Compl. ¶ 56.
45
Am. Compl. ¶¶ 5(i), (j), 56.
10
At a February 19, 2015 meeting, the Compensation Committee addressed
Redstone’s compensation for 2015.46 The meeting minutes indicate that the
Compensation Committee discussed “changes in the goals and objectives from the
prior year and the status of the participation of the Executive Chairman in the
Company’s 2015 bonus program,” as well as Redstone’s annual base salary.47 The
Compensation Committee ultimately did not establish goals for Redstone in 2015,
determined that he would not receive a bonus that year, and kept his base salary at
$1.75 million.48 The Board later decided to re-nominate Redstone to be a director.49
In the spring of 2015, Redstone’s failing health became a subject of tabloid
intrigue. On May 20, 2015, The Hollywood Reporter published an article entitled
“Sumner Redstone’s Two Girlfriends Throwing Him 92nd Birthday ‘Passion to
Party’ Bash Amid Viacom Intrigue.” It reported that Redstone’s “health is said to
have declined considerably since his last in-person interview, which [The Hollywood
Reporter] published in January 2014 . . . Now sources say his speech is all but
unintelligible.”50 Leah Bishop, Redstone’s estate attorney, acknowledged in the
46
Am. Compl. ¶¶ 5(d), (e).
47
Am. Compl. ¶¶ 5(d), (e), 54, 57; Moses Aff. Ex. 25 at 5.
48
Am. Compl. ¶¶ 5(d), (e), (g), 72; Moses Aff. Ex. 25 at 5.
49
Am. Compl. ¶ 60.
50
Am. Compl. ¶ 59.
11
article that Redstone’s speech was “severely impaired” and that he “no longer can
be understood on the phone.”51
On May 31, Vanity Fair published an article entitled “Who Controls Sumner
Redstone?” One person who saw Redstone in person stated in the article: “Sumner
(a) cannot speak and (b) hasn’t had a meal since Labor Day other than tubes. I think
there’s a big charade going on that Sumner’s doing fine . . . I think he’s pretty out of
it . . . He can’t speak, and I don’t know how much he knows what’s going on.”52 The
article also reported that a person visiting with Robert Evans, one of Redstone’s
closest friends, said “[h]e [i.e., Redstone] looks like he’s dead,” to which Evans
responded, “[w]ell, you should see him in person—he looks even worse.”53
In October 2015, two CBS directors, Goldberg and Kopelson, each met
separately with Redstone at his home. During these meetings, Redstone was
“especially vacant and absent,” and “appeared out of touch, remote and non-
responsive to the people around him.”54 Scrutiny of Redstone’s health further
intensified after Manuela Herzer, Redstone’s former caretaker, filed a petition in
51
Am. Compl. ¶ 59.
52
Am. Compl. ¶ 62.
53
Am. Compl. ¶ 62.
54
Am. Compl. ¶¶ 66-67.
12
California state court on November 24, 2015 claiming that Redstone did not have
the capacity to revoke her status as his healthcare agent (the “Herzer Action”).55
On December 2, 2015, Moonves received an email from a fellow director
stating: “The recent legal actions and continuing questions regarding Sumner
Redstone’s health create an environment of uncertainty that could distract investors
from focusing on the operational performance of the company. We want our
shareholders to be totally confident that CBS is being managed and governed at the
level they expect.”56
According to the Amended Complaint, the Compensation Committee decided
at its January 27, 2016 meeting that Redstone “would not receive a bonus for fiscal
year 2015” but “approved the continued contractual salary compensation payable
to” Redstone of $1.75 million for 2016.57 The only reference to Redstone’s
compensation in the minutes of that meeting, by contrast, states simply that “the
Committee noted that the Executive Chairman would not be receiving a bonus for
55
Am. Compl. ¶¶ 7-8.
56
Am. Compl. ¶ 70. The Amended Complaint states that the email was sent from “Bruce
Goldberg,” which appears to be a mistake, as that name is a combination of the names of
two different CBS directors: Leonard Goldberg and Bruce Gordon. I infer that the email
came from one of these two directors.
57
Am. Compl. ¶¶ 72-73.
13
2015.”58 Two days later, Redstone was present telephonically for the Board meeting
but did not speak at all.59
E. Redstone Becomes Chairman Emeritus of CBS
In early February 2016, the California court in the Herzer Action ordered an
examination of Redstone by a geriatric psychiatrist.60 According to an article in The
New York Times, the geriatric psychiatrist “found that [Redstone] lacked mental
capacity.”61
On February 2, 2016, Redstone tendered his resignation as Executive
Chairman of CBS.62 The next day, on February 3, the Board held a special meeting
and discussed Redstone’s resignation.63 Redstone attended this meeting by
telephone but did not speak.64 The Board accepted his resignation and unanimously
appointed Redstone as Chairman Emeritus.65 According to a Board resolution
adopted on February 3, 2016, the appointment was made “in view of [Redstone’s]
many years of leadership as Executive Chairman and his significant historical
58
Moses Aff. Ex. 26 at 3-4.
59
Am. Compl. ¶ 76.
60
Am. Compl. ¶ 77.
61
Am. Compl. ¶ 77.
62
Am. Compl. ¶ 5(n).
63
Am. Compl. ¶¶ 5(m), 79.
64
Am. Compl. ¶ 79.
65
Am. Compl. ¶¶ 5(n), 80; Moses Aff. Ex. 27 at 1-3.
