By Jessica Toonkel
(Reuters) - Viacom Inc disclosed on Friday it would foot the bill for embattled Chief Executive Officer Philippe Dauman's legal fight against controlling shareholder Sumner Redstone, even as Wall Street cheers the executive's potential departure.
The disconnect demonstrates the complicated corporate governance challenge Viacom's board is facing in the battle for control of Redstone's $40 billion media empire, which includes CBS Corp (NYSE:CBS) and Viacom, investors and corporate governance experts said.
"I don't think it's appropriate to use shareholder money for the suit," said Ben Strubel, a principal with Lancaster, Pennsylvania-based wealth manager Strubel Investment Management, which owns non-voting shares of Viacom. "I don't think it's appropriate to use shareholder money toward his compensation given the company's performance."
Viacom, which owns Comedy Central, Nickelodeon, MTV and Paramount, has been struggling to turn around its ratings. Reflecting some of that weakness, the company's stock is down nearly 50 percent over the past two years.
On Friday, Viacom said its third-quarter profit would fall well short of Wall Street expectations, citing a disappointing domestic box office haul from its latest Teenage Mutant Ninja Turtles movie and disruption stemming from all the controversy.
Viacom's stock has risen about 15 percent since May 20, when Redstone removed Dauman and board member George Abrams from the seven-person trust that will ultimately control Redstone's media empire. About half of that rally came on Thursday when Redstone ousted Dauman and four others from the Viacom board.
Viacom shares fell 1.4 percent to close at $44.42 on Friday.
If a judge affirms the new slate of directors, they have the authority to overhaul Viacom management, which may include Dauman. If he is removed, he could potentially receive nearly $90 million in severance, according to compensation consultant Equilar.
Still, Viacom's board, led by lead independent director Fred Salerno, has argued that 93-year-old Redstone, who they believe is being manipulated by his daughter Shari, is not the one making decisions in the best interest of all shareholders.
“On the very day that Mr. Redstone’s representatives acted to remove Mr. Dauman and Mr. Abrams, they made it clear the issue was about control of Viacom. It is clearly in the interests of all of Viacom’s stockholders that the Massachusetts actions be pursued in order to preserve the independence of Viacom’s board."
The fight over control between Dauman and Redstone is playing out in courtrooms in Delaware, Massachusetts and California.
In a May 23 lawsuit filed in Massachusetts, Dauman and Abrams are contesting their removal from Redstone's family trust and the board of National Amusements Inc, the holding company for Redstone's voting shares. The trust will control Redstone's stake after he dies or is declared mentally incompetent.
National Amusements, in a statement on Friday, said there was "no justification" for Viacom's funding of the legal fight against Sumner Redstone. "The need for strong, independent oversight of Viacom could not be more apparent," the statement said.
The fact that the company is funding a lawsuit from its CEO against its controlling shareholder points to the complexities of having a family run a multi-billion dollar company, said corporate governance consultant Francis Byrd.
"It does appear to be unseemly but these are the sorts of complications you find with a controlled company where the family drama can easily bleed into the corporate operations," Byrd said.
Naveen Sarma, a credit analyst with Standard & Poor's, said he would have preferred the board stay out of the power struggle.
"We would rather they would have remained an observer but they have chosen to take sides," he said. The ratings agency last month lowered its corporate governance rating of Viacom from satisfactory to fair, due to the uncertainty engulfing the company.
Standard & Poor's is watching whether the power struggle affects the company's operations, Sarma said.
The company itself now acknowledges that the legal drama is hurting its bottom line.
On Friday, Viacom said its third-quarter earnings will miss Wall Street estimates, marking the first time since October 2008 that it has put out such guidance.
The company cited the Teenage Mutant Ninja Turtles movie and a delay in completing an agreement with an unnamed streaming video provider. It also blamed the latter on "the recent and highly public governance controversy."
The media company also said it expects domestic ad sales to decline about 4 percent in the third quarter ending June 30, an improvement from last quarter's decline of 5 percent.
Viacom said it expects adjusted earnings of about $1.00 to $1.05 per share in the quarter. Analysts, on average, were expecting a profit of $1.38 per share, according to Thomson Reuters I/B/E/S.