Paramount vs. Time: Delaware Showdown Set : Fate of a Media Giant Hangs in Balance as Court Rules on an Unprecedented Case

Time Inc. and hostile suitor Paramount Communications head to Delaware Chancery Court on Tuesday for a hearing that may decide Time’s fate and set precedent in takeover law that will be felt for years to come.

Of course, the Chancery Court’s staff doesn’t need high-flown descriptions to persuade them that this is a big one. Since takeover-stock speculators began using cellular phones to keep in touch with their trading desks a few years ago, the staff has measured the importance of courtroom takeover battles by how many cellular phones they collect before a hearing.

Tuesday morning’s hearing may be one for the record books, they say, judging by how many arbitragers have announced plans to show up.

“We collect 30 or 40 of these phones before a big hearing, but this may set the record,” said a clerk in the office of Chancellor William T. Allen, who is presiding in the case. “We’ve had nonstop calls for a month.”

The arbs give Time the edge to prevail in court against Paramount’s month-old offer and complete the acquisition of Warner Communications that it proposed on June 16. That’s evident from the price of Time’s stock, which closed at $151.50 a share on Friday, off $4.125 for the day and far below Paramount’s $200-a-share bid. Time stock has been edging down since mid-June from a peak of $182.75.

But the arbs want to be there in person for the hearing, because they know that--as Chancellor Allen has noted in an early ruling--the circumstances of this case are without precedent. Plenty of other experts believe that it could go the other way.

“Personally, I’d rather be holding Paramount’s hand,” said Prof. Ronald Gilson, a specialist in takeover law at Stanford University.

Clearly, the case is also of enormous interest to observers with no holding of Time’s stock. Corporate managements, who have seen huge hostile bids win company after company in the past decade, fear that the decision could extend the limits of what bidders can do in pursuit of a reluctant prey.

Some big shareholders and shareholder rights advocates, in contrast, contend that Time directors have abused the rights of shareholders in trying to evade Paramount’s offer.

“You can put the question as, ‘Who owns the company--the shareholders or the management?’ ” said Prof. Alan Bromberg, a securities law expert at Southern Methodist University.

While the pleadings in the case are under wraps, on Chancellor Allen’s order, the outlines of the Paramount and Time arguments are clear.

Paramount and some unhappy Time shareholders have asked the court to block Time’s $14-billion tender offer for Warner, saying it was an improper attempt by Time directors to avoid a takeover and entrench current management in their jobs.

Paramount will contend that Time already put itself up for sale in March, when it announced a stock-swap merger with Warner. That deal, which was abandoned in favor of the tender offer for Warner, amounted to the sale of Time because it would have put 62% of Time stock in the hands of Warner shareholders, Paramount will contend.

Wants Defenses Dismantled

Paramount will cite the precedent of the 1986 takeover battle for cosmetics giant Revlon, and the 1988 fight for the Macmillan publishing house, to argue that once the sale of a company is inevitable, its board must consider all offers.

They will argue that Time directors have failed to fulfill their duties by pursuing the Warner tender offer and by putting in place a “poison pill” defense and a special stock-swap plan with Warner, both of which were designed to make a takeover by a third party prohibitively expensive. Paramount’s lawyers will ask the court to order Time to dismantle those defenses.

Time, meanwhile, will contend that its offer for Warner was a proper exercise of the directors’ “business judgment,” of the kind that the Delaware courts previously have said they will not second-guess. The acquisition is no different than if Time had sought to buy a much smaller company to strengthen its business, the lawyers will maintain.

They will contend that Time’s offer for Warner was a proper and “proportional” response to the threat posed by Paramount’s inadequate and iffy tender offer. Under an important precedent made by the Delaware Supreme Court in the 1985 takeover fight for Unocal, directors’ reaction to a bid must be reasonable, rather than excessive, in relation to the threat posed by a hostile bidder.

As the takeover fight has continued in the past month, Time has hammered away again and again on the theme that Paramount’s bid is highly conditional and threatens the future value of Time shares if Time and Warner merge to form a global media company.

Time lawyers are expected to offer testimony from Time’s investment bankers that the company is worth about $250 a share.

Has Ruled Both Ways

Experts who predict a Time victory believe that Allen may rule that the decision to buy Warner was a proper exercise of the directors’ prerogatives, part of the broad realm in which the courts have agreed not to meddle.

While Allen has shown himself to be an advocate of shareholder rights in some decisions, in others he has also shown a reluctance to order companies to auction themselves.

Such a ruling would provoke an outcry from shareholder rights activists, who have sharply criticized the tactics of Time’s directors. Among other things, they have criticized the directors for switching from a stock-swap merger, which required approval by shareholders, to a tender offer, which could be completed with no stockholder input.

“Time’s board has gone beyond the limits,” said Robert A. G. Monks, president of Institutional Shareholder Services, a Washington firm that advises big stockholders how to vote.

A ruling against Paramount might also leave its feisty chairman, Martin S. Davis, with no better alternative than to wait for the Time-Warner merger, try to mount a bid to acquire both, then sell the Warner properties. Such a bid would be huge--perhaps rivaling the granddaddy of them all, last year’s $25-billion buyout of RJR Nabisco.

Chancellor Allen’s ruling may come this week, and the Delaware Supreme Court may rule on the expected appeal before the end of the month. No matter which way the decision goes, though, many knowledgeable observers expect the contest for Time to continue for months.