14
contributions to the Company.”66 Minutes of a February 3, 2016 Board meeting
reflect that Redstone “indicated that he would continue to be available for
consultation and to attend Board meetings.”67
On February 18, 2016, the Compensation Committee considered Redstone’s
compensation as Chairman Emeritus.68 Minutes of the meeting state that the
Compensation Committee took “into account his reduction in responsibilities
following his resignation as the Company’s Executive Chairman on February 2, and
his continuing employment with the Company as an at-will employee.”69 The
minutes also state that the Compensation Committee discussed Redstone’s
“significant historical contributions to the Company during his previous executive
positions with the Company, including his status as a renowned leader in the
entertainment industry and his leadership on the Company’s Board of Directors, and
his continuing availability for advice and consultation and continuing participation
on the CBS Board of Directors as Chairman Emeritus.”70 The Compensation
66
Moses Aff. Ex. 27 at 3.
67
Moses Aff. Ex. 27 at 1.
68
Am. Compl. ¶ 5(n).
69
Am. Compl. ¶ 5(n).
70
Am. Compl. ¶ 5(n).
15
Committee approved annual compensation of $1 million for Redstone in his role as
Chairman Emeritus.71 In this role, Redstone was not eligible for a bonus.72
On April 15, 2016, the Company disclosed in a proxy statement that the Board
had nominated Redstone for re-election as a director.73
On May 9, 2016, the Herzer Action was dismissed when the California court
determined that Redstone “was sufficiently competent to terminate Ms. Herzer as
his caretaker.”74 The California court reasoned that “Redstone is presumed to have
capacity and Herzer’s expert did not establish that he lacked capacity to change his
agent.”75 The court also emphasized that it was “not making any ultimate finding
related to Redstone’s mental capacity.”76
On May 20, 2016, Philippe Dauman (the CEO and a director of Viacom) and
George Abrams (a Viacom director) were informed that Redstone had removed them
as trustees of the Sumner Redstone National Amusements Trust and as directors of
National Amusements, Inc., the entities through which Redstone maintains his
controlling interest in CBS.77 In response, Dauman and Abrams filed a lawsuit in
71
Am. Compl. ¶ 83.
72
Moses Aff. Ex. 19.
73
Am. Compl. ¶ 81.
74
Am. Compl. ¶¶ 8, 84; Moses Aff. Ex. 17 at 1.
75
Moses Aff. Ex. 17 at 17.
76
Id. at 11 (emphasis in original).
77
Am. Compl. ¶¶ 89-90.
16
Massachusetts state court, seeking to be reinstated.78 Relevant to this action,
Dauman and Abrams alleged in their complaint that Redstone:
suffers from profound physical and mental illness. In particular, he is
afflicted with a “subcortical neurological disorder” that can be
characterized by dementia, impaired cognition, a slowness of mental
processing, a loss of memory, apathy, and depression. Because of his
diminished physical and mental health, Mr. Redstone is unable to
initiate or participate in meaningful conversation, including
communications concerning his business or personal affairs. In court
proceedings earlier this year, lawyers representing Mr. Redstone appear
to have agreed [that] Mr. Redstone is subject to mental impairment and
stipulated that he is susceptible to undue influence.79
Redstone did not attend CBS’s annual stockholders meeting on May 26,
2016.80 On June 14, 2016, Redstone was taken by car to visit CBS, where he met
with Moonves for approximately ten minutes but did not leave the car.81
On October 25, 2016, the Elder Abuse Complaint was filed on Redstone’s
behalf against Herzer and other defendants, alleging elder abuse, breach of fiduciary
duty, constructive fraud, and intentional infliction of emotional distress.82 Among
other things, the Elder Abuse Complaint describes Redstone’s extreme decline in
health since the spring of 2014, his inability to communicate orally, his complete
78
Am. Compl. ¶ 91.
79
Am. Compl. ¶ 91.
80
Am. Compl. ¶ 86.
81
Am. Compl. ¶ 93.
82
Am. Compl. Ex. B.
17
reliance on nursing care, and a mental state where he was “easily duped, confused
and manipulated.”83
The Board did not nominate Redstone for re-election as a director at CBS’s
May 19, 2017 annual meeting.84 It appears that Redstone continues to hold the title
of Chairman Emeritus,85 but it is unclear from the record how much compensation
he has received from the Company since the Compensation Committee set his salary
for that position in February 2016 at $1 million annually.
II. PROCEDURAL HISTORY
On March 29, 2016, plaintiff made a Section 220 demand on CBS.86 On July
20, 2016, plaintiff filed this action derivatively on behalf of CBS. Plaintiff did not
make a pre-suit demand on the Board, alleging that demand would be futile.
On January 19, 2017, after defendants filed a motion to dismiss the original
complaint, plaintiff filed the Amended Complaint, which asserts two claims. Count
I asserts a claim for breach of fiduciary duty for waste of corporate assets against all
the individual defendants, except Redstone, with respect to the compensation he
83
Am. Compl. ¶ 95.
84
Moses Aff. Ex. 35 at 3.
85
Sumner M. Redstone, CBS CORP., https://www.cbscorporation.com/people/sumner-m-
redstone/ (last visited Apr. 18, 2018).
86
Am. Compl. ¶ 2 & Ex. A.
18
received from CBS during the Relevant Period. Count II asserts that Redstone was
unjustly enriched by the receipt of this compensation.
On February 2, 2017, defendants filed a motion to dismiss the Amended
Complaint under Court of Chancery Rules 23.1 and 12(b)(6) for failure to plead
demand futility and failure to state a claim upon which relief may be granted,
respectively. After initial briefing, the court heard oral argument on the motion to
dismiss on September 15, 2017. On December 22, 2017, the court requested
supplemental briefing concerning who (i.e., the Compensation Committee or the
Board) was empowered to terminate the Employment Agreement, and the legal
implications of the answer to that question on the pending motion. Briefing on this
issue was completed on January 16, 2018.
