Court Opinion

ID: 4214646
Source: CourtListenerOpinion
Date Created: 2017-10-25 16:07:01.729162+00
Date Added: 2024-06-11T14:15:02.694219
License: Public Domain

COURT OF CHANCERY
                                      OF THE
                                STATE OF DELAWARE

ANDRE G. BOUCHARD                                            Leonard L. Williams Justice Center
   CHANCELLOR                                                 500 N. King Street, Suite 11400
                                                             Wilmington, Delaware 19801-3734

                           Date Submitted: August 1, 2017
                           Date Decided: October 25, 2017

 P. Bradford deLeeuw, Esquire             Jon E. Abramczyk, Esquire
 Rosenthal, Monhait & Goddess, P.A.       Morris, Nichols, Arsht & Tunnell LLP
 919 North Market Street, Suite 1401      1201 North Market Street
 Wilmington, DE 19801                     Wilmington, DE 19801

 Anne C. Foster, Esquire                  Edward B. Micheletti, Esquire
 Richards, Layton & Finger, P.A.          Skadden, Arps, Slate, Meagher & Flom LLP
 920 North King Street                    One Rodney Square
 Wilmington, DE 19801                     Wilmington, DE 19801

 David A. Seal, Esquire
 Abrams & Bayliss LLP
 20 Montchanin Road, Suite 200
 Wilmington, DE 19807

       RE:      R.A. Feuer v. Philippe P. Dauman, et al.
                Civil Action No. 12579-CB

 Dear Counsel:

       This letter constitutes the Court’s decision on defendants’ motion to dismiss

 claims for breach of fiduciary duty, waste, and unjust enrichment. Plaintiff brought

 these claims derivatively on behalf of Viacom Inc. challenging the company’s

 payment of approximately $13 million of compensation to its founder and then-

 Chairman Sumner Redstone from July 2014 to May 2016, when Viacom’s directors

 allegedly knew that he was incapacitated and incapable of doing his job. For the
R.A. Feuer v. Philippe P. Dauman, et al.
C.A. No. 12579-CB
October 25, 2017

reasons explained below, the motion is granted and the complaint will be dismissed

with prejudice as to the named plaintiff because the claims asserted in the complaint

were released as part of a settlement agreement Viacom entered in August 2016.

I.       Background

         The facts recited below are drawn from the Verified Derivative Complaint

filed on July 20, 2016, and certain facts of which I may take judicial notice because

they are not subject to reasonable dispute.1 For the purpose of deciding this motion,

I assume the truth of all well-pled facts and draw all reasonable inferences in favor

of plaintiff.2

         A.       The Parties

         Nominal defendant Viacom, Inc. is a Delaware corporation headquartered in

New York that owns various global media brands. Plaintiff alleges he has been a

stockholder of Viacom at all relevant times.

         Defendant Sumner Redstone served as Viacom’s Executive Chairman from

January 1, 2006 until February 4, 2016, when he became Chairman Emeritus.

Sumner founded Viacom and has been its controlling stockholder since 1986. He is

the settlor of the Sumner M. Redstone National Amusements Trust, which owns 80%

1
    D.R.E. 201.
2
    Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002).

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C.A. No. 12579-CB
October 25, 2017

of National Amusements, Inc. (“NAI”), which in turns owns (directly and indirectly

through certain subsidiaries) 79.5% of Viacom’s Class A voting shares. Defendant

Shari Redstone is a Viacom director and Sumner’s daughter. She controls the

remaining 20% of NAI.3

      The complaint names as defendants nine other individuals in addition to

Sumner and Shari who were members of the Viacom board at the times relevant to

the allegations in the complaint: George S. Abrams, Philippe P. Dauman, Thomas

E. Dooley, Blythe J. McGarvie, Deborah Norville, Charles E. Phillips, Jr., Frederic

V. Salerno, William Schwartz, and Christiana Falcone Sorrell. Dauman had been

Viacom’s President and Chief Executive Officer since September 2006. He and

Abrams also were directors of NAI until May 20, 2016.

      B.     Compensation Paid to Sumner from 2014 to 2016

      During the times relevant to this action, Sumner was party to an employment

agreement with Viacom dated December 29, 2005, which was amended on

September 26, 2006.4 As amended, the employment agreement set his base salary

3
  This decision refers to Sumner Redstone and Shari Redstone by their first names for
clarity. No disrespect is intended.
4
 Cumings Aff. Ex. C: Employment Agreement with Sumner M. Redstone, Dec. 29, 2005,
§§ 2(a), (c); Ex. D: Amendment to Employment Agreement with Sumner M. Redstone,
Sept. 26, 2006, § 1 (Dkt. 23).

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C.A. No. 12579-CB
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at $1 million per year and entitled him to receive bonus compensation. The

employment agreement could be terminated at will by either party.5 Effective

January 1, 2014, Sumner’s base salary was increased to $2 million.

