By Dan Levine and Jessica Toonkel
(Reuters) - Investors targeted Viacom Inc on two fronts on Tuesday, in a lawsuit alleging Executive Chairman Sumner Redstone is incapacitated and should not have been paid millions in compensation, and in an activist investor presentation calling for changes to the board and management.
The separate moves were the latest challenges to New York-based Viacom, whose networks include Nickelodeon, MTV and Comedy Central. The cable network has been under pressure due to weak ratings and concerns about the mental condition of 92-year-old Redstone, whose holding company, National Amusements, has about 80 percent of the voting stock at Viacom and CBS .
A November lawsuit by an ex-girlfriend of Redstone has raised questions about his ability lead the company as well.
Viacom has maintained Redstone is in full mental control. It said the most recent lawsuit was without merit and it would contest it vigorously. It also responded to the activist report, saying it was focused on long-term value for shareholders.
"We are encouraged by the growth in our strong international business, the ratings upswings at most of our networks, Paramount’s strong start in 2016, our leadership position in advertising technology and other positive recent developments,” Viacom said in a statement.
CBS, also named in the lawsuit, declined to comment.
The shareholder lawsuit, filed in the Delaware Court of Chancery against the boards of Viacom and CBS, alleges the companies improperly paid millions for Redstone's services as executive chairman "while he was physically and mentally incapacitated."
Payments to Redstone "for services not rendered" amounted to bad faith by the two boards, the lawsuit said. It also said the Viacom board misrepresented Redstone's deteriorated physical and mental condition in a January 2015 proxy statement.
Such derivative lawsuits, in which a shareholder sues on behalf of the company against a third party such as the board, are difficult to pursue but provide a new public forum for outsiders to question Redstone's abilities.
"It's a pretty tough uphill battle to pursue a derivative suit," said Lawrence Hamermesh, professor of corporate and business law at Widener University School of Law. "The key is whether there is enough here to call into question the independence of the members of the compensation committee."
The lawsuit said that board members were personally loyal to Redstone and their actions proved their lack of independence.
Separately, in a paper published on Tuesday, activist investor Eric Jackson, managing director at SpringOwl Asset Management, called for changes to Viacom's board and management and suggested it should consider merging with AMC Entertainment Holdings .
Jackson declined to comment on how many shares his firm owns. His paper came as investors are being asked to consider whether Viacom should allow all shareholders to vote. Redstone will oppose the measure, assuring its failure, but investors welcomed Jackson's move.
Viacom's shares, which nearly halved in value in 2015, rose 7.5 percent to $42.86 in morning trading on Tuesday.
"Viacom management has underperformed for years with no accountability," Jackson said, calling the company's board one of the biggest and highest paid in the media industry.
Questions about whether Redstone is capable of continuing as executive chairman of Viacom and CBS were heightened in November after former girlfriend Manuela Herzer filed a lawsuit that raised doubts about the billionaire' s competence. In that suit, Herzer is seeking to have Redstone examined to see if he was mentally able to make decisions for himself.
The Redstone controversy began last fall when Herzer was thrown off his advance healthcare directive and escorted out of his sprawling hilltop estate. She sued, contending the mogul was in no position to make such decisions.
Redstone named Viacom Chief Executive Philippe Dauman as his new health care agent. Dauman filed a motion on Friday in a New York court seeking to stop his deposition in connection with Herzer's case.
The New York Times first reported on Jackson's presentation earlier on Tuesday.
(Additional reporting by Tom Hals in Delaware and Karen Freifeld in New York)