III. ANALYSIS
Plaintiff challenges three categories of cash payments that CBS made to
Redstone during the Relevant Period, namely the payment of (1) a $9 million bonus
for 2014, (2) his annual base salary of $1.75 million as Executive Chairman from
late May 2014 until his resignation from this position in February 2016, and (3) his
annual base salary of $1 million as Chairman Emeritus beginning in February
2016.87 These categories are depicted in the chart below:
87
Am. Compl. ¶¶ 50, 72, 83.
19
is futile when the directors upon whom the demand would be made “are incapable
of making an impartial decision regarding such litigation.”90
Because plaintiff did not make a demand on the Board before initiating this
action, he must allege with particularity that his failure to make such a demand
should be excused.91 In this analysis, I accept as true plaintiff’s particularized
allegations of fact and draw all reasonable inferences that logically flow from those
allegations in plaintiff’s favor.
Under Delaware law, depending on the factual scenario, there are two
different tests for determining whether demand may be excused: the Aronson test
and the Rales test.92 The test articulated in Aronson v. Lewis93 applies when “a
decision of the board of directors is being challenged in the derivative suit.”94 The
test set forth in Rales v. Blasband, on the other hand, governs when “the board that
would be considering the demand did not make a business decision which is being
90
Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993).
91
Ct. Ch. R. 23.1.
92
Both tests boil down to the same inquiry: whether “the derivative plaintiff has shown
some good reason to doubt that the board will exercise its discretion impartially and in
good faith.” In re infoUSA, Inc. S’holders Litig., 953 A.2d 963, 986 (Del. Ch. 2007).
93
473 A.2d 805.
94
Rales, 634 A.2d at 933 (emphasis in original).
21
challenged in the derivative suit,” such as instances “where directors are sued
derivatively because they have failed to do something.”95
“A decision approved by at least half of the corporation’s directors who would
consider a demand, even when acting by committee, can be imputed to the entire
board and thus triggers the Aronson test. . . . By contrast, the Rales test applies
where a derivative plaintiff challenges a decision approved by a board committee
consisting of less than half of the directors who would have considered a demand,
had one been made.”96 Under either test, plaintiff “must impugn the ability of at
least half the directors in office when it initiated [its] action . . . to have considered
a demand impartially.”97
B. Demand Futility is Governed by the Rales Test
Plaintiff’s breach of fiduciary duty and unjust enrichment claims are governed
by Rales. The Amended Complaint and the materials it incorporates by reference
show that Redstone’s compensation during the Relevant Period was determined by
the Employment Agreement and the four-member Compensation Committee. More
specifically, Redstone’s $1.75 million base salary for 2014 and 2015 was set by the
terms of the Employment Agreement entered into before the Relevant Period and
95
Id. at 933-34 & n.9.
96
Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 56-57 (Del. Ch.
2015) (citations omitted).
97
Id. at 57 (citation omitted).
22
could only be reduced by terminating the Employment Agreement, which did not
occur until Redstone resigned in February 2016. Thus, any challenge to these
payments is based on inaction and subject to Rales.98 Challenges to Redstone’s $9
million bonus in 2014 and the setting of his $1 million annual salary in 2016 as
Chairman Emeritus also are analyzed under Rales because they were decisions made
by the four-member Compensation Committee, which comprised a minority of the
full thirteen-member Board.
Plaintiff argues that the Aronson test should apply because a majority of the
directors reviewed Redstone’s performance and “the full CBS board was aware that
Sumner was incapacitated and essentially went along with the decision purportedly
made by” the majority of directors regarding Redstone’s compensation.99 I disagree
for two reasons. First, reviewing performance is distinct from setting specific
amounts to be paid. It is indisputable that the four-member Compensation
Committee, which had the fully-delegated authority to set the level of Redstone’s
compensation under its charter, made the decisions establishing the amount of
98
In re Goldman Sachs Grp., Inc. S’holder Litig., 2011 WL 4826104, at *6 (Del. Ch. Oct.
12, 2011).
99
Pl.’s Answering Br. 24, 26 (emphasis added) (Dkt. 65). According to plaintiff, “two
committees (comprised of 6 directors), along with defendant Moonves” made the
compensation decisions. Id. at 26. This assertion is incorrect because the Compensation
Committee’s charter clearly states that the Compensation Committee is vested with the full
authority to “set the compensation level[] of the Chairman.” Moses Aff. Ex. 14 at 3.
23
Redstone’s bonus and his salary as Chairman Emeritus.100 Plaintiff does not dispute
this point.101 Second, the fact that the Board and the Nominating and Governance
Committee were aware of the Compensation Committee’s considerations in setting
Redstone’s compensation does not mean that the Nominating and Governance
Committee affirmatively made the decision to pay Redstone those amounts.102
C. Demand is Partially Excused under the Rales Test
Under Rales, plaintiff’s claims should be dismissed under Rule 23.1 unless
the particularized allegations of the Amended Complaint “create a reasonable doubt
that, as of the time the complaint is filed, the board of directors could have properly
exercised its independent and disinterested business judgment in responding to a
demand.”103 The demand futility analysis “is conducted on a claim-by-claim basis”
under Delaware law.104 “Independence means that a director’s decision is based on
100
See Calma v. Templeton, 2015 WL 1951930, at *6 (Del. Ch. Apr. 30, 2015) (holding
that Rales applied where a dully authorized compensation committee, and not the entire
board, approved a restricted stock grant).
101
Tr. 51 (Sept. 15, 2017) (“Q: Do you agree that the four members of the compensation
committee had plenary authority to make each of the decisions that you’re challenging
. . . ? A: I think that’s supported by the organic documents that were produced in response
to the 220 and, in particular, the compensation committee charter.”).
