Power Sheet - May 10, 2016

After a judge abruptly dismissed a lawsuit over Sumner Redstone’s mental competency yesterday, casual observers may conclude that the issue is settled – that at least in the view of Judge David Cowan, Redstone is competent. But it isn’t settled at all, and in fact the proceedings in the case last week raise a new issue: Did the CBS and Viacom boards, of which Redstone was executive chairman, have a duty to tell shareholders about his condition?

The suit was brought by a former girlfriend, Manuela Herzer, who is apparently miffed that the 92-year-old billionaire threw her out of his house last fall, removed her as his health care agent, and wrote her out of his will. She challenged his mental competency. But Judge Cowan’s ruling yesterday focused only on Redstone’s health care in declining to restore Herzer as Redstone’s health care agent. Cowan emphasized that he was not ruling on Redstone’s mental competency.

The significant revelation for outsiders was Redstone’s videotaped testimony, recorded at his home last Thursday and played in court Friday. The video has not been publicly released, but a transcript has been, and it reveals that Redstone is barely able to speak. In 17 minutes of testimony, he frequently couldn’t answer simple questions (“What was your birth name?”) or couldn’t be understood. A court official designated as an “interpreter” repeatedly asked him to repeat himself more slowly and loudly, but he was frequently incomprehensible. Sometimes he was asked to spell out his answer by pointing to letters on a board, but that never worked. The one phrase he seemed able to enunciate clearly was “f—ing bitch,” which he used several times when asked about Herzer.

Until February 4 of this year, when Redstone became chairman emeritus of CBS and Viacom, he was executive chairman of both companies. The key word is “executive.” That means he wasn’t just chairing board meetings; he had operating responsibilities. Now, maybe six months ago he was completely different from how we was in the deposition last week. But if not, it seems inconceivable that he could possibly have carried out operating duties.

Investors were told nothing. They noticed that he had long since stopped speaking on earnings calls, and the entertainment industry was rife with rumors about his health, but last week’s deposition was the first evidence of his condition in many months, and it was shocking. Did the board bear a duty to tell investors about his condition?

No SEC rule requires a company to say anything about an executive’s health. Remember that Apple didn’t even disclose that CEO Steve Jobs had had a liver transplant until after the media reported it. But SEC rules do require a company to disclose material information. I’d say that when the CEO has a liver transplant, that’s material, and when the executive chairman can’t answer simple questions and can scarcely express himself, that’s material. But those are just my opinions.

And in this case there’s a larger issue. Redstone owns controlling stakes in CBS and Viacom, so he can replace both boards if he wants to; nothing happens that he doesn’t want to happen. It’s another reminder to investors that when they buy stock in a company with a controlling shareholder, they’re just along for the ride, for better or for worse.

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