REUTERS: A judge sided on Thursday with Shari Redstone in her battle to retain control over CBS Corp and dealt a setback to the U.S. media company's plans to strip her voting power.
Chancellor Andre Bouchard, the judge on Delaware's Court of Chancery, denied a request by CBS for a temporary restraining to bar Redstone from amending bylaws or sacking directors ahead of a board meeting at 5 p.m. EDT (2100 GMT) Thursday.
At that meeting the CBS board will consider issuing a special dividend that would dilute Redstone's vote to 17 percent, from 80 percent, an act of defiance aimed at preventing a merger with sister company, Viacom Inc .
Fears that Redstone would replace CBS Chief Executive Les Moonves sent CBS shares down as much as 6 percent after the ruling.
It was unclear which bylaws would govern the meeting scheduled to take place at CBS' offices in New York City with Redstone in attendance, according to sources familiar with the situation.
On Wednesday, Redstone used her control to amend CBS's bylaws to require a supermajority, or 90 percent, of directors to approve the issuance of a special dividend, essentially allowing her to block the move.
The CBS board will argue Redstone's bylaw amendment does not apply at Thursday's meeting because in the company's view such changes require a 20-day notice period, sources told Reuters.
CBS also plans to challenge the bylaw in court, two other sources told Reuters on Thursday. Bouchard said in his ruling he could set aside Redstone's bylaw amendments if CBS shows they are invalid or unfair, implying that the bylaw was in place.
"The ruling clearly recognizes that we may bring further legal action to challenge any actions by NAI that we consider to be unlawful," CBS said in a statement.
The Redstone family controls both CBS and Viacom through the National Amusements Inc (NAI) movie theater company and has said it wants to merge them if both companies support the deal. NAI welcomed Thursday's ruling, and said CBS' special committee had breached its fiduciary obligations to CBS shareholders.
Bouchard said he denied the temporary restraining order because any action that Redstone takes will be subject to his review and "extensive power" to correct. He said CBS had already shown it had a non-frivolous claim against Redstone for a breach of fiduciary duty for her alleged interference with CBS.
A lawyer for National Amusements dismissed the allegations against Redstone in court on Wednesday.
The fast-moving battle for control of the CBS boardroom was put in motion on Sunday, when CBS's special committee determined the merger with Viacom long favored by Shari Redstone was not in the interest of CBS shareholders.
National Amusements believes a deal is needed for the two media companies to gain scale and compete with the likes of video-streaming company Netflix Inc and Amazon.com Inc .
Shares of CBS ended down 4.1 percent on the New York Stock Exchange at US$51.61 while shares of Viacom slipped 0.4 percent to US$28.16 on Nasdaq.
(Reporting by Tom Hals in Wilmington, Delaware and Jessica Toonkel in New York; editing by Tom Brown and Lisa Shumaker)