See Baiera, 119 A.3d at 57 (“The inference of full board approval . . . amounts to little
102
more than speculation.”).
103
634 A.2d at 934.
104
Cambridge Ret. Sys. v. Bosnjak, 2014 WL 2930869, at *4 (Del. Ch. June 26, 2014)
(citing Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 977
n.48 (Del. Ch. 2003), aff’d, 845 A.2d 1040 (Del. 2004); Needham v. Cruver, 1993 WL
179336, at *3 (Del. Ch. May 12, 1993)).
24
the corporate merits of the subject before the board rather than extraneous
considerations or influences.”105 “A director is considered interested where he or
she will receive a personal financial benefit from a transaction that is not equally
shared by the stockholders. Directorial interest also exists where a corporate
decision will have a materially detrimental impact on a director, but not on the
corporation and the stockholders.”106 Accordingly, a director can be rendered
“interested” with respect to whether litigation should be brought when the director
would face a substantial threat of personal liability.107
Here, it bears emphasis that plaintiff has not argued that any of the directors
were not independent.108 Plaintiff instead contends only that the Board was not
“disinterested” because its members face a substantial threat of personal liability on
the theory that the decision to continue paying Redstone throughout the Relevant
Period “simply cannot be a decision made in good faith and constitutes waste.”109
Consistent with the approach of analyzing demand futility claim-by-claim, I address
below the alleged threat of personal liability to the directors arising from plaintiff’s
105
Aronson, 473 A.2d at 816.
106
Rales, 634 A.2d at 936 (citation omitted).
107
Kohls v. Duthie, 791 A.2d 772, 782 (Del. Ch. 2000).
108
See Tr. 52 (Sept. 15, 2017); Emerald Partners v. Berlin, 726 A.2d 1215, 1224 (Del.
1999) (“Issues not briefed are deemed waived.”).
109
Pl.’s Answering Br. 31.
25
claims related to three challenged categories of cash payments to Redstone: (1) the
$9 million bonus paid for 2014, (2) the Executive Chairman salary ($1.75 million
annually) paid from late May 2014 until Redstone resigned from that position in
February 2016, and (3) the Chairman Emeritus salary ($1 million annually)
beginning in February 2016. I begin with a brief discussion of the legal standards
for bad faith and waste.
1. Legal Standards for Bad Faith and Waste
As general matter, “bad faith will be found if a fiduciary intentionally fails to
act in the face of a known duty to act, demonstrating a conscious disregard for his
duties,”110 or if “the decision under attack is so far beyond the bounds of reasonable
judgment that it seems essentially inexplicable on any other ground other than bad
faith.”111 “Good faith is presumed and the party challenging director action bears
the burden of rebutting that presumption.”112 “The proper inquiry is not whether a
director neglected to do all that [he] should have . . . but rather whether the director
knowingly and completely failed to undertake [his] responsibilities.”113
110
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009) (citation and internal
quotations omitted).
111
Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963, 981 (Del. Ch. 2000) (citation
and internal quotations omitted).
112
McGowan v. Ferro, 859 A.2d 1012, 1036 (Del. Ch. 2004) (citation omitted).
113
DiRienzo v. Lichtenstein, 2013 WL 5503034, at *13 (Del. Ch. Sept. 30, 2013) (citation
and internal quotations omitted).
26
“The Delaware Supreme Court has implicitly held that committing waste is
an act of bad faith.”114 In order to make out a waste claim, a plaintiff needs to show
that the corporation has entered into a transaction in which it received consideration
“so inadequate in value that no person of ordinary, sound business judgment would
deem it worth what the corporation has paid.”115 In the context of employee
compensation, courts afford great deference to a board’s decision,116 since “[t]he
decision as to how much compensation is appropriate . . . is a core function of a
board of directors”117 and “[c]ourts are ill-fitted to attempt to weigh the ‘adequacy’
of consideration.”118
As the above formulations demonstrate, the “standards for corporate waste
and bad faith by the board are similar” in that, to prevail on either theory, “the
plaintiff must overcome the general presumption of good faith by showing that the
board’s decision was so egregious or irrational that it could not have been based on
114
In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 749 (Del. Ch. 2005) (citing White
v. Panic, 783 A.2d 543, 553-55 (Del. 2001)).
115
Grobow v. Perot, 539 A.2d 180, 189 (Del. 1988) (quoting Saxe v. Brady, 184 A.2d 602,
610 (Del. Ch. 1962)), overruled on other grounds by Brehm, 746 A.2d 244.
116
See Brehm, 746 A.2d at 263 (“[A] board’s decision on executive compensation is
entitled to great deference.”).
117
In re Goldman Sachs, 2011 WL 4826104, at *14.
118
Brehm, 746 A.2d at 263 (citation omitted).
27
a valid assessment of the corporation’s best interests.”119 In short, it takes an extreme
factual scenario for a plaintiff to state a claim for bad faith or waste.
2. The 2014 Bonus
“The Delaware General Corporation Law (DGCL) expressly empowers a
board of directors to appoint committees and to delegate to them a broad range of
responsibilities, which may include setting executive compensation.”120 When a
committee, rather than the board of directors, has plenary power to fix an executive’s
compensation, then it is the committee that legally determines the amounts to be paid
to that executive.121
At CBS, the responsibility for setting Redstone’s compensation as Executive
Chairman of the Company during the Relevant Period validly and solely laid with
the four-member Compensation Committee. As mentioned above, the
Compensation Committee’s charter provides that its “primary purpose . . . is to
discharge the responsibilities of the Board relating to the compensation of the
Company’s executive officers and other senior executives” and expressly states that
119
White, 783 A.2d at 554 n.36 (citation omitted).
