THE TIME INC. DECISION : Excerpts from the Ruling

The Arguments

It is the gist of plaintiffs’ position . . . that Time’s board of directors does have such a supervening fiduciary duty and has failed to understand or, more accurately, has chosen to ignore that fact, in order to force the Warner transaction upon the corporation and its shareholders--a transaction that, plaintiffs assert, the shareholders would not approve, if given the opportunity to vote on the matter. The board of Time is doing this, it is urged, not for a legitimate reason, but because it prefers that transaction which secures and entrenches the power of those in whose hands management of the corporation has been placed.

It is the gist of the position of the directors of Time that they have no fiduciary duty to desist from accomplishing the transaction in question in these circumstances. They contend, quite broadly speaking, that their duty is to exercise their judgment prudently (i.e., deliberately, in an informed manner) in the good faith pursuit of legitimate corporate goals. This, they say, the record shows they have done. Moreover, they assert that the result of that judgment is a proposed transaction of extraordinary benefit and promise to Time and its shareholders. It is quite reasonable, they contend, for the board to prefer it, on behalf of the corporation and its shareholders, to the sale of the company presently for $200 per share cash.

Time’s ‘Corporate Culture’

Neither the goal of establishing a vertically integrated entertainment organization, nor the goal of becoming a more global enterprise, was a transcendent aim of Time management or its board. More important to both, apparently, has been a desire to maintain an independent Time Inc. that reflected a continuation of what management and the board regarded as distinctive and important “Time culture.” This culture appears in part to be pride in the history of the firm--notably Time magazine and its role in American life--and in part a managerial philosophy and distinctive structure that is intended to protect journalistic integrity from pressures from the business side of the enterprise. . . .

Plaintiffs in this suit dismiss this claim of “culture” as being nothing more than a desire to perpetuate or entrench existing management disguised in a pompous, highfalutin’ claim. I understand the argument and recognize the risk of cheap deception that would be entailed in a broad and indiscriminate recognition of “corporate culture” as a valid interest that would justify a board in taking steps to defeat a non-coercive tender offer. Every reconfiguration of assets, every fundamental threat to the status quo, represents a threat to an existing corporate culture. But I am not persuaded that there may not be instances in which the law might recognize as valid a perceived threat to a “corporate culture” that is shown to be palpable (for lack of a better word), distinctive and advantageous. . . .

(In a Warner merger,) maintaining a Time culture--all the outside directors except (Arthur) Temple agree--was the first and central requirement and could only be assured by securing the top job ultimately for (Time President Nicholas J.) Nicholas.

Scope of the Ruling

It is not part of the function of the court to evaluate whether the Time-Warner deal is a good deal for Time shareholders or a poor one. The Time shareholders complain, feeling that under the revised merger Warner shareholders get all of the premium and they get little--except a promise that Mr. Nicholas will someday guide their company, and knowledge that they may be foreclosed from a comparable premium from Paramount. Plaintiffs find this to be cold comfort. Determination of the legal issues, however, does not require this court to try to evaluate, in light of the evidence, whether (Warner Chairman Steven J.) Ross and his negotiator . . . out-negotiated Time’s (Vice Chairman Gerald M.) Levin and Mr. Nicholas in this transaction.

Long- vs. Short-Term Goals

Delaware law does recognize that directors, when acting deliberately, in an informed way, and in the good faith pursuit of corporate interests, may follow a course designed to achieve long-term value even at the cost of immediate value maximization. . . .

Reasonable persons can and do disagree as to whether it is the better course from the shareholders’ point of view collectively to cash out their stake in the company now at this (or a higher) premium cash price. However, there is no persuasive evidence that the board of Time has a corrupt or venal motivation in electing to continue with its long-term plan even in the face of the cost that that course will no doubt entail for the company’s shareholders in the short run. In doing so, it is exercising perfectly conventional powers to cause the corporation to buy assets for use in its business. . . .

The value of a shareholder’s investment, over time, rises or falls chiefly because of this skill, judgment and perhaps luck--for it is present in all human affairs--of the management and directors of the enterprise. When they exercise sound or brilliant judgment, shareholders are likely to profit; when they fail to do so, share values likely will fail to appreciate. . . . The corporation law does not operate on the theory that directors, in exercising their powers to manage the firm, are obligated to follow the wishes of a majority of shares. In fact, directors, not shareholders, are charged with the duty to manage the firm.