War of the Redstones: Next salvo

NEW YORK (Fortune) -- Behind-the-scenes, the drama between Sumner Redstone and his daughter and presumed successor Shari is escalating. FORTUNE has learned that Shari is raising questions about self-dealing on Sumner's part that echo accusations made in earlier lawsuits by other kin as well as claims that Sumner misused funds held by the family company for his own benefit.

These accusations could prove a valuable weapon for Shari in negotiations about her possible exit from the family media business, which includes controlling stakes in Viacom and CBS, as well as in court, where it seems most Redstone family conflicts end up.

As detailed last week by FORTUNE, father and daughter have dueled over a number of matters, including corporate governance issues and Shari's efforts to more closely tie executive compensation with shareholder returns.

But the spat over corporate governance, while real, is merely one element of a deeper conflict that involves issues of control that have long roiled the Redstone family - namely how Sumner maneuvered his way to control of the family enterprise through the 1984 redemption of stocks held in trusts for his children and his brother Edward's children.

In addition, another serious flashpoint in the deteriorating relationship has been how funds held by National Amusements - the Massachusetts-based theater chain that is the vehicle for Sumner's control of Viacom (Charts) and CBS (Charts, Fortune 500) - have been spent.

This includes, among other instances, the previously-reported redemption of stock by Sumner in a slot machine company held by National Amusements to make a charitable donation to a Boston hospital in his own name. Shari felt she should be entitled to a similar distribution to make her own donation, or at the very least the hospital donation should have been made in the name of National Amusements.

As for the potential of a lawsuit, a representative for Shari said, "We certainly hope that it never comes to that point. But Shari will protect her rights and those of her children."

A spokesman for Sumner declined comment.

The messy spectacle casts into doubt the future control of one of the world's largest media empires, which includes the CBS broadcast network, MTV, the Paramount film studio and the pay-television channel Showtime.

Sumner's modus operandi has been to resist the succession question at every turn, and several times over his career he has shuffled aside once-favorite executives who had been seen as possible CEO candidates.

But the management question is separate from the issue of who will be controlling shareholder upon his death. In a past interview, Sumner said it was "likely" that Shari would become controlling shareholder "when I'm gone."

While Sumner has vacillated publicly about whether his daughter is in line to take over his voting stock in the companies, about five years ago, following his divorce with his wife Phyllis, he designated Shari, 53, as his successor in a new trust - saying she would automatically become chairman of Viacom and CBS if she is still on the board when Sumner dies.

The trust, called the SMR Trust, holds his shares in National Amusements. Among the trustees are current Viacom CEO and longtime Sumner lieutenant Philippe Dauman.

It appears that Sumner is moving towards an attempt to forcibly remove Shari from the boards of Viacom and CBS, where she sits as vice chairman, because that is the only way he can prevent Shari from taking over upon his death.

Such an effort would mimic his 2003 ouster of his son Brent from the board of directors of Viacom - which at the time was little-remarked upon in the press. This time it likely won't be as easy, as Shari, by all accounts, is prepared to fight such a move, in the courts if necessary.

There is another similarity to Sumner's actions toward Brent then, and with Shari now. In 2003 Sumner said Brent was leaving, as well as three other directors, amid a push for more independent directors. "The changes in the composition of our board reflect our deep commitment to good corporate governance," Sumner said at the time.

Now he is wielding the corporate governance cudgel against Shari. In a letter made public last week he wrote, "While my daughter talks of good governance, she apparently ignores the cardinal rule of good governance that the boards of the two public companies, Viacom and CBS, should select my successor."

This is ironic, given that in 2005 Shari was elevated to the vice chairmanship of Viacom and took on the task of improving the company's corporate governance standards.

In particular, after Sumner decided to split his empire in to two public companies - Viacom and CBS - she was in charge of ensuring that each board had an adequate number of independent voices. She also led the effort to more closely tie executive pay with shareholder returns - something Sumner eventually assented to but according to sources became a serious point of contention in their relationship.

If the spectacle continues to escalate and eventually leads to lawsuits - as many expect it to - allegations involving self-dealing in a long-ago transaction in which Sumner gained control of National Amusements, which are the basis for a still-unsettled lawsuit brought by Sumner's nephew, Michael Redstone, are likely to be front-and-center in the dispute with Shari.

Specifically, in 1984 Sumner redeemed shares in National Amusements that were held in trust for his two children and his brother Edward's children, according to allegations in Michael's lawsuit as well as a suit filed by his son, Brent that was settled earlier this year.

According to Brent's lawsuit, in 1984 Sumner "breached fiduciary duties and abused confidential relationships by arranging for [National Amusements] to buy all of the trust's stock at a price that was advantageous to the company and to himself personally. With this transaction, Sumner Redstone solidified control of [National Amusements] and ultimately of Viacom."

The details of this transaction, according to court documents, did not come to light until 2004 amid separate litigation involving family members.

In February Sumner settled the lawsuit with Brent, and bought out his son's 1/6th share of National Amusements for a reported $1.3 billion. That left Sumner holding 80 percent of National Amusements, with Shari holding the other 20 percent.

National Amusements, in turn, controls 76 percent of the voting stock in CBS, and 79 percent in Viacom - and a roughly 11 percent equity share of each.

National Amusements itself is valued at around $8 billion, giving Shari's stake a value of close to $1.6 billion.

Negotiations between Sumner's representatives and Shari's lawyers have been ongoing, and one scenario being discussed is a deal in which Shari would exchange her stake in Viacom and CBS for control of the 120 movie theater chains owned by National Amusements, where Shari has been president since 1999.

In a statement released last week Shari said she "has no desire to be 'bought out' of National" and that she "intends to continue to try to resolve this matter in a way that is fair to the companies and their employees, and to future generations of Redstones."

Given the Redstone family's long affinity for litigation, many observers say it's hard to imagine that the latest family feud won't end up in the courts.