CBS Corporation (“CBS”) has two classes of stock.  The Class A common stock has voting power; the Class B common stock does not.  Shari Redstone, through her control of National Amusements, Inc. (“NAI”), controls approximately 80% of the voting power of CBS and approximately 10% of the economic stake.

In September 2016, NAI’s counsel sent a letter requesting that CBS consider a potential combination with Viacom Inc. (“Viacom”).  The board of directors of CBS (the “Board”) adopted resolutions authorizing a special committee of independent directors (the “2016 Special Committee”) to consider the transaction and make a recommendation to the Board.  The 2016 Special Committee’s work ended in December 2016.  In January 2018, NAI again approached CBS asking for a combination with Viacom.  The Board adopted resolutions to form a second special committee (the “2018 Special Committee”) with essentially the same mandate and authority.

On May 13, 2018, the 2018 Special Committee determined that a merger was not in the best interests of the stockholders other than NAI.  It also recommended that the Board consider the issuance of a stock dividend to all Class A and Class B stockholders (the “Stock Dividend”), which would have the effect of reducing NAI’s voting power from 80% to 20%.  On May 16, NAI executed written consents to amend CBS’s bylaws to require approval of 90% of the directors in order to declare a dividend (the “90% Bylaw”).  On May 17, the Board voted to approve the Stock Dividend by a vote of 11-3, with NAI’s three directors casting the dissenting votes.

This expedited litigation commenced on May 14, 2018 to adjudicate the validity of the Stock Dividend and 90% Bylaw.  The NAI parties filed a motion to compel the production of two categories of privileged materials, both involving communications with CBS’s outside counsel.  The Court of Chancery granted in part and denied in part the NAI parties’ motion to compel holding that sufficient adversity existed between the parties for matters falling within the purview of the special committees formed by the board of directors.

While NAI contended that their three designees to the Board were entitled to unfettered access to any legal advice rendered to CBS, the Court held that sufficient adversity existed between the NAI directors and CBS such that they could no longer have a reasonable expectation that they were a joint client of the Board’s counsel.  The Court held that CBS employed appropriate governance procedures by establishing the two Special Committees that openly put NAI on notice that they were being segregated from CBS’s deliberations.

The Court reasoned that a special committee charged with the evaluation of a transaction may need to confer with the corporation’s in-house or outside counsel in order to discharge their duties appropriately.  Therefore, to the extent that CBS counsel was acting in furtherance of the process undertaken by either Special Committee, the Court denied the motion to compel.

It is well settled that members of a board of directors are entitled to essentially unfettered access to the corporation’s records to carry out their fiduciary duties.  However, as this decision illustrates, it could be a different story when it comes to privileged matters.  While directors generally are entitled to privileged records as well, should sufficient adversity exist between the director and the corporation on one or more issues, access may be denied for those issues.