120
In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 54 (Del. 2006) (citing 8 Del. C. §
141(c)).
121
Id.
28
the Compensation Committee “shall set the compensation level[] of the
Chairman.”122
At the beginning of 2014, before Redstone allegedly became incapacitated in
late May 2014, the Compensation Committee decided to include Redstone in the
bonus pool for 2014 and set the 2014 performance criteria that CBS would have to
achieve in order for Redstone to be entitled to a bonus.123 After the Company
reportedly achieved its performance goals, the Compensation Committee awarded
Redstone a $9 million bonus.124
Relevant to the demand futility analysis, the decision to award this $9 million
bonus was an exercise of discretion made solely by the four members of the
Compensation Committee. This means that, putting the members of the
Compensation Committee and Redstone aside, eight members of the thirteen-
member Board did not participate in making the decision to award the $9 million
bonus and thus would not face a substantial threat of personal liability for that
decision. Accordingly, because these eight directors constitute a majority of the
Board and their independence is not questioned, demand on the Board is not excused
122
Moses Aff. Ex. 14 at 1, 3.
123
Moses Aff. Ex. 20 at 10.
124
Am. Compl. ¶¶ 5(b), 55; Moses Aff. Ex. 23 at 3, 11-12; Ex. 24.
29
with respect to plaintiff’s breach of fiduciary duty claim challenging Redstone’s
2014 bonus.
3. The Executive Chairman Salary Payments
Unlike the 2014 bonus, payment of Redstone’s $1.75 million annual salary as
Executive Chairman from the end of May 2014, when he allegedly became
incapacitated, through early February 2016, when he resigned as Executive
Chairman, was not the product of an affirmative decision of the Compensation
Committee. Rather, the salary compensation Redstone received during this period
was set by default in the Employment Agreement that was entered into before the
Relevant Period. As discussed above, under the Employment Agreement, the
Compensation Committee could only increase, and not decrease, Redstone’s salary,
which was set at $1.75 million annually in 2010. Thus, the only way for CBS to
reduce or eliminate this annual salary obligation would have been for the Company
to terminate the Employment Agreement, which could be “terminated by either party
at will upon receipt of notice to the other party.”125
The parties disagree whether the Board alone, or also the Compensation
Committee, was empowered to terminate the Employment Agreement. Plaintiff
argues that the Board alone had this authority. Defendants, on the other hand, argue
that the Compensation Committee was empowered to terminate the Employment
125
Moses Aff. Ex. 9 at Ex. 10.1 ¶ 9.
30
Agreement “without further Board approval” pursuant to the authority delegated to
it under its charter, but they concede that the “Board could also have terminated the
agreement pursuant to its inherent ability to manage and direct the affairs of the
Company.”126
I need not decide whether the Board alone had the authority to terminate the
Employment Agreement because, as defendants acknowledge, the Board retained
the concurrent power to do so.127 Thus, it would not be appropriate to limit my
inquiry solely to the members of the Compensation Committee when considering
which directors potentially face a substantial threat of personal liability for failing to
terminate, or failing to at least consider terminating, the Employment Agreement.
Put differently, given the full Board’s conceded inherent ability to terminate the
Employment Agreement, all of its members could face a sufficiently substantial
threat of liability if it would have been wasteful or an act of bad faith not to at least
consider doing so.
A central tenant of our corporate law is that the “business and affairs of every
corporation . . . shall be managed by or under the direction of a board of directors.”128
126
Defs.’ Suppl. Br. 1 (Dkt. 86).
127
Indeed, before the court asked for supplemental briefing concerning whether the
Compensation Committee or the Board was empowered to terminate the Employment
Agreement, it was defendants’ position that this was “a decision rightly left to the judgment
of the Board.” Defs.’ Opening Br. 43 (Dkt. 55).
128
8 Del. C. § 141(a).
31
To be sure, directors may—and must as a practical matter for a large public
corporation—delegate day-to-day decision-making to officers.129 Critically though,
these “delegations ‘must be monitored in order to ensure their quality and
integrity.’”130
Here, as one would expect for a corporate executive receiving millions of
dollars of compensation, Redstone’s Employment Agreement expressly required
him to “be actively engaged” in performing certain specified duties:
Without limiting the foregoing, you [Redstone] will be actively
engaged in, and have responsibility, working with the Board and the
President and [CEO] of CBS, [] for (a) the overall leadership and
strategic direction of CBS, (b) providing guidance and support to senior
management of CBS, (c) the coordination of the activities of the Board
and (d) communication with shareholders and other important
constituencies.131
Contrary to the terms of the Employment Agreement quoted above, the Amended
Complaint alleges numerous facts demonstrating that it should have been abundantly
clear to the members of the Board—from their attendance at Board meetings, press
publicity, and other interactions with the Company—that far from being “actively
129
8 Del. C. § 142.
130
1 STEPHEN A. RADIN, THE BUSINESS JUDGMENT RULE 444 (6th ed. 2009) (quoting
William B. Chandler III, The Legal Framework for Analyzing Audit Committee Oversight,
CORP. GOVERNANCE ADVISOR 18 (Jan./Feb. 2000)).
131
Moses Aff. Ex. 9 at Ex. 10.1 ¶ 1.