         In May 2014, Sumner turned 91. He was hospitalized several times that year

for pneumonia and, according to a lawsuit filed against him by a former caretaker,

suffered brain damage that “severely compromised Sumner’s ability to swallow and

to articulate speech.”6 Beginning in July 2014, Sumner allegedly ceased providing

any services of value to Viacom. Sumner was physically absent from a series of

board meetings through the summer and fall of 2014, by which point the directors

allegedly knew about his incapacitation. Viacom paid Sumner $13.2 million in total

compensation for the 2014 fiscal year, which ended on September 30, 2014,

including approximately $2 million in salary and a $10 million bonus.7

         In 2015, Sumner did not participate in any conference calls with analysts and

did not physically attend any Viacom board meetings or the annual stockholder

meeting. According to sources quoted in a May 31, 2015 Vanity Fair article entitled

5
 Cumings Aff. Ex. C: Employment Agreement with Sumner M. Redstone, Dec. 29, 2005,
§ 9 (Dkt. 23).
6
    Compl. ¶ 28.
7
 The remaining $1.2 million mostly was attributable to a change in the value of Sumner’s
pension. See Cumings Aff. Ex. E: Viacom Proxy Statement, Jan. 23, 2015, at 39 (Dkt.
23).

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Who Controls Sumner Redstone?, “Sumner (a) cannot speak and (b) hasn’t had a

meal since Labor Day other than tubes.”8 The article quoted an individual who

allegedly told one of Sumner’s closest friends that Sumner “looks like he’s dead,”

to which the friend replied: “Well, you should see him in person—he looks even

worse.”9      Viacom paid Sumner $2 million in salary for the 2015 fiscal year but

eliminated his cash bonus.

         In February 2016, with rumors circulating regarding his condition, Sumner

resigned as Viacom’s Chairman and was designated Chairman Emeritus.

Nevertheless, on March 14, 2016, Sumner was reelected as a director after the rest

of the board recommended his reelection to the stockholders. Sumner continued to

receive a salary until May 2016, when payments to him were stopped without public

explanation. According to Viacom’s public filings, Sumner received $1.3 million

in salary during the 2016 fiscal year.10

         C.        Turmoil in the Viacom Boardroom Leads to a Settlement

         On May 20, 2016, Dauman and Abrams were notified that Sumner

purportedly had removed them as trustees of his trust, as directors of NAI, and as

8
    Compl. ¶ 47.
9
    Compl. ¶ 48.
10
     See Cumings Aff. Ex. M: Viacom Proxy Statement, Dec. 16, 2016, at 23 (Dkt. 23).

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managers of NAI’s subsidiaries. These actions prompted Dauman and Abrams to

file a lawsuit in Massachusetts seeking to be reinstated to their positions, and

prompted Sumner to file a lawsuit in California affirming their removals. In their

Massachusetts complaint, Dauman and Abrams alleged that Sumner “suffers from

profound physical and mental illness” and that he is afflicted with a “subcortical

neurological disorder.”11

         On June 16, 2016, NAI issued a written consent purporting to amend

Viacom’s by-laws to permit vacancies on its board to be filled by Viacom’s

stockholders, to remove five of the defendants (Dauman, Abrams, McGarvie,

Schwartz, and Salerno) from the Viacom board, and to fill the resulting vacancies

with new directors. That same day, two lawsuits were filed in this Court under 8
Del. C. § 225 seeking to determine the proper composition of Viacom’s board in

light of the written consent submitted by NAI. In one action (C.A. No. 12472-CB),

NAI sought a declaration that the consent was valid. In the other action (C.A. No.

12473-CB), Salerno accused Shari of exercising undue influence over Sumner and

sought to invalidate the consent.    On June 24, 2016, these two actions were

consolidated (hereafter, the “225 Action”).

11
     Compl. ¶ 79.

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         On August 18, 2016, the 225 Action, the Massachusetts action, and the

California action were settled pursuant to a Confidential Settlement and Release

Agreement (the “Settlement Agreement”) that was signed by each of the individual

defendants in this action individually and in their capacity as directors of Viacom.12

The Settlement Agreement contains a general release of Viacom’s claims against its

directors (the “Release”) up to its Effective Date, which is defined in the agreement’s

preamble as August 18, 2016:

