By Keach Hagey and Joann S. Lublin 

After barely surviving a Boston hotel fire in 1979, Sumner Redstone was treated for his injuries at Massachusetts General Hospital. The media mogul showed his gratitude by donating millions of dollars to its burn unit.

Mass General could play a key role in the next chapter of Mr. Redstone's story as the 92-year-old's health deteriorates. At least one of its doctors would help decide whether he relinquishes control of a $40 billion media empire that includes Viacom Inc. and CBS Corp.

Mr. Redstone stepped down last week as chairman of CBS and Viacom, and the chief executives of those two companies slid into his role. But the real transfer of power is yet to come, since Mr. Redstone continues to have overwhelming control of the companies through ownership of 80% of the voting shares.

Despite famously claiming he would live forever, Mr. Redstone did plan what should happen to those controlling interests should he die or be deemed incapacitated. They will go into an irrevocable trust that would be managed by seven of his associates, relatives and board members.

According to people familiar with the terms of the trust, the decision on whether he is incapacitated would be made by three doctors from multiple hospitals, including at least one from Mass General. Whether and when to call in the three doctors, the people said, is up to a majority vote among five people close to Mr. Redstone.

They are Philippe Dauman, Viacom's chief executive and Mr. Redstone's successor as chairman; David Andelman, an estate-planning lawyer who sits on the CBS board; George Abrams, another Boston lawyer close to Mr. Redstone who sits on the Viacom board; Shari Redstone, Mr. Redstone's daughter, who serves as vice chairman of CBS and Viacom; and her son, Tyler Korff, also an attorney.

These five also sit on the board of National Amusements Inc., the holding company that Mr. Redstone built out of his father's drive-in movie theater company. National Amusements holds the controlling stakes in Viacom and CBS. Once the trust goes into effect, the company's board members along with two Boston lawyers will oversee the trust.

The responsibilities of the five National Amusements board members have grown more complicated in recent months because a lawsuit filed by a former companion has raised questions about Mr. Redstone's health. Manuela Herzer's suit alleges Mr. Redstone lacked mental capacity when he removed her last October as his health-care agent, the person with authority over his care if he were incapacitated, and replaced her with Viacom's Mr. Dauman.

The mogul's lawyers said the lawsuit is without merit and are seeking its dismissal. People close to Mr. Redstone acknowledge he has had ministrokes that have restricted his jaw movement and impaired his speech.

The fate of his controlling interests would have a far-reaching impact on media brands spanning CBS, MTV and Paramount. The trust would have the power, for example, to decide how to proceed should Viacom or CBS or pieces of those companies field takeover offers.

For some corporate-governance experts, the arrangements surrounding control of Viacom and CBS are troubling. The trust could become a "shadow" board with tremendous power over the boards of the two companies, one leadership specialist suggested.

"From a corporate governance standpoint, it is not ideal," said David Dotlich, a CEO succession expert at recruiters Korn/Ferry International. Shari Redstone "could dispose of Philippe [Dauman]" if she wins support from three other trustees, added Mr. Dotlich, who also coaches top executives about leadership.

The trust would have a duty to guard the interests of its beneficiaries, Mr. Redstone's grandchildren. The company boards are required to work for the interests of all shareholders.

People who are members of the trust and sit on one of the company's boards will be powerful and conflicted, several governance experts argued.

That is especially troublesome for a full-time executive such as Mr. Dauman. "You're basically asking the managers to oversee themselves," said Charles Elson, head of the Weinberg Center for Corporate Governance at University of Delaware's business school. "For a public company, [the trust] is a very poor structure."

Dr. Dotlich, a psychologist, questioned the independence of the companies' boards. Viacom and CBS directors include "friends, associates, lawyers and people [Mr. Redstone] has worked with," he said. "That has been the tradition in corporate governance, which we are now moving away from."

Viacom and CBS rank near the bottom of S&P 500 companies when it comes to the independence of their boards, with 55% and 57% of directors deemed independent, according to data through Oct. 30 provided by MSCI ESG Research.

The lawsuit by Ms. Herzer raises other issues. Dr. Dotlich said there could be shareholder lawsuits if the California judge overseeing the case agrees Mr. Redstone has been incapacitated for several months. On Feb. 16, the judge in the case is expected to see sealed results from a medical examination of Mr. Redstone conducted by a geriatric psychiatrist hired by Ms. Herzer.

Experts disagreed whether shareholders could successfully argue that the companies' boards didn't adequately investigate Mr. Redstone's health and disclose it. Mr. Elson said directors could claim they made "a judgment call" that their longtime leader wasn't incapacitated during recent months.

Jeffrey Sonnenfeld, a senior associate dean at Yale School of Management, said investors could rightfully argue that board directors "had a failure of proper governance oversight."

If the judge considering Ms. Herzer's suit rules that Mr. Redstone lacked mental capacity when he removed her as his health-care agent, that won't necessarily trigger the transfer of shares to the trust, according to people familiar with the trust and outside legal experts. But it is likely to put pressure on National Amusements board members to begin their own examination.

"It will put pressure on them because I think you reach a point where they begin to lose credibility if they don't take some action," said Burt Levitch, a lawyer who specializes in trusts and estate planning.

Write to Keach Hagey at keach.hagey@wsj.com and Joann S. Lublin at joann.lublin@wsj.com

 

(END) Dow Jones Newswires

February 06, 2016 15:44 ET (20:44 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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