32
engaged” in the CBS’s affairs, Redstone was providing no meaningful services to
the Company beginning at some point in the latter part of 2014 or in 2015:
On May 22, 2014, after being carried onstage in a chair, Redstone
only briefly attended the annual stockholders meeting to call it to
order.132
Beginning with the July 29, 2014 Board meeting, Redstone, who
usually attended Board meetings in person, never physically attended
another Board meeting.133
Redstone’s participation in the July 29, 2014 Board meeting, the
October 1, 2014 Board meeting, the November 5, 2014 quarterly
earnings call, the December 11, 2014 Board meeting, and the
January 29, 2015 Board meeting consisted of little more than
introducing himself. He made no substantive contribution.134
Redstone did not participate in any conference calls with Wall Street
analysts in 2015, and he did not speak at all at any of the other Board
meetings held in 2015—on March 31, May 21, October 2, and
December 10.135
On May 20, 2015, The Hollywood Reporter published an article
reporting that Redstone was severely impaired.136
On May 31, 2015, Vanity Fair published a similar article.137
On November 24, 2015 the Herzer Action was filed.138
132
Am. Compl. ¶ 38.
133
Am. Compl. ¶¶ 40, 44, 49, 56.
134
Am. Compl. ¶¶ 40, 44, 47, 49, 56.
135
Am. Compl. ¶ 56.
136
Am. Compl. ¶ 59.
137
Am. Compl. ¶ 62.
138
Am. Compl. ¶¶ 7-8.
33
The Amended Complaint also sets forth individualized allegations as to
several CBS directors—namely Moonves, Kopelson, and Goldberg—indicating that
they knew about Redstone’s inability to contribute to CBS in any meaningful sense:
On July 14, 2014, Moonves received an email from a CBS executive
alerting him that Redstone’s speech was incomprehensible.139
By early September 2014, Moonves and Kopelson (as well as
several CBS executives) knew that Redstone had been hospitalized
at the end of August 2014 with pneumonia.140
On November 3, 2014, Kopelson sent Moonves an email stating:
“Hard to tell if he is worse. Barely communicates and then is totally
unintelligible. Had coughing fit Saturday night and Sydney took
him into the hospital just to check him out and then home.”141
In October 2015, Goldberg and Kopelson met with Redstone at his
home, during which Redstone was “especially vacant and absent”
and “appeared out of touch, remote and non-responsive to the people
around him.”142
On December 2, 2015, Moonves received an email from a fellow
CBS director expressing concern about distractions caused by legal
actions and questions regarding Redstone’s health.143
139
Am. Compl. ¶ 39.
140
Am. Compl. ¶¶ 41-42.
141
Am. Compl. ¶ 45.
142
Am. Compl. ¶¶ 66-67.
143
Am. Compl. ¶ 70.
34
One logically would expect, and thus it would reasonable to infer, that these reports
and observations about Redstone’s condition would have been reported back to the
other members of the Board.144
Viewing these and the other alleged facts in the light most favorable to
plaintiff, as the court must at this stage of the case, the Amended Complaint
describes with particularity a situation where the members of the Board face a
substantial threat of liability for non-exculpated claims for waste and/or bad faith
because: (1) Redstone’s contributions to the Company after May 2014 were so
negligible and inadequate in value that no person of ordinary, sound business
judgment would deem them worth the millions of dollars in salary that the Company
was paying him; and (2) the failure to inquire into Redstone’s health or to at least
consider terminating his Employment Agreement while the Company paid him
millions of dollars over a twenty-month period is reflective of a conscious disregard
of the directors’ fiduciary duties.
To be clear, the Board certainly did not need to terminate Redstone’s
employment immediately upon him falling ill. Redstone has been a leading and
144
See J. Travis Laster & John Mark Zeberkiewicz, The Rights and Duties of Blockholder
Directors, 70 BUS. LAW. 33, 45 (2014) (citing Gantler v. Stephens, 965 A.2d 695 (Del.
2009) (“The failure by an officer or director to provide information regarding the
corporation to the board, or a group of directors who direct that information not be
furnished to one or more directors, may constitute a breach of fiduciary duty on the part of
the officers or directors responsible for the failure.”).
35
prominent figure in the entertainment industry for decades, before and after CBS
became an independent public company. He was entitled to be treated in a dignified
and respectful manner upon falling ill, as one would hope the Company would treat
any of its employees. According to the allegations of the Amended Complaint,
however, the Company made no effort to reckon with the financial consequences of
Redstone’s severe incapacity for approximately twenty months. If plaintiff’s
allegations are true, the Board’s extended period of inaction is inexplicable.
Focusing on the decline in Redstone’s compensation “from $11.76 million in
2013 to $1 million in 2016,” defendants argue that “[t]here is simply no logical
inference . . . that Mr. Redstone’s capabilities and health issues were ignored.”145
Perhaps discovery will bear out that these concerns actually were addressed as
defendants imply, but the record currently before the court does not. To the contrary,
there is no indication in plaintiff’s pleading, or in the many documents defendants
chose to place in the record from the Section 220 production to plaintiff, that
Redstone’s mental or physical capacity or his ability to perform any substantive tasks
was discussed in any meaningful sense during the Relevant Period.146 Glaringly
145
Defs.’ Reply Br. 30 (Dkt. 68).
146
For example, CBS’s Board and Compensation Committee minutes in the latter part of
2014 and throughout 2015 contain no discussion of Redstone’s mental or physical capacity.
See Moses Aff. Exs. 20, 22-34. Defendants argue that “there is no requirement under
Delaware law that board minutes adopt any level of particularity.” Defs.’ Reply Br. 30.
True enough, but at this stage of the litigation all reasonable inferences must be drawn in
favor of plaintiff.
36
absent, for example, is any memorandum or other writing candidly assessing
Redstone’s capabilities and the pros and cons of terminating his Employment
Agreement.147
In sum, based on the particularized allegations of the Amended Complaint and
the procedural posture of the pending motion, the court has good reason to doubt the
ability of the Company’s directors to investigate impartially claims against
themselves concerning the salary payments made to Redstone as Executive
Chairman after late May 2014. Accordingly, demand is excused with respect to that
part of Count I of the Amended Complaint.
