THE TIME INC. DECISION : Ruling Gives Managers a New Ace in Hole : But Experts Say Not to Look for Any Real Slowdown in Takeover Bids
The Delaware court ruling Friday favoring Time Inc. over Paramount Communications clearly strengthens the hands of managements against hostile suitors, legal experts and investment bankers said Friday.
But the ruling may only have limited impact because it mainly reinforces existing practices and sets no dramatic new legal precedents, experts said. The ruling also could be reversed or modified by the Delaware Supreme Court or other courts, they noted.
And although shareholder rights advocates were quick to condemn the ruling, saying that Time should be forced to accept Paramount’s hostile bid or any higher-priced ones, they conceded that the judgment is not likely to discourage hostile bids in other takeover struggles.
“We don’t think it will slow down the takeover market at all,” said Howard D. Sherman, director of research at Institutional Shareholder Services Inc. in Washington, which consults with pension funds and other institutional investors on corporate governance issues.
“It’s not earth-shattering,” said Bernard Black, an associate professor at Columbia University Law School. “It does not chart new directions but (reinforces) current attitudes as much as anything.”
The ruling by Delaware Chancellor William T. Allen in effect allows Time to pursue a merger with Warner Communications instead of being taken over by Paramount. If Paramount were allowed to pursue its $200-a-share unsolicited bid, Time shareholders stood to make handsome profits.
But the judge agreed with Time management’s contention that its proposed merger with Warner was the culmination of two years of planning and negotiations. As such, Allen ruled, it is within management’s prerogative to pursue the Warner merger as better for Time’s long-term interests than accepting Paramount’s bid.
Experts said the ruling has the primary effect of strengthening the so-called business judgment doctrine, which provides boards of directors and managements with wide discretion in determining the best interests of their companies.
Specifically, the ruling gives managements of target companies greater ability to consider long-term interests of the business as a whole over short-term interests of shareholders in making quick profits.
“The courts never said that clearly that directors can ignore obvious short-term benefits in favor of pie-in-the-sky long-term benefits,” said Alan R. Bromberg, securities law professor at Southern Methodist University. “This may be the first time that has been so clearly said.”
The decision also gives managements greater leeway to pursue friendly mergers, without necessarily meaning that they are putting their own companies up for sale, said one investment banker close to the Time-Warner negotiations. Many companies have hesitated to pursue friendly mergers, fearing that doing so might prompt potential suitors to launch unsolicited bids. Under Delaware law, a company that is considered up for sale must sell itself to the highest bidder.
Contingencies for Mergers
“What this ruling does is reinforce the fact that directors can use good business judgment to do mergers on a friendly basis and not necessarily worry about putting their company in play,” the investment banker said.
Accordingly, some managements might be spurred to develop long-term business plans that include contingencies for friendly mergers as a defense against hostile deals, SMU’s Bromberg suggested.
“This suggests very strongly the importance of having an alliance with another company as part of a long-term plan,” Bromberg said. “The court seems to be giving a great deal of deference to what Time said its long-term strategy was.”
But critics of the ruling were quick to point out that it could give companies too much discretion to fight off hostile offers.
“The ruling opens up a whole arena for unusual rationales for deals beneficial to management as opposed to shareholders,” said Fredric Roberts, a Los Angeles investment banker.
“For a while, target corporations will feel they have more leeway in resisting unsolicited offers,” shareholder rights advocate Sherman said. “And saying that their company is not for sale will be an argument used more extensively.”
But both proponents and critics of the ruling agreed that the peculiar facts of this case--particularly the fact that Time entered merger discussions with Warner long before Paramount launched its bid for Time--limits the applicability of the ruling.
Also limiting the applicability was the fact that Chancellor Allen did not definitively address companies’ use of “poison pills,” “lockups” or other anti-takeover tactics launched primarily to defend against hostile bids.
“I don’t think this case makes it any easier to fight off a hostile raider by making a quickie deal with a ‘white knight,’ ” SMU’s Bromberg added. A white knight is a party brought in to acquire a target firm on a friendly basis, saving it from a hostile deal.
Also limiting the ruling’s reach is the fact that other states have gone further than Delaware in favoring target managements. Some states, such as New York, Massachusetts and Ohio, have enacted far-reaching anti-takeover statutes that inhibit hostile bids for firms incorporated in their states, Columbia’s Black said.
However, many of the nation’s largest companies--including Time, Paramount and Warner--are incorporated in Delaware and are subject to its laws and court rulings.
No End to Takeover Bids
Experts generally agreed that legitimate raiders and hostile suitors won’t pull back from making bids due to Friday’s ruling. They noted that Chancellor Allen’s ruling did nothing to block Paramount’s ability to pursue a takeover of the combined Time and Warner.
“This doesn’t mean that a raider can’t come in and break up a merger” by selling off assets of combined companies, said one investment banker.
Shareholder rights advocates did complain, however, about the enormous power of the Delaware courts and their potential for conflicts of interest. Delaware derives much of its revenue from fees paid by firms incorporating there because of its pro-management laws and court rulings.
MAIN STORY: Part I, Page 1
