Paramount Loses Its Bid to Block Time-Warner Deal

Paramount Communications’ battle to take over Time Inc. suffered a devastating setback Friday as a Delaware judge refused to block Time’s acquisition of Warner Communications Inc.

Ruling on a case that has riveted Hollywood and Wall Street, Delaware Chancellor William T. Allen rejected Paramount’s arguments that Time directors breached their duty to shareholders by seeking a $14-billion purchase of Warner that they hoped would enable them to evade Paramount’s $12.2-billion offer to buy Time.

The Time directors were “exercising perfectly conventional powers” in proposing the merger of Time, a big publishing and cable TV company, and Warner, a diversified entertainment conglomerate, Allen said. “Directors, not shareholders, are charged with the duty to manage the firm,” he wrote in a 79-page opinion.

Late Friday, the Delaware Supreme Court agreed to hear an appeal from Paramount and a group of disgruntled shareholders. The completion of Time’s tender offer for Warner stock was delayed until July 24, when the high court will hear arguments.

The three-way takeover fight began on March 4, when Time and Warner announced that they would merge in a stock-swap deal to form the world’s largest media and entertainment company. On June 7, Paramount announced its offer, which Time soon rejected and sought to block by offering to buy Warner.

The ruling “is a very big step toward making Time-Warner a reality,” Time Chairman J. Richard Munro said in a statement.

Time’s stock sank $4.75 a share in Friday trading, to $145.25, as many on Wall Street voiced little confidence that Paramount could win its appeal.

“The fat lady has done most of her singing,” said Andrew Wallach, an analyst with the Drexel Burnham Lambert Inc. investment bank.

Warner’s stock rose $2 to $64.25, and Paramount’s slipped 12.5 cents to $57.50.

Paramount executives said that they remain determined to continue their quest for Time, although they repeated recent statements that, at a price of roughly $30 billion, the merged Time-Warner company would be too expensive to swallow.

The Time-Warner deal “effectively precludes any bidder at all--and absolutely precludes any bid at a price near $200 a share,” Paramount spokesman Jerry Sherman said.

The ruling outraged some Time shareholders and even some scholars, who had hoped that Allen would frown on Time’s efforts to circumvent the $200-a-share offer.

Allen, who is the senior lower court judge in a state that sets key precedents in corporate takeover law, has often but not always been seen as sympathetic to shareholders’ rights.

“This sounds like, ‘Damn the shareholders, full speed ahead with the directors’ plans,’ ” said Alan C. Bromberg, a securities law professor at Southern Methodist University in Dallas.

But not all Time shareholders were unhappy with the ruling. The company’s largest institutional shareholder, Los Angeles-based Capital Group, threw its weight behind the Time-Warner deal soon after Paramount announced its hostile bid.

Merger Called Shrewdest Move

Although Capital’s clients stood to gain either way, because they are large institutional holders of Warner and Paramount stock as well, Capital’s senior vice president, Gordon Crawford, publicly backed the Time-Warner merger as the shrewdest long-term move.

On Friday, Crawford cheered the court’s decision, saying that it “confirms the fact that boards of directors have the . . . duty to look after the long-term interests of shareholders.”

Bromberg, the securities law professor, said the ruling was a “conservative” one, relying heavily on the long-established principle that directors have wide latitude to exercise their “business judgment” in running corporations. He said Allen’s opinion probably would give comfort to corporate executives worried about the threats of hostile takeovers.

Wall Street and takeover specialists had been giving Time the edge in the contest, as indicated by the recent slow decline of Time’s stock price. Still, some observers were surprised at how Chancellor Allen seemed to side with Time on point after point in the ruling.

For example, Paramount had ridiculed Time’s suggestion that it had arranged for the future leadership of Time-Warner to remain in Time executives’ hands to preserve Time’s journalistic “culture” and identity.

Melvyn Canter, a Paramount lawyer, lampooned this notion in a court hearing last Tuesday, joking that it should be properly called “People magazine culture,” because the celebrity magazine is so important to Time Inc. profits.

But Chancellor Allen acknowledged that Time executives’ feelings about the culture might, in fact, be a legitimate motive for them to arrange to keep the top position in the hands of Chairman Munro and President Nicholas J. Nicholas Jr. “There may be at work here a force more subtle than a desire to maintain a title or office to assure continued salary or perquisites,” he wrote.

Paramount had contended that Time must consider its bid because Time’s aborted stock-swap deal with Warner would have shifted 62% of Time shares into the hands of Warner shareholders. Under Delaware law, directors must seek out the best bid for their company once they have begun a change of control.

But Allen found that there had been no change of control contemplated in the stock-swap deal, because the Time shares would have been widely dispersed among Warner shareholders, not concentrated in the hands of a few powerful stock owners.

Again disagreeing with Paramount, Allen accepted Time’s contention that the primary purpose of the merger was long-range business strategy rather than takeover defense. The tender offer for Warner “has its origin and central purpose in bona fide strategic business planning,” he wrote.

The chancellor found also that Time’s offer to purchase Warner was a reasonable, not excessive, response to Paramount’s takeover bid, and thus was not illegal. Although a merger with Warner would make it more difficult for Paramount to buy Time, it did not totally preclude a hostile takeover, the judge pointed out.

Some Wall Street observers speculated that, if Paramount does not succeed with its appeal, it will not have many good options with which to continue its pursuit of Time. Indeed, some said the company may face a heightened risk of takeover itself, if the deal falls through, and may want to quickly acquire another company to reduce its risks.

Some analysts noted, too, that Paramount, which owns Paramount Pictures, may have hurt its relationship with Hollywood’s film community with its offer for Time. Film producer George Lucas this week wrote a newspaper column critical of the Paramount offer.

Although most eyes were on the Time-Paramount contest in Delaware Chancery Court, Warner’s largest shareholder pursued its own legal actions in the same arena. Overriding objections from Warner and Time, Allen refused to stop Chris-Craft Industries from seeking a temporary restraining order in a New York court, in a matter set for a Monday hearing.

Chris-Craft contends it is being coerced into converting all of its preferred shares--about 12% of Warner’s equity--into common stock to participate in Time’s tender offer. Because Time has promised to pay cash for only about 51% of Warner’s shares, the offer is expected to be oversubscribed. Any shares returned to Chris-Craft would be common, not preferred. Chris-Craft has asked the New York court to allow it to tender preferred shares without conversion.

Paul Richter reported from New York and Kathryn Harris from Los Angeles.

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