Time, Paramount Continue Legal Skirmishing

While securities lawyers prepared for a showdown today in Delaware court in the takeover contest for Time Inc., more legal skirmishing took place Monday in Washington at the Federal Communications Commission.

Paramount Communications Inc., which launched its hostile bid for Time five weeks ago, filed new documents urging the federal agency to take a short cut that would enable Paramount to press ahead with its $200-a-share tender offer, now set to expire July 28.

Separately, Paramount also announced that it will pay 9% interest to Time stockholders who tender their shares if the deal isn’t closed within 60 days. The interest would only accrue, however, “from the date that Time agrees or is ordered to refrain from interfering with Paramount’s efforts to obtain FCC and state and local cable regulatory approvals for Paramount’s acquisition of Time,” the company said.

Cable Systems an Issue

Time’s cable-TV systems have been a thorny issue from the start, since regulation of the cable television industry occurs at three governmental levels. Paramount has argued that it should be allowed to use a temporary caretaker, or voting trust, to hold Time shares while Paramount awaits the FCC’s normal review of its fitness to hold certain federal licenses.

But Time’s attorneys have argued fiercely that granting such a trust would preempt the right of local and state authorities to determine whether local franchises should be transferred to a new owner.

The FCC has not indicated when it might act on the Paramount petition, but in Monday’s 15-page letter, Paramount’s lawyers urged the commission to act promptly and to ignore the goings-on in other arenas.

To most participants, the scuffling before the FCC is a sideshow compared to the battle shaping up today in Delaware Chancery Court, where Chancellor William T. Allen will listen to arguments over the legality of Time’s actions to fend off Paramount.

Squads of lawyers representing both sides huddled Monday night in Wilmington law offices to prepare for today’s session, expected to play to a full house in a 200-seat courtroom.

In addition to Time’s and Paramount’s legal teams, the chancellor will hear arguments from lawyers representing certain disgruntled Time shareholders who want Time (the company) to negotiate with Paramount over its cash offer.

Warner Communications will also be represented, because the Paramount bid disrupted a Time-Warner plan to merge through a non-cash exchange of shares. After Paramount launched its hostile bid, Time decided to acquire Warner for $14 billion in a tender offer set to expire July 17.

Lawyers for Time are expected to cite a 1980 New York state case to assert that Time’s board was entitled to throw out its stock-swap plan in favor of the cash tender offer for Warner.

Previous Ruling in Dispute

In the case--Krause, Hinds vs. Internorth--a company threatened with a hostile tender offer abandoned a friendly merger that faced a shareholder vote. Instead--like Time--it made a tender offer for the company that required no shareholder approval. The courts held that the target company’s board was properly exercising its “business judgment” prerogatives.

Paramount’s lawyers, in rebuttal, are expected to argue that the New York state ruling has been superseded by more recent Delaware cases, including several that would bar a target company from making such a defensive move.

The hearing is expected to take three to four hours and will include questioning by Chancellor Allen. He is expected to rule before Friday, when he is due to leave on vacation. In the FCC pleadings, Paramount defended itself against Time’s allegations that Paramount has tried to deceive the agency.

Paramount said it has consistently acknowledged that local approvals for cable licenses might take several months to obtain, but it argued Monday that the FCC process “could potentially consume an even longer period.” For that reason, Paramount said it has solid legal grounds for requesting the short cut, which would allow Paramount to use a trustee to physically acquire Time shares and complete the tender offer.

One of Time’s attorneys, however, bristled at the argument. Philip L. Verveer, a former FCC attorney, said: “The notion that the FCC would drag its feet . . . is just preposterous.” Verveer said he has always suspected that Paramount requested the voting trust in order to create an opportunity “to take the stock and close the deal without the local approvals.”

Kathryn Harris reported from Los Angeles and Paul Richter from Wilmington, Del.