4. The Chairman Emeritus Salary Payments
On February 3, 2016, the day after Redstone resigned as Executive Chairman,
the Board appointed him as Chairman Emeritus.148 About two weeks later, on
February 18, the Compensation Committee decided to pay Redstone an annual salary
147
Pointing to the Company’s proxy statement, defendants assert that if Redstone’s
employment had been terminated due to disability, the vesting of approximately $3.2
million in equity awards would be accelerated. Defs.’ Opening Br. 13; Defs.’ Reply Br.
21; Tr. 25 (Sept. 15, 2017). That certainly would be a valid consideration for the Board to
take into account in deciding upon a course of action. The problem at this procedural stage,
however, is that there is no indication in the record (including the documents that
defendants submitted with their papers) that this factor actually was considered in real time.
Tr. 25-26 (Sept. 15, 2017).
148
Am. Compl. ¶¶ 20, 80; Moses Aff. Ex. 27.
37
of $1 million for “his continuing employment with the Company as an at-will
employee following [his] resignation.”149
The setting of Redstone’s compensation as Chairman Emeritus was a
Compensation Committee decision, like the setting of the bonus payment in 2014.
Nevertheless, it would be unreasonable in my view to expect that the other members
of the Board would be able to consider a demand regarding this decision
impartially.150 Practically speaking, it would be against the personal interests of
those directors to be critical of a decision to pay Redstone an annual salary of $1
million given that plaintiff’s claims regarding the base salary payments made to
Redstone as Executive Chairman after May 2014 (before he became Chairman
Emeritus in February 2016) will proceed against them.
Put differently, how could a director realistically be expected to criticize a
subsequent decision to pay a $1 million annual salary when that director is already
being sued for permitting prior annual salary payments to have been made to that
same, allegedly incompetent person? This concern about impartiality is particularly
149
Am. Compl. ¶¶ 5(n) (quoting minutes of Feb. 18, 2016 Compensation Committee
meeting (Moses Aff. Ex. 28 at 5)), 83.
150
One might question the non-Compensation Committee directors’ ability to be impartial
with respect to the 2014 bonus payment for the same reason, but that one-time decision
was qualitatively different. It is not contested that the Company met its performance goals
for 2014 and that Redstone was able to perform his duties for approximately five months
in 2014, which by itself may be sufficient consideration for the bonus. See Tr. 47, 65 (Sept.
15, 2017).
38
acute here, where there is no indication from the allegations of the Amended
Complaint that Redstone’s mental or physical capacity had improved in early 2016
relative to the latter half of 2014 through 2015. Accordingly, demand is excused
with respect to the claims regarding Redstone’s compensation as Chairman
Emeritus.
5. Demand is Excused for Part of the Unjust Enrichment Claim
Count II of the Amended Complaint asserts that Redstone was unjustly
enriched through his receipt of cash compensation during the Relevant Period. This
claim parallels plaintiff’s breach of fiduciary duty claim in Count I, turning on the
same challenged payments.151
For the reasons explained above, plaintiff has pled no particularized facts
excusing his failure to make a demand on the Board with respect to the 2014 bonus
payment. This holds true whether the theory of recovery for that payment is based
on an alleged breach of fiduciary duty or unjust enrichment. The Board, however,
could not impartially consider unjust enrichment claims with respect to the
Executive Chairman and Chairman Emeritus base salary payments, since, as
explained above, twelve of its thirteen members face a sufficiently substantial threat
151
See Seinfeld v. Slager, 2012 WL 2501105, at *16 (Del. Ch. June 29, 2012) (dismissing
unjust enrichment claims that were “derivative of” other claims, including waste claims,
that were dismissed for failure to demonstrate that demand on the board was excused).
39
of personal liability for breach of fiduciary duty by permitting those payments to be
made. Accordingly, demand with respect to that aspect of Count II is excused.
D. The Amended Complaint States Claims for Breach of Fiduciary
Duty and Unjust Enrichment
In this section, I address whether plaintiff has stated a claim for relief with
respect to the claims for which demand is excused, i.e., the breach of fiduciary duty
and unjust enrichment claims concerning the Executive Chairman and Chairman
Emeritus salaries paid to Redstone after late May 2014. The standards governing a
motion to dismiss for failure to state a claim for relief under Court of Chancery Rule
12(b)(6) are well settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and ([iv]) dismissal is inappropriate
unless the “plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.”152
1. The Executive Chairman Salary Payments
“The standard for pleading demand futility under Rule 23.1 is more stringent
than the standard under Rule 12(b)(6), and a complaint that survives a motion to
dismiss pursuant to Rule 23.1 will also survive a 12(b)(6) motion to dismiss,
assuming that it otherwise contains sufficient facts to state a cognizable claim.” 153
152
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (citations and internal
quotations omitted).
153
Citigroup, 964 A.2d at 139 (citation and internal quotations omitted).
40
Accordingly, for the same reasons stated in the demand futility analysis, plaintiff has
stated a claim with respect to the payment of the Executive Chairman salary from
the latter half of 2014 until Redstone’s resignation from that position in February
2016. To briefly reiterate, plaintiff sufficiently has alleged well-pled facts
demonstrating that Redstone’s contributions over that time period were so
disproportionately small that continued payment of the Executive Chairman salary
($1.75 million annually) was a decision beyond the range of what any reasonable
person might be willing to trade for such “services.”