         Each of Viacom, its subsidiaries, affiliates under its control,
         predecessors, successors and assigns, and the current and former
         directors, officers, employees, agents, attorneys and representatives of
         each of them (collectively the “Viacom Parties”), hereby releases and
         forever discharges from all liability . . . [Sumner and Sheri
         Redstone], . . . Dauman, Abrams, Salerno, McGarvie, Schwartz,
         Phillips, Sorrell, Norville, Dooley, and the agents, attorneys,
         representatives, heirs, executors and assigns of each of them . . . from
         any and all Claims (defined below) which such Viacom Party ever
         had, now has or hereafter can, shall or may have, for, upon or by
         reason of any matter, cause or thing whatsoever from the beginning
         of the world to the Effective Date of this Settlement, including, but
         not limited to, any and all Claims arising out of or relating to conduct
         alleged in, or the claims asserted in or that could have been asserted in,
         the Massachusetts Action, the California Action, or the Delaware
         Actions.13

12
     See Cumings Aff. Ex. N: Form 8-K, Aug. 23, 2016, Ex. 10 (Dkt. 23).
13
     Id. § 7(a) (emphasis added).

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II.      Procedural History and the Parties’ Contentions

         On July 20, 2016, after obtaining documents from Viacom in response to a

demand to inspect books and records under 8 Del. C. § 220, plaintiff filed this action

asserting two claims derivatively on behalf of Viacom. Count I asserts a claim for

breach of fiduciary duty and waste of corporate assets against all the individual

defendants except Sumner for “approving excessive compensation packages to him

in 2014 and 2015, when they knew that he had provided no services of value to the

Company after July 2014, at the latest.”14 Count II asserts that Sumner was unjustly

enriched by receiving this compensation.

         On October 20, 2016, each of the defendants moved to dismiss the complaint

under Court of Chancery Rules 12(b)(6) and 23.1 for failure to state a claim for relief

and to plead demand futility. Addressing the merits, defendants emphasize that the

lion’s share of the challenged compensation came in the form of a $10 million bonus

that was paid to Sumner for Viacom’s 2014 fiscal year, which ended September 30,

2014, and that plaintiff does not allege that Sumner failed to perform services during

most of that fiscal year. As to the payments made for fiscal years 2015 and 2016,

which totaled approximately $3.3 million, defendants assert that Sumner’s

14
     Compl. ¶ 100.

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“continued retention was deemed appropriate in light of his historical role as

Viacom’s founder and for his many years of prior service.”15

         On July 18, 2017, after a protracted briefing schedule, a hearing was held on

defendants’ motion to dismiss. Supplemental submissions were provided thereafter,

on July 25 and August 1, 2017.

III.     Analysis

         The standards governing a motion to dismiss for failure to state a claim for

relief 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.”16

Among the arguments defendants have asserted in support of dismissal is that the

claims in the complaint, both of which are asserted derivatively on behalf of Viacom,

fail to state a claim for relief because Viacom released them in the Settlement

Agreement. This argument presents a threshold issue regarding the viability of

plaintiff’s claims that is dispositive of the present motion.

15
     Individual Defs.’ Opening Br. 3 (Dkt. 23).
16
     Savor, 812 A.2d at 896-97.

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          The plain language of the Release in the Settlement Agreement quoted above

unambiguously provides that Viacom released each of the individual defendants

“from any and all Claims” it had “by reason of any matter, cause or thing” arising

up to the “Effective Date” of the Settlement Agreement, which is defined to be

August 18, 2016.17 The Settlement Agreement defines “Claims” to include “any

claim based on . . . breach of fiduciary duty, . . . incapacity, . . . unjust enrichment or

other legal duty.”18 Thus, the literal terms of the Release plainly encompass and bar

litigation of the fiduciary duty and unjust enrichment claims asserted in the

complaint here, since those claims both arise entirely from compensation decisions

that directors of Viacom allegedly made before August 18, 2016. Indeed, plaintiff

effectively conceded that this expansive language would bar his claims if the Release

is valid.19

          In his brief, plaintiff devoted a single paragraph to address the Release,

making two points. First, plaintiff contends that the release is ineffective “because

17
     Cumings Aff. Ex. N: Form 8-K, Aug. 23, 2016, Ex. 10 at 1 (Dkt. 23).
18
     Id. § 7(d).
19
  July 18, 2017 Hearing Tr. at 69 (acknowledging that it “looks like” plaintiff’s claims
would be “released if the release was valid”) (Dkt. 48); Pl.’s Aug. 1, 2017 Letter at 1
(conceding that “the release in Section 7(a) of the Agreement is extremely broad and
appears nominally to cover a claim of unjust enrichment” against Sumner) (Dkt. 47).

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corporate fiduciaries cannot contract away or limit their fiduciary duties.” 20 In

support of this argument, plaintiff cites Paramount Communications, Inc. v. QVC

Network Inc.21 This citation is inapposite. In QVC, our Supreme Court found that a

no-shop provision in a merger agreement “could not validly define or limit the

fiduciary duties” of a target corporation’s directors in a sale of control of the

corporation, reasoning that “[t]o the extent that a contract, or a provision thereof,

purports to require a board to act or not act in such a fashion as to limit the exercise

of fiduciary duties, it is invalid and unenforceable.”22 Here, the Release does not

purport to limit prospectively any exercise of fiduciary duty owed by Viacom’s

directors. Rather, by its terms, the Release extinguishes potential liability arising

from prior acts.

