Sumner Redstone tries to derail Philippe Dauman’s plan to sell Paramount stake

The battle between ailing media mogul Sumner Redstone and his longtime protege Philippe Dauman intensified Monday when the family’s holding company moved to block the potential sale of a stake in Paramount Pictures.

Viacom Inc. had been closing in on identifying a buyer this month for a piece of the historic Hollywood movie studio in an effort to pay down some of Viacom’s debt. The strategy had been championed by Dauman, Viacom’s chief executive, who has been under pressure to improve the media company’s performance.

But on Monday the Redstone family firm, National Amusements Inc., which controls nearly 80% of voting stock in Viacom and CBS, announced that it had amended Viacom’s bylaws to require a unanimous vote of its board to approve any Paramount deal. The firm cited the need “to protect long-term interests of stockholders.”

The change would effectively derail any transaction because at least one powerful board member – Sumner Redstone – is vehemently opposed to the Paramount sale. During a recent visit with a UCLA geriatric psychiatrist, Redstone became tearful when the issue of Paramount came up, according to court documents.

Viacom blasted the move of the company’s controlling shareholder to unilaterally change the corporate bylaws. A spokesperson said the action was “illegitimate” and “completely at odds with good corporate governance.”

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The Redstone family’s maneuver came on the eve of a hearing in a high-profile lawsuit to decide who will oversee Redstone’s controlling shares in the media companies when he dies or becomes incapacitated. The fight over Viacom is flush with corporate intrigue, family infighting and questions about Redstone’s medical condition.

Dauman and another longtime Redstone associate, George Abrams, were ousted from the trust that will eventually oversee Redstone’s controlling shares in Viacom and CBS Corp. – a $40-billion empire.

Dauman and Abrams sued Redstone and his family members two weeks ago to try to reverse the decision, contending the mogul has been manipulated by his daughter.

A court hearing in the case will be held in Massachusetts on Tuesday.

The lawsuit puts Dauman in the precarious position of clashing with his mentor, as well as members of the Redstone family. It also has forced Dauman to backpedal from his own words six months ago when he testified that Redstone, who struggles to speak, “was engaged, attentive and opinionated as ever.”

Additionally, Dauman, 62, must fend off allegations that his lawsuit is little more than an effort to stay in power after nearly a decade as CEO of Viacom, which has seen its stock slump nearly 40% in the last two years.

“This is a very unusual situation,” said Jason Schloetzer, an associate professor at Georgetown’s McDonough School of Business. “You don’t usually see a controlling shareholder being thrown around, and punched about, by his management team and his board.”

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The central issues in the case are whether Redstone has the mental capacity to make complex business decisions and whether he is under the undue influence of his daughter, Shari Redstone, who is vice chair of Viacom and CBS.

Shari Redstone, who experienced periods of estrangement from her father, now oversees his care. She has been unhappy with Viacom’s performance as Paramount has struggled to muster hits at the box office, and Viacom’s cable channels, including MTV and Comedy Central, have had sharp ratings declines at a time when consumer habits have changed rapidly.

“Philippe is in a difficult position because his company has been under-performing,” said William Klepper, an adjunct professor of management at the Columbia Business School in New York.

On Monday, Dauman’s lawyers filed court papers that asked the judge to immediately order a medical evaluation of Redstone by an impartial doctor, contending the billionaire who lives in Beverly Park is suffering from a “progressive neurological disease characterized by dementia.”

A report last week by UCLA’s Dr. James Spar noted that Redstone has a “mild degree” of “cognitive impairment.” When questioned, Spar said that Redstone indicated that he dumped Dauman from his trust because he had “done a bad job running Viacom.”

Spar’s report, compiled after visiting the mogul twice last month, noted that Redstone appeared to understand that removing Dauman and Abrams from the trust “increased the probability that, when Mr. Redstone becomes incapacitated or dies, the trustees of the National Amusements Trust would remove Mr. Dauman as chairman and CEO of Viacom,” Spar wrote.

“Finally, I observed that, despite the fact that Mr. Dauman had ignored Mr. Redstone’s wishes regarding Paramount, and had filed suit against Mr. Redstone, Mr. Redstone had not removed Mr. Dauman as chairman and CEO of Viacom,” Spar wrote in his report. “Mr. Redstone seemed to ponder the point for a minute but did not respond, and I did not pursue the issue.”

Legal and business experts say much of the troubles stem from Redstone’s desire to hang onto the reins of his company’s as long as possible.

“The problem here is that [Dauman and Abrams] are approaching this as if it was a publicly controlled company, but National Amusements is more like a family business,” said Klepper. “And Shari now is probably the most legitimate voice in the family -- and so she has to be listened to.”

In their court papers filed Monday, Dauman’s attorneys described Redstone’s frail state, saying he relies on a feeding tube.

“He is a 93-year-old man suffering from overwhelming physical ailments, including an inability to speak, stand, walk, eat, write or read,” attorney Joseph Bierwirth Jr. wrote in Monday’s filing on behalf of Dauman and Abrams, who was Redstone’s friend for 50 years and served as his escrow attorney.

“Time is of the essence,” he said. “There is a grave risk that Sumner Redstone will not be available to provide any evidence in this case.”

Anthony Szczygiel, a professor emeritus at the SUNY Buffalo Law School, said the judge must first decide whether the case will be heard in Massachusetts or California.

Redstone’s lawyers have asked that the matter be moved to Los Angeles, where the mogul lives. Redstone’s legal team has already won one victory in Los Angeles, and they are hoping to keep their streak alive. Then comes the question of whether Redstone is mentally competent.

“Determining capacity isn’t an all-or-nothing thing,” Szczygiel said. “It’s something of a sliding scale. You can be capable of understanding and doing certain things, and at the same time unable to understand the consequences of taking other actions.”

In some ways, the Massachusetts case is similar to the recent case that played out in a Los Angeles courtroom. In that case, Los Angeles County Superior Court Judge David J. Cowan stopped short of deciding that Redstone was mentally competent. But he said that Redstone made it clear he did not want his former companion, Manuela Herzer, overseeing his healthcare.

“There are some real parallels here to the healthcare case,” Szczygiel said. “Redstone said, ‘I don’t trust this woman and I don’t want her to be in charge,’ and maybe that will be the standard here. He’s making a choice of who he trusts and who he doesn’t trust.”

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