R.A. Feuer v. Philippe P. Dauman

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
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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).
4
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C.A. No. 12579-CB
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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).
12
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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
14