          Second, plaintiff asserts that the release is “clearly a self-interested

transaction.”23 This may well be true, but no claim has been asserted challenging

the validity of the Settlement Agreement or the enforceability of the Release.24 More

20
     Pl.’s Answering Br. 34.
21
     637 A.2d 34 (Del. 1993).
22
     Id. at 51.
23
     Pl.’s Answering Br. 34.
24
  Cf. In re Riverstone Nat’l Inc. Stockholder Litig., 2016 WL 4045411, at *1 (Del. Ch.
July 28, 2016) (holding that entire fairness is the appropriate standard of review for a
challenge to a merger where the acquiror waived in the merger agreement the right to
pursue a corporate opportunity claim pre-dating the merger against the target board).

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specifically, when confronted with a defense based on the terms of the Release,

plaintiff made no effort to amend his complaint to assert a claim challenging the

enforceability of the Release or to allege facts concerning the circumstances under

which it was entered so as to provide a record from which the Court could second-

guess its enforceability. To the contrary, as plaintiff acknowledged in his brief with

admirable candor, “insufficient facts have been put before the Court concerning the

circumstances under which [the Release] was negotiated and executed to assess its

validity.”25

         “Should a plaintiff become aware that the allegations set forth in his complaint

are inadequate to support his claim, he should request leave of the Court to amend

his complaint rather than attempt to expand its scope through briefing.” 26 Here,

defendants raised the Release as a basis for dismissal of plaintiff’s claims in their

opening brief on May 1, 2017—more than eight months after Viacom publicly

disclosed the Settlement Agreement in a Form 8-K.27 Yet plaintiff elected not to

seek leave in accordance with Court of Chancery Rule 15(aaa) to amend his

25
     Pl.’s Answering Br. 34.
26
  Orman v. Cullman, 794 A.2d 5, 28 n.59 (Del. Ch. 2002) (citing Court of Chancery Rule
15(aaa)).
27
     Cumings Aff. Ex. N: Form 8-K, Aug. 23, 2016, Ex. 10 (Dkt. 23).

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complaint to address the circumstances surrounding entry of the Release and instead

proceeded to file his answering brief based on a stale, incomplete pleading.

       Plaintiff’s approach here stands in contrast to the approach another Viacom

stockholder took in a separate action in this Court (C.A. No. 12545-CB) asserting

putative class claims for breach of fiduciary duty against Viacom’s directors

concerning their response to Sumner’s decline in health. In that case, the plaintiffs

amended their complaint within two months of the Settlement Agreement, asserting,

among other things, that defendants had breached their fiduciary duties by approving

the Settlement Agreement.28

       “Delaware courts recognize the validity of general releases.”29               Given

plaintiff’s failure to provide a factual basis for the Court to set aside the terms of the

Release in the Settlement Agreement, the plain terms of which bar litigation of the

derivative claims asserted in this case, the Court has no basis upon which to ignore

28
  Am. Compl., In re Viacom Class B S’holder Litig., No 12545-CB, ¶ 162 (Del. Ch. Nov.
10, 2016) (Dkt. 76). Plaintiffs voluntarily dismissed their claims in this action after oral
argument was heard on defendants’ motions to dismiss. (Dkt. 121 & 125).
29
   Deuley v. DynCorp. Int’l, Inc., 8 A.3d 1156, 1163 (Del. 2010); see also Chakov v.
Outboard Marine Corp., 429 A.2d 984, 985 (Del. 1981) (same); Hob Tea Room, Inc. v.
Miller, 89 A.2d 851, 856 (Del. 1952) (same); H-M Wexford LLC v. Encorp., Inc., 832 A.2d
129, 149 (Del. Ch. 2003) (“[I]t is more or less universally the case that when a corporation
pays value to settle a claim, it demands and receives releases in favor of its directors,
officers and other agents, in order to preclude the possibility of having to defend against
any additional claims arising out of the matter at issue in the settlement.”).

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the terms of a presumptively valid release of claims and thus must dismiss the

complaint. This dismissal is with prejudice as to the named plaintiff only. Nothing

in this decision, which expresses no opinion on the issue of demand futility or on

any matter other than the facial application of the Release to the two claims asserted

in the complaint, is intended to have preclusive effect on any other stockholder of

Viacom.

IV.   Conclusion

      For the reasons explained above, the complaint is dismissed with prejudice as

to the named plaintiff only.

      IT IS SO ORDERED.

                                       Sincerely,

                                       /s/ Andre G. Bouchard

                                       Chancellor

AGB/gm

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