2. The Chairman Emeritus Salary Payments
Plaintiff also has stated a claim for breach of fiduciary duty with respect to
the Chairman Emeritus salary payments. The Company explicitly stated that it
appointed Redstone as Chairman Emeritus and decided to pay him an annual salary
of $1 million with the expectation that Redstone would continue to contribute to
CBS. In particular, the minutes of the Compensation Committee’s February 18,
2016 meeting state that it set Redstone’s salary in consideration of his “continuing
employment with the Company as an at-will employee,” and that Redstone’s
“continuing availability for advice and consultation and continuing participation on
the CBS Board of Directors as Chairman Emeritus” was a factor in making this
41
decision.154 But, as discussed above, plaintiff has alleged facts that the Board knew
that Redstone would not be able to contribute anything of value to CBS by this time,
and had known so for a while.
The Compensation Committee minutes reflect that Redstone’s “significant
historical contributions to the Company” also was discussed when determining the
Chairman Emeritus salary.155 The Company similarly recited in a proxy statement
that “[t]he Board believes that that appointment of Mr. Redstone as Chairman
Emeritus is appropriate, in view of his many years of leadership as Executive
Chairman of the Board and his significant historical contributions to the
Company.”156 Relying on these references, defendants defend the Chairman
Emeritus salary awarded to Redstone based on this court’s dismissal of waste claims
involving the payment of compensation for past services rendered.
In each of those cases, however, the payments made were one-time events,
typically as part of a severance or retirement arrangement.157 Here, by contrast, the
154
Am. Compl. ¶ 5(n) (quoting minutes of Feb. 18, 2016 Compensation Committee
meeting (Moses Aff. Ex. 28 at 5)); see also Moses Aff. Ex. 28 at Ex. K (approving the $1
million Chairman Emeritus salary “with respect to the continuing at-will employment
arrangement with Mr. Sumner M. Redstone”).
155
Am. Compl. ¶ 5(n) (quoting minutes of Feb. 18, 2016 Compensation Committee
meeting (Moses Aff. Ex. 28 at 5)).
156
Moses Aff. Ex. 3 at 8.
157
See Seinfeld, 2012 WL 2501105, at *7 (dismissing waste claim with respect to a $1.8
million retirement bonus paid for past services rendered); Zucker v. Andreessen, 2012 WL
2366448, at *10 (Del. Ch. June 21, 2012) (dismissing waste claim with respect to a
42
Board did not purport to make only a single payment to Redstone for past
contributions as part of a plan of separation. Rather, the Company chose to continue
to pay him an annual salary in “exchange” for services it allegedly knew that he
could not render. The decision to award an apparently ongoing salary of this size
under the circumstances was “sufficiently unusual to require the court to refer to
evidence before making an adjudication of [its] validity and consistency with
fiduciary duty.”158 Accordingly, this aspect of Count I also states a claim for relief.
3. Unjust Enrichment
Unjust enrichment is “the unjust retention of a benefit to the loss of another,
or the retention of money or property of another against the fundamental principles
of justice or equity and good conscience.”159 “The elements of unjust enrichment
are: (1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment
and impoverishment, (4) the absence of justification, and (5) the absence of a remedy
provided by law.”160 “When the complaint alleges an express, enforceable contract
severance package); Zupnick v. Goizueta, 698 A.2d 384, 388-89 (Del. Ch. 1997)
(dismissing waste claim with respect to a stock option award granted for past services
rendered where the options became exercisable immediately upon the executive’s
retirement and the executive was eligible to retire when the options were granted).
158
Lewis v. Vogelstein, 699 A.2d 327, 339 (Del. Ch. 1997) (Allen, C.).
159
Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988) (citation
and internal quotations omitted).
160
Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010) (citation omitted).
43
that controls the parties’ relationship, however, a claim for unjust enrichment will
be dismissed.”161
Because Redstone’s base salary compensation as Executive Chairman was
governed by the Employment Agreement, plaintiff has not stated a claim for unjust
enrichment with respect to those payments. It is not alleged, however, that Redstone
ever signed a new employment contract in connection with his appointment as
Chairman Emeritus after his resignation as Executive Chairman.162 With respect to
these payments, Redstone only implicitly challenges the fourth element, i.e., the
absence of justification:
To the extent the Complaint seeks to challenge the compensation paid
to Mr. Redstone following his resignation as Executive Chairman and
appointment as Chairman Emeritus, it nonetheless fails to state a claim
because . . . there was no underlying wrongful conduct by the Individual
Defendants in awarding that compensation to Mr. Redstone.163
I disagree. For the reasons explained above, plaintiff has adequately pleaded that
the Chairman Emeritus payments made to Redstone were wasteful and thus lacked
justification. Accordingly, at this stage of the case, the court cannot conclude that
161
Bakerman v. Sidney Frank Importing Co., Inc., 2006 WL 3927242, at *18 (Del. Ch.
Oct. 10, 2006) (citation omitted).
162
Redstone’s Joinder & Mot. to Dismiss ¶ 4 n.5 (Dkt. 58).
163
Id.
44
there is no reasonably conceivable set of circumstances under which Redstone was
unjustly enriched by these particular payments.164
IV. CONCLUSION
For the reasons stated above, defendants’ motion to dismiss is GRANTED in
part and DENIED in part. This action will proceed in the manner set forth above.
The parties are directed to confer and to submit an implementing order within five
business days of this decision.
IT IS SO ORDERED.
164
See Ryan v. Gifford, 918 A.2d 341, 361 (Del. Ch. 2007) (quoting Schock v. Nash, 732
A.2d 217, 232-33 (Del. 1999)) (“A defendant may be liable ‘even when the defendant
retaining the benefit is not a wrongdoer’ and ‘even though he may have received [it]
honestly in the first instance.’”).
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R.A. Feuer v. Sumner M. Redstone
Combined Opinion