Pfeffer v. Redstone

Summer Redstone (defendant) owned a controlling interest in National Amusements, Inc. (NAI) (defendant). NAI in turn owned a 71 percent voting interest in Viacom, Inc., which owned a majority stake in Blockbuster, Inc. Redstone also was Viacom’s chief executive officer. Viacom decided to spin off a majority of its interest in Blockbuster via (1) a special $5-per-share dividend to be paid to Blockbuster’s shareholders (special dividend) and (2) an offer to Viacom shareholders to voluntarily exchange their shares for Blockbuster shares at an exchange ratio set by Viacom (exchange offer). The prospectus for the exchange offer (prospectus), which closed in October 2004, stated that (1) NAI would not be exchanging its shares, (2) a special committee of Blockbuster’s independent directors recommended that Blockbuster’s full board approve the exchange offer, (3) the special committee approved the final terms of the divestiture, and (4) neither Viacom nor Blockbuster were making a recommendation regarding the exchange offer. Blockbuster experienced financial difficulties after the exchange offer. In addition, in March 2006, Blockbuster reclassified its reported cash flows for 2003 through 2005. However, this restatement did not affect Blockbuster’s total cash flows or net income. Beverly Pfeffer (plaintiff) was a Viacom shareholder who participated in the exchange offer. Pfeffer filed suit in Delaware Chancery Court alleging, among other things, that Viacom’s directors (including Redstone) breached their fiduciary duties of disclosure. Per Pfeffer, the prospectus was false or misleading because it did not disclose (1) the issue that would cause Blockbuster to reclassify its cash flows, (2) that a cash-flow analysis (cash analysis) conducted by a mid-level Blockbuster treasury employee seven months before the special dividend and exchange offer showed that Blockbuster faced significant cash constraints, (3) how the exchange ratio was computed, and (4) the composition of the special committee. With respect to the cash analysis, Pfeffer alleged that Viacom’s directors must have known about it because Blockbuster’s chief executive officer knew about it and would have told Redstone, who would have told Viacom’s board. The vice chancellor dismissed the complaint. Pfeffer appealed.