Court Dooms Paramount’s Hostile Bid for Time Inc.

The biggest corporate battle in the history of the entertainment business came to an end Monday as Paramount Communications Inc. abandoned a seven-week struggle to take over Time Inc.

The withdrawal left Time free to acquire Warner Communications Inc. in a move that will create the world’s largest entertainment conglomerate.

Time is the nation’s largest magazine publisher and owns a vast network of cable TV systems in addition to the Home Box Office programming unit. Warner is the parent of the Warner Bros. movie studio, the Lorimar-Telepictures television studio and the recorded music industry’s most profitable labels, in addition to cable television systems and publishing interests.

Paramount surrendered after it failed in a last-ditch legal challenge to the Time-Warner deal.

By late Monday, Time said it had closed its cash tender offer for a majority of Warner’s shares, turning over $7 billion to a bank, which will send checks to Warner shareholders early next month.

Paramount’s formal withdrawal occurred two hours after Delaware’s Supreme Court said a lower court judge had been “fully supported by the record” in rejecting Paramount’s challenge to the Time-Warner union on July 14.

The justices’ ruling is expected to give broad latitude to corporate directors trying to fend off unwanted takeover bids, but on Monday Wall Street and Hollywood were still fixated on the bloodied fighters. Paramount’s shares rose nearly $2 on the New York Stock Exchange as speculators wagered that the company--the wounded aggressor--is now vulnerable to a takeover effort.

In a statement, Paramount Chairman Martin S. Davis said that the company would continue to explore means of accelerating its growth, “including acquisitions, mergers, joint ventures and partnerships.” In referring to the aborted Time takeover bid, he said that Paramount “believes in making bold moves when they’re in the best interests of Paramount’s shareholders.”

Separately, a Paramount spokesman reiterated company statements that it won’t attempt to buy the combined Time Warner entity.

Time, for its part, made a public gesture toward patching up its relationship with Paramount.

Discounts Acrimony

“Now we can get on with the building of Time Warner,” said Nicholas J. Nicholas Jr., Time’s president and chief operating officer.

Nicholas insisted that the weeks of acrimony would not prevent Time Warner from pursuing business dealings with Paramount. (Warner co-owns a movie theater company with Paramount, and Time’s Home Box Office has an exclusive five-year deal to license Paramount’s movies for its pay-television service.)

“Paramount makes good films and offers them at a good price, and we intend to keep buying them,” Nicholas said. “We make great stuff and hope everybody will buy it, too.”

Paramount, which owns its namesake Hollywood studio as well as Simon & Schuster and other publishing and entertainment properties, set off the struggle with a hostile bid for Time on June 6, less than three weeks before Time and Warner shareholders were expected to approve a stock-swap merger. Time rejected the bid, and on June 16 it offered to buy Warner for $14 billion.

Wall Street observers speculated at the beginning of the takeover fight that Paramount’s bid might flush out any number of other bidders for Time, Warner or even Paramount. But many analysts now believe that completion of the Time Warner deal will add so much debt to the combined company as to make it largely resistant to a takeover attempt.

No Bidders for Paramount

And, despite the speculative trading in Paramount’s stock, no bidders for it have emerged.

Paramount closed at $59.375 a share, up $1.875, while Time’s price declined $1 to close at $137.50. Warner, which closed at $67.125, up $1.625, was the most active issue on the New York Stock Exchange with 4.74 million shares traded.

After the Delaware court’s ruling, the first formal steps were taken toward completion of the Time Warner deal. Late Monday, Time announced that it had closed its $70-a-share tender offer for 100 million shares. The company has promised to acquire Warner’s remaining 98 million shares, but so far it has not negotiated the formula it will pay in cash, stock or debt securities to equal $70 per share.

The deal is expected to take two to three months to complete, provided the two companies can reach agreement on the non-cash part of the transaction.

The three justices of the Delaware Supreme Court delivered their opinion from the bench in a summary that provided no details of their reasoning and lasted less than a minute. A full written ruling, which may establish important precedents in takeover law, may not be made public for six months or more.

But lawyers in the case said the justices’ views were evident from their questions at the 2 1/2-hour morning hearing. The justices had prepared at length for the hearing and “obviously came in here today with strong opinions,” said Michael R. Klein, an attorney for Literary Partners, a shareholder group associated with Texas billionaire Robert M. Bass that had sided with Paramount.

Justices Question Attorneys

The justices sharply questioned attorneys for Paramount and its shareholder allies about their claims that the lower court judge, Chancellor William T. Allen, had misinterpreted important precedents.

In his ruling, Chancellor Allen had concluded that Time’s board was well within its prerogatives when it rejected Paramount’s bid and chose a merger that it believed fitted better with its long-term strategic plan. Allen found that the board was entitled to pursue the long-term plan under a legal tenet called the “business judgment rule,” even if it appeared that Paramount’s $200-a-share bid offered shareholders a better profit in the short term.

At Monday’s hearing, Paramount attorney Melvyn Cantor said that Allen had “misconstrued totally” the meaning of a key precedent and should not have allowed Time’s board to ignore the Paramount bid. He contended that Time was guilty of “gross negligence” in failing to fully explore Paramount’s offer to negotiate a deal.

But Justice Andrew G. T. Moore asked Cantor if Delaware precedents did not establish that directors are entitled to reject an offer when it does not follow the company’s long-term plan. Moore asked also--perhaps rhetorically--whether Delaware’s court had ever ordered a company to negotiate against its will.

And he asked whether the challengers contended that “in the 11th hour, that everything must stop, and the board is held hostage to any bidder that walks in?”

But although Time won the day, it may come in for criticism in the court’s final ruling. The justices questioned Time’s lawyers on tactics that the company used in pursuing the Warner deal.

They asked why Time had found it necessary to pay banks “dry-up fees” to keep them from helping fund a rival takeover bid. They questioned why Time had canceled a scheduled shareholder vote on the Warner merger, thus apparently depriving stock owners of a say on the merger.

And they asked why Time’s 85%-owned cable subsidiary had offered to pay the cost of any lawsuits for localities that wished to challenge Paramount’s request to take over cable licenses.

Time attorney Robert Joffe acknowledged that he had been concerned at the offer to pay attorneys’ fees. “When I learned about it, I asked the client to stop